Tour operators face changes to the VAT regime that, added to a return to the higher tax rate from January 1 2010, will leave many companies paying more.

Travel firms pay VAT under the tour operators’ margin scheme. This levies VAT at the standard rate – to return to 17.5% in January after falling to 15% last December – but on the margin added to a holiday, not on the full price.

The rules and rates vary around Europe, but now the European Commission insists TOMS falls within its regulations. The resulting guidance issued this month by HM Revenue and Customs involves changes that VAT expert David Bennett, of accountancy firm Saffery Champness, describes as “tricky”.

Bennett believes the changes could inflate the VAT bill of some firms by up to 30% – a significant amount when VAT can account for up to 4% of a company’s operating costs.

The changes boil down to removing the current flexibility, which allows operators to opt in or out of TOMS.

For example, an agent or travel management company offering conference arrangements to a business client can opt out and apply the full VAT rate to a bill by issuing a tax invoice. The TMC or agent can recover any VAT it has paid and the client can recover the full VAT on their bill – so neither pays out.

Abolition of the chance to opt into TOMS will affect travel wholesalers and TMCs selling to businesses that, in turn, sell on services. These transactions do not fall within TOMS, but some companies find it advantageous to pay VAT under the scheme.

A third change – to the assessment of in-house facilities for VAT – may benefit some tour operators, although Bennett doubts many will take advantage.

This applies to operators with their own aircraft or properties. TOMS requires in-house facilities are accounted for in the same way as those ‘bought in’. But EU law, to apply from January, allows a company to attach a ‘market value’
to these.

Bennett explains: “In-house supplies are zero-rated for VAT. So if you apply a higher value to these, a greater proportion of the selling price is not subject to VAT. That is why HMRC has been slow to accept the ruling. It is good news for tour operators with in-house suppliers.”

But he warns: “Market value is subjective. HMRC will not accept someone pushing too far. I would not assume companies will use it.”

He believes the reduced flexibility will leave more losers than winners and says: “Companies will have to change their VAT accounting. It may become more complicated and higher cost.” Bennett adds: “Companies need to start preparing for these changes now.”

ABTA head of financial services Mike Monk agrees: “Quite a lot needs to be done between now and January. The average business cannot change its systems overnight.”

The changes will deny many schools the chance to reclaim VAT on school trips, but Monk does not believe this will lead teachers to book trips independently.

“Not to go through a tour operator involves a huge amount of work and additional risk,” he says. “But it will reduce the margins of some tour operators.”

  • Market Intelligence stories are produced by the Travolution team. Read more at