Posted on behalf of Sue Rathmell, VAT specialist, MHA MacIntyre Hudson
Tour operators use a special EU VAT scheme to work out how much VAT they have to pay on holidays they sell. This is known as the Tour Operators’ Margin Scheme or TOMS, for short. As its name suggests, tour operators all over the EU have to work out the margin on the holidays they sell and then VAT is due at the standard rate on the margin on holidays which take place within the EU. No VAT is due on the margin on sales outside the EU. It is worth saying that is strange that it puts holidays outside the EU at a VAT advantage to those within the EU.
It is a notoriously difficult scheme for businesses to operate as it results in lengthy and complex calculations.
We already know that if the UK does leave with a withdrawal agreement with the EU in place (the so-called ‘soft Brexit’), then TOMS will continue in its current form during the transitional period. What we didn’t know until now, was how tour operators were to be expected to handle their VAT in the event of a hard Brexit.
Yesterday the Treasury issued a new Statutory Instrument (SI) which will be enacted in the event of a no deal hard Brexit. This SI says that tour operators will continue to pay VAT on the margin of UK holidays but that the margin will be zero rated for all holidays which take place outside the UK.
This would save tour operators a hefty VAT bill if there is to be a hard Brexit, but is there a sting in the tail?
The explanation accompanying the SI includes this sentence: ‘It is possible that some member States will require UK based tour operators to register for VAT for supplies of travel services made in their country, although practices vary’.
Currently UK tour operators are not required to register in any other EU country because TOMS covers their activities in the whole of the EU. Non-EU tour operators, e.g. those based in the US, Dubai or Asia, are not required to register either. This has given non-EU tour operators supplying holidays into the EU, a financial advantage over EU tour operators.
It is hard to see how the EU could require UK tour operators to register for VAT without also requiring non-EU ones to do the same. However if this is on the cards and tour operators are going to have to register in all the EU countries where they offer holidays, this could mean up to 27 local VAT registrations. Tour operators will be understandably concerned about the prospect of the work involved let alone the additional costs.
Sue Rathmell is a VAT specialist in the travel sector. She can be contacted by email firstname.lastname@example.org or by telephone on 01227 602305.