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Comment: UK agents must familiarise themselves with TOMS

The trade must prepare for potential curveballs from the EU to ensure recovery is not set back, argues Avalara senior director Anh Carter

The UK government’s latest travel review on September 17 announced an overhaul of the existing travel system, with simpler and cheaper testing requirements for double-vaxxed travellers, and the movement of eight more countries, including Turkey and the Maldives off the red list – as the amber list is scrapped altogether.

This news, and the gradual reopening of international travel, will have been welcomed by eager travellers and industry professionals alike, but it also should prompt renewed consideration for changes that came into effect earlier this year to the Tour Operators Margin Scheme (TOMS).

What is TOMS?

TOMS will be familiar to many industry professionals, but not necessarily to all. It is an especially fiddly part of VAT legislation, so let’s start with the basics.

The UK-based TOMS, which came into play post-Brexit, is a special scheme for UK businesses that buy in and resell travel, accommodation, and other services as principal or undisclosed agents. It’s a simplification measure that treats these services as a bundle of supplies made to the same person as a single supply in the UK. In most cases it continues the principles of EU TOMS in that it prevents businesses from having to register for VAT in each country they operate in and applies to supplies made to non-business customers and to businesses for their own use.

Put simply, TOMS reduces time spent on VAT processes, and reduces costs as a result.

Fortunately for industry professionals, Brexit has not resulted in a withdrawal of the scheme, and they can continue to use TOMS to account for VAT. The new TOMS rules only require payment of VAT on UK packages, rather than the whole of the EU: packages sold where the trip is in the EU incur 0% UK VAT rather than 20% and while they still need to be calculated under TOMS, VAT is not payable to HMRC:

On the whole, this is excellent news for most UK tour operators.

Trouble on the horizon?

However, despite some positive changes post-Brexit, there could be a TOMS storm brewing for UK businesses.

Following the end of the UK Brexit transition period after December 31, 2020, the German Ministry of Finance took the position that the special VAT scheme for travel agents no longer covers transactions by UK travel agents. Whilst the UK has confirmed a UK-based TOMS will continue, in the longer term there might be a requirement to register for VAT with individual EU states.

The rules aren’t clear cut: historically other countries that fall outside the EU such as China and the US have not had to register. What’s more, hunting down VAT from overseas countries could put off travel companies from selling in that country, resulting in fewer tourists: a price which many countries are not willing – and simply cannot afford – to pay.

But the UK is a much closer neighbour, and this has the potential to impact rulings significantly.

There is every possibility that German authorities could begin to approach UK businesses to seek VAT registration, and given their influential position within the EU, this could trigger other countries to follow suit.

How to navigate the risks

Now that travel is opening back up, particularly for EU countries where TOMS changes will apply, and German intervention is an impending possibility, UK travel agents must urgently prioritise familiarising themselves with potential TOMS changes and how these will affect their business.  Otherwise, they will risk compliance failure just at the moment when the industry is on the mend.

Alongside simply getting to grips with the intricacies of TOMS, businesses must also prepare by assessing the VAT risk posed by the countries they operate in, clarifying which – if any – of their services fall under TOMS, and checking that their EU suppliers are issuing qualifying VAT invoices to support the recovery of input VAT should they be needed at a later date.

They should also consider the cost and administrative implications of additional EU VAT registrations for sales to UK consumers of EU travel and holidays, and ensure they have the capacity for any potential changes. Given the complexity of the Tour Operators Margin Scheme, expert support can help take some of the burden off businesses who might otherwise struggle.

UK travel agents might understandably have failed to see the benefit of trawling through pages of complex legislation when the UK-based TOMS scheme first became relevant, in the middle of a national lockdown. But Boris’ announcement has confirmed that we are now firmly in the first holiday season since the Brexit transition period, and it is a vital reminder to revisit the changes and prepare for curveballs from the EU to ensure the UK travel business can not only recover, but thrive, unhampered by the country’s new non-EU status.

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