Tour Operators – Can you benefit from adapting your TOMS calculations?

12 February 2014

After lengthy deliberation, HM Revenue & Customs (HMRC) has announced it is not going to change the way the Tour Operators Margin Scheme [TOMS] is operated in the UK.

The HMRC VAT brief announcement can be read here

Despite the European Court’s binding decision last year that:

  • Wholesale supplies (sold for onward resale rather than directly to consumers) should be included in TOMS, and
  • The TOMS calculations should be carried out on a transaction level basis

HMRC has decided not to disturb the status quo at the moment. The European Commission has already indicated an intention to review the application of TOMS across Europe, so major changes may be ahead anyway. The rationale is that any further changes that need to be implemented, or the possibility of the changes mentioned above being reversed, will be both disruptive and potentially costly for UK businesses. HMRC will, therefore, review the situation in 12 months’ time.

Although HMRC plans to make no changes, the tax authority has made it clear that any business that is affected by the court’s decision can adopt the changes.

Some businesses may already be familiar with the significance of the changes, having benefitted from the wholesale supplies ‘opt-in’ before it was removed in January 2010. If that method was beneficial to them, or perhaps just simpler administratively, they might wish to consider reverting to those accounting procedures.

Currently the UK framework for TOMS requires an annual calculation using global figures for all transactions, whether supplied singly or as a package that include any TOMS supplies. This produces the UK output tax liability for the standard rated margin on the TOMS supplies, plus that for the full selling price of any standard rated in-house supplies that have been supplied together with TOMS supplies. The total is compared with TOMS output tax provisionally declared and the difference is adjusted accordingly. The annual calculation also creates the provisional standard rated percentage for the subsequent year.

The court’s decision concluded this approach is incorrect and calculations of margins achieved should be made at transaction level rather than globally. Whether or not this different approach will suit a business will be very much dependent on their individual record-keeping capabilities, as all component costs will need to be recorded in such a way they can be directly linked to the income they generate. Many businesses will of course already keep their records in this manner, to enable them to monitor profitability of different packages they market. Others, however, may apply costs to generic accounting cost centre headings in their accounting systems rather than package by package. Each business will therefore need to explore whether transaction level calculations, rather than the global annual exercise, are a practical or cost-effective possibility.

If businesses have establishments in other European Community Member States from which they make B2B wholesale supplies, they may need to review their VAT accounting and reporting requirements as TOMS accounting may be mandatory in those countries concerned.

The Abbey Tax Blog can be viewed here

Author: Mark Burke, VAT Manager on the ReSource Tax and VAT Consultancy Team.