What is the Tour Operators' Margin Scheme (TOMS) and how does it work for VAT?

Full answer

The Tour Operators' Margin Scheme (TOMS) is a compulsory VAT scheme for any business that buys in 'designated travel services' (for example hotel rooms, flights, coach transfers or car hire) and resells them in its own name to a traveller without significantly changing them. It is not limited to traditional tour operators -- hotels selling packages, conference organisers and some businesses arranging staff travel can fall within it. Why it exists: normally a business reclaims input VAT on its purchases and charges output VAT on sales. With travel bought across many countries that is impractical, so TOMS taxes only the margin. You cannot reclaim the VAT on the bought-in travel services; instead, UK VAT at the standard 20% rate applies to your margin on the portion of the package enjoyed within the UK. Travel services consumed outside the UK are generally zero-rated under the scheme. The margin is the total selling price minus the total cost of the travel services bought in for resale. Worked illustration: if you sell a UK package for GBP 1,200 and the bought-in travel services cost GBP 1,000, the margin is GBP 200. VAT is calculated on that GBP 200 (VAT-inclusive), not on the GBP 1,200. The precise apportionment between UK and non-UK supplies and the annual calculation method are set by HMRC, so follow current HMRC TOMS guidance and consider professional advice -- the calculation is genuinely complex. Who it affects: travel and hospitality businesses, especially those near the GBP 90,000 VAT registration threshold. In-house services you supply yourself (not bought in) sit outside TOMS and follow normal VAT rules. Use a VAT calculator to model the VAT on your computed margin once you know it.

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