Might the Tour Operator Margin Scheme (TOMS) disappear in the course of the Brexit process? Abta director of finance and resources Carolyn Watson considers the implications
Mention of the Tour Operator Margin Scheme (TOMS) brings either a glazed look or one of horror, so abolishing TOMS as a result of Brexit would at first seem an attractive option. But be careful what you wish for.
UK VAT law is rooted in EU law. TOMS was introduced in the main EU VAT directive in 1977. It is applied to transactions by tour operators who deal with customers in their own name and who use supplies of goods/services provided by other persons.
The margin is calculated as the difference between the total amount paid by the traveller and the actual cost. This margin is subject to VAT.
TOMS avoids tour operators having to register for VAT in every EU member state. As a simplification scheme, it works and is better than multiple VAT registrations and returns.
Consideration of the likely effects of Brexit on VAT in the travel sector must take into account the European Commission’s VAT Action Plan and the possibility of TOMS reform. These add complexity.
The VAT action plan, published by the EC in April, outlines proposals to revise the VAT system with the aim of creating one EU VAT area to tackle the VAT ‘gap’ (i.e. the gap between VAT due and VAT paid) and to adapt the system to the digital economy.
It suggests that, while the principle for VAT should be taxation in the member state of a destination, the means by which VAT is collected would change. This approach is likely to be influential in determining the future EU taxation of travel and influence UK rules even after Brexit.
The Commission has also sought tenders for a study on reform of TOMS, which will look at whether TOMS is fit for purpose and at alternative options, including abolition. Future models must consider how equality could be achieved between EU and third-country competitors (which the UK may become).
So following Brexit, what possible VAT structures could there be? The UK could:
• Remain part of a VAT union, functioning for VAT purposes as part of the EU.
• Remain part of the Single Market, adopting a VAT system compatible with, but separate from, the EU system.
• Be a third country, designing its own VAT system.
In all scenarios, the EU would still have an influential role in shaping UK rules for the application of VAT to travel.
Even if the UK designed its own VAT system it would need to harmonise place-of-supply rules with the EU to avoid double taxation or non-taxation in the UK.
But whatever the future UK VAT system, it will apply only to domestic transactions. The EU rules will continue to apply to services with an EU place of supply.
So whatever deal the UK strikes with the EU, the travel sector will continue to be faced with legal obligations imposed by the EU – and without a scheme such as TOMS, this could require multiple VAT registrations.
It seems unlikely that any new EU rules will take effect before late 2020. The timing of Brexit is also uncertain, but it could happen before changes to the EU travel VAT rules. So we may face:
• Existing rules until Brexit
• Then a post-Brexit UK system
• Then the obligations of a new EU scheme.
The future is complicated. HM Treasury and HM Revenue and Customs have told Abta they are in “listening mode”.
We worked through the implications of various options at a recent Abta workshop and we’ll use this analysis to ensure the best interests of the industry are considered in the design of VAT schemes with or without TOMS.
This article appeared in the second edition of Abta’s Travel Law Today – the twice-yearly journal which complements Abta’s annual Travel Law Seminar and is available to all seminar attendees.
Abta will host its 19th Travel Law Seminar in London on May 23-24 2017. To register, visit abta.com/events or email events@abta.co.uk
Register before December 22 to receive a complimentary copy of Travel Law Today.