Inbound operators face being left out of pocket and at a commercial disadvantage due to proposed changes to the Tour Operators Margin Scheme (Toms), a leading trade body warns.

Some will be forced to leave the UK if a ruling last September by the European Court of Justice (ECJ) is implemented.

It overruled the way in which wholesale travel has been taxed in the UK and could force companies to relocate outside the European Union.

The majority (96%) of UK-based inbound operators and wholesalers polled by the European Tour Operators Association (Etoa) said the ruling would damage their competitiveness and their ability to sell the UK as a destination.

The ECJ ruling comprised a series of judgments on the application of VAT under Toms.

The decision would affect the margins of inbound operators, ground handlers and conference and event organisers whose business-to-business activities have previously been zero-rated for Toms.

But as the tax would not impact businesses based outside the EU, more than half of respondents said they were going to be forced into relocation.

Etoa members have a combined turnover of £2.4 billion and employ more than 2,500 people in the UK.

There would be a tax on the company’s gross margin, which a competitor based outside the EU does not pay. Operators would also have to show their business customers how much margin they are making.

The judgment obliges wholesalers to reveal their gross margins to their clients and to account for taxation on a transaction-by-transaction basis.

These two measures place an “acute competitive and bureaucratic burden” on any business caught by the tax, Etoa claims.

The ruling would apply VAT to all tourism exports, including any packages in which a UK holiday is sold through a third party and any sale of a European package to a business based in most of the important source markets, including China, India and the US.

“It makes the UK less competitive, it makes selling the UK less competitive and it makes the UK less competitive as a base for doing tourism business,” Etoa said.

Association chief executive Tom Jenkins (pictured) said: “The ruling is an attack on the process of adding value to tourism services.

“It inadvertently delivers a devastating blow to growth businesses working in growth markets. It is hallmarked ‘industrial catastrophe’.

“But how the ruling is implemented lies in the hands of the government. This taxation scheme (Toms) is in dire need of reform: one of the shocking aspects of this judgment is that it grants tax free status to foreign holidays, whilst landing a new and substantial tax on our tourism exports.

“So what is alarming is not just the savagery of what is proposed, but its stupidity. Reform has to be on the agenda before implementation.”