TOMS and No-Deal Brexit: Impact on the Tour Operators Margin Scheme

UK Travel related operators could see changes to their VAT accounting…

The Tour Operators Margin Scheme (TOMS) is a VAT simplification measure introduced by the European Union (EU) to help companies involved in the travel and touring sectors. A company that buys in and resupplies travel and travel related services can use TOMS to prevent the need to pay VAT separately in each different EU member state in which a tour or holiday takes place.

The scheme has regularly been reviewed and subjected to scrutiny over the years and there is a good chance it may be back in the spotlight in the event of a no-deal Brexit.

Opportunities for UK Suppliers

The UK Government has announced that from 1 January 2021, UK companies will be allowed to continue to apply TOMS to the margin of UK holidays. The margin made on the element of the trip that takes place outside the UK (e.g. Italy, Spain etc.) would be free of VAT under UK rules. Currently, EU VAT rules say that non-EU tour operators cannot register for TOMS so on the face of it, that might give UK suppliers an advantage. A UK supplier might not have to charge a customer VAT on any part of a European tour that takes place outside the UK, whereas an EU based supplier would probably have to charge VAT at different rates on every stage of the trip. How concerned the EU would be about that is hard to say but it seems likely that changes will be announced eventually.

How a UK supplier could benefit from the impact of Brexit on the TOMS is summarised in the example below:

Before Brexit:

UK TOMS Supplier

making German Supply

French TOMS Supplier

making German Supply

Bought in service

(£100 + £19 of unrecoverable German VAT)

€119

Bought in service

(£100 + £19 of unrecoverable German VAT)

€119

Sale to consumer

(No VAT disclosed on invoice)

€149

Sale to consumer

(No VAT disclosed on invoice)

€149

Gross Profit Margin

€30

Gross Profit Margin

€30

Imputed UK VAT at 20% Standard Rate

€5

Imputed French VAT at 20% Standard Rate

€5

Net Gain

€25

Net Gain

€25

After Brexit:

UK TOMS Supplier

making German Supply

French TOMS Supplier

making German Supply

Bought in service

(£100 + £19 of unrecoverable German VAT)

€119

Bought in service

(£100 + £19 of unrecoverable German VAT)

€119

Sale to consumer

(No VAT disclosed on invoice)

€149

Sale to consumer

(No VAT disclosed on invoice)

€149

Gross Profit Margin

€30

Gross Profit Margin

€30

No UK VAT charged on supply

€0

Imputed French VAT at 20% Standard Rate

€5

Net Gain

€30

Net Gain

€25

To register, or not to register: that is the question

As mentioned above, non-EU tour operators do not have to register for VAT in the EU, but previously that would not have included UK operators. We know that the EU has said before that it sees the proximity of the UK as a unique risk; if TOMS is restructured, it seems likely that removing the UK advantage will be top of the EU's priorities. There is a real possibility that UK suppliers will need to register for VAT in each EU state in which a tour or trip is “consumed”.

Using the same example as earlier, you can see how having to register in the EU reduces net profit for the UK supplier:

Post-Brexit:

UK TOMS Supplier

providing German Supply

Bought in service

(£100 + £19 of recoverable German VAT)

€119

Sale to consumer

(£125 + £24 of payable German VAT)*

€149

Gross Profit Margin

€30

Output VAT paid to German Tax Authorities

€24

Input VAT reclaimed from German Tax Authorities

€19

Net VAT Payable Position

€5

Net Gain

€25

For any taxpayers using TOMS, it is important to apply the new rules correctly but be prepared to react quickly to any changes from the EU. Businesses should review the EU states in which they make TOMS supplies and research the local VAT registration and filing rules. After Brexit, it may be necessary to appoint a fiscal agent in the country to represent your company – some EU states insist on this for non-EU members – so preparation is crucial. There will be implications for cash flow, contracts and accounting entries, as well as tax filings. 

For more information on TOMS or how Brexit might impact the tax affairs of your business, contact a representative below:

Sean O'Sullivan
Director
Tel: +44 (0)20 7430 5966
Email: sosullivan@fitzandlaw.com

Jonathan Shepley
Tax Consultant
Tel: +44 (0)20 7430 5968
Email: jshepley@fitzandlaw.com

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