What Is the EU's Tour Operator Margin Scheme?

The European Union's Tour Operator Margin Scheme (TOMS) is a unique and intricate taxation regulation that impacts tour operators and travel agents within the EU. This VAT scheme, which has undergone various changes and interpretations since its inception, is designed to simplify the VAT obligations of businesses that resell travel, accommodation, and certain other travel services. 

Understanding TOMS is crucial for businesses in the travel industry to ensure compliance and optimize their tax efficiency. This blog post delves into the details of TOMS, exploring its origins, mechanics, implications, and challenges.

Key takeaways

• Simplified VAT for travel services: The EU’s Tour Operator Margin Scheme (TOMS) streamlines VAT accounting for businesses reselling travel services by taxing only the profit margin, not the full sale price.
• VAT becomes a business cost: Under TOMS, VAT on purchased services can’t be reclaimed, making it a direct cost that affects pricing strategies and profitability.
• One-country VAT compliance: Tour operators apply VAT rules based on their home country, reducing the need for multi-country VAT registration within the EU.

Understanding the basics of TOMS

The rationale behind TOMS

The primary objective of the Tour Operator Margin Scheme is to streamline the VAT accounting process for tour operators and travel agents who package and sell travel services in the EU. 

Before TOMS, these businesses faced the daunting task of accounting for VAT in every member state where the services were enjoyed. This not only created a significant administrative burden but also posed challenges in terms of compliance with varying VAT rates and rules across different EU countries.

Scope of the VAT scheme

TOMS applies to businesses that buy and sell travel services as the principal or undisclosed agent. These services include accommodation, transport, car hire, and other tourist services. Notably, the scheme is mandatory for eligible businesses; there's no option to opt-out. However, it's important to note that TOMS only applies to supplies made to the final consumer and not to business-to-business sales.

Key features of TOMS

VAT on margin: Under TOMS, VAT is charged not on the full selling price but on the margin, which is the difference between the cost of the services purchased and the selling price to the consumer.

No input tax deduction: Businesses cannot reclaim VAT on the purchase of goods and services resold under TOMS.

Simplification of VAT returns: Operators have to account for VAT in just one EU member state, significantly reducing administrative burdens.

How TOMS works

To understand how the Tourist Operator Margin Scheme works in practice, let's consider a simple example. Suppose a tour operator based in France buys hotel accommodation in Italy for €500 and sells it as part of a package to a consumer for €800. The margin here is €300 (€800 - €500). Under TOMS, the tour operator will pay VAT only on this €300 margin.

Calculation of the margin

The calculation of the margin can be complex, especially when dealing with multiple services and packages. The margin for VAT purposes is generally calculated annually, although some member states allow or require quarterly calculations. Additionally, there are special rules for calculating the margin on certain types of supplies, like in-house supplies and agency services.

Place of supply rules

One of the complexities of TOMS is determining the place of supply for VAT purposes. Generally, the place of supply for services under TOMS is where the business selling the services is established. This means that a tour operator in Germany will account for VAT in Germany, regardless of where the actual travel services are enjoyed.

Implications of TOMS for businesses

Compliance requirements

Businesses under TOMS need to maintain detailed records of their purchases and sales to accurately calculate their margins. They must also stay updated with the VAT rates applicable in their home country, as these rates will apply to their margins.

Impact on pricing and profitability

The Tourist Operator Margin Scheme significantly influences the pricing strategies and profitability of businesses within the travel and tourism sector in the European Union. This impact is multifaceted, affecting how businesses set their prices, their competitive edge in the market, and their overall financial health.

‍VAT as a cost component: Under TOMS, the VAT payable is based on the margin, which is the difference between the cost of travel services purchased and the selling price to the consumer. This structure means that VAT becomes a direct cost component for the business. Unlike traditional VAT systems where businesses can reclaim VAT on inputs, under TOMS, the VAT on purchases is not recoverable. This non-reclaimable VAT essentially raises the cost of goods sold, impacting the overall profitability of the business.

Pricing strategies: Given that VAT is calculated on the margin, businesses operating under TOMS have a unique pricing challenge. To maintain profitability, they need to manage their margins carefully. This often leads to two pricing strategies:

• High-margin strategy: Some businesses might opt for a high-margin strategy, where they increase the selling price of their packages. While this approach leads to a higher absolute VAT amount (since it's a percentage of a larger margin), it also results in higher gross profits. However, the risk here is pricing oneself out of the market, especially in highly competitive segments.

• Volume-based strategy: Alternatively, businesses may choose a volume-based strategy, aiming for lower margins but higher sales volumes. This approach can be effective in competitive markets but requires efficient operations to maintain profitability, given the lower margin per sale.

Competitive dynamics: TOMS also affects how businesses position themselves in the market. Since the scheme only applies to companies selling to the final consumer, there's a competitive disparity between those who sell directly to consumers and those who operate on a B2B model (who can reclaim VAT on their purchases). This difference can lead to pricing variations in the market, influencing consumer choices and overall market dynamics.

Challenges in cross-border operations

For businesses operating in multiple EU countries, TOMS can present challenges. They need to understand and comply with the specific TOMS regulations in each country where they are established, which can vary significantly.

Recent developments and future outlook

The EU has been working on reforming VAT rules, including those related to TOMS, to modernize the system and address the challenges posed by the digital economy. Recent developments have focused on simplifying VAT obligations for cross-border ecommerce, and similar reforms may be expected in the area of travel services.

Conclusion

The EU's Tour Operator Margin Scheme is a vital regulation for businesses in the travel and tourism sector within the EU. While it simplifies VAT accounting, it also brings a set of complexities and challenges. Businesses need to stay informed and compliant with the scheme's regulations to operate effectively and competitively. 

As the travel industry continues to evolve, particularly in the digital landscape, we can anticipate further changes and adaptations in the scheme to meet new challenges and opportunities.

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Frequently Asked Questions

Who does the Tour Operator Margin Scheme (TOMS) apply to?

TOMS applies to tour operators and travel agents established in the EU who buy and resell travel services to final consumers as principals or undisclosed agents.

What services are covered under TOMS?

TOMS covers travel-related services such as accommodation, transport, car hire, and other tourist services, provided they are sold as part of a package to consumers.

Can businesses reclaim input VAT under TOMS?

No. Businesses operating under TOMS cannot reclaim VAT on the purchase of services they resell. VAT becomes a direct cost and is only charged on the profit margin.

How is VAT calculated under TOMS?

VAT is calculated on the margin—i.e., the difference between the total cost of purchased services and the selling price to the customer, not the full sale price.

Do I need to register for VAT in each EU country where services are provided?

No. One of the benefits of TOMS is that VAT is accounted for in the member state where the business is established, reducing the need for multiple VAT registrations.

Does TOMS apply to business-to-business (B2B) transactions?

No. TOMS only applies to supplies made to the final consumer. B2B sales fall outside the scope of the scheme.

Are there any ongoing changes to TOMS?

Yes, the EU continues to review and modernize VAT rules, including TOMS, especially in light of the digital economy. Future reforms may impact how the scheme is applied.