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.
In short: The EU's Tour Operator Margin Scheme (TOMS) is a mandatory VAT scheme for businesses that resell travel services, such as accommodation and transport. Under TOMS, you pay VAT only on your margin, not the full price. You can't reclaim input VAT, but you account for VAT in just one EU member state.
The European Union's Tour Operator Margin Scheme (TOMS) is a unique and complex tax rule for tour operators and travel agents in the EU. Its use and interpretation have changed in various ways since it began. TOMS aims to simplify the VAT obligations of businesses that resell travel, accommodation and certain other travel services.
If you work in the travel industry, you need to understand TOMS to stay compliant and keep your tax costs efficient. Below we explain where TOMS comes from, how it works, what it means for your business and the challenges it brings.
What is the Tour Operator Margin Scheme (TOMS)?
Why does TOMS exist?
TOMS exists to make VAT accounting simpler for tour operators and travel agents who package and sell travel services in the EU.
Before TOMS, these businesses had to account for VAT in every member state where travellers used the services. This created a heavy admin burden. It also made compliance hard, because VAT rates and rules differ across EU countries.
Who and what does the VAT scheme cover?
TOMS covers businesses that buy and resell travel services as the principal or undisclosed agent. These services include accommodation, transport, car hire and other tourist services. The scheme is mandatory for eligible businesses, so you can't opt out. TOMS also applies to business-to-business (B2B) sales, not only sales to the final consumer.
What are the key features of TOMS?
VAT on margin: Under TOMS, you charge VAT on your margin, not the full selling price. The margin is the difference between what you paid for the services and what the consumer pays you.
No input tax deduction: You can't reclaim VAT on goods and services that you resell under TOMS.
Simpler VAT returns: You account for VAT in just one EU member state, which greatly cuts your admin burden.
How does TOMS work?
Under TOMS, a tour operator pays VAT only on the difference between its buying price and its selling price. Let's look at a simple example of the Tourist Operator Margin Scheme in practice.
A tour operator based in France buys hotel accommodation in Italy for €500. It sells this as part of a package to a consumer for €800. The margin is €300 (€800 - €500). Under TOMS, the tour operator pays VAT only on this €300 margin.
How is the TOMS margin calculated?
The TOMS margin is generally calculated once a year, although some member states allow or require quarterly calculations. Calculating the margin can be complex, especially with multiple services and packages. There are also special rules for the margin on certain supplies, like in-house supplies and agency services.
What are the place of supply rules under TOMS?
Under TOMS, the place of supply is generally where the business selling the services is established. Working out the place of supply for VAT is one of the trickier parts of TOMS. The general rule for the place of supply for services under TOMS means a tour operator in Germany accounts for VAT in Germany. This applies wherever the travel services are actually used.
What does TOMS mean for businesses?
What are the TOMS compliance requirements?
Under TOMS, you need detailed records of your purchases and sales so you can calculate your margins accurately. You must also stay updated with the VAT rates in your home country, because these rates apply to your margins.
How does TOMS affect pricing and profitability?
The Tourist Operator Margin Scheme has a big effect on how travel businesses in the EU set prices and make a profit. It shapes your prices, your competitive edge and your overall financial health.
VAT as a cost: Under TOMS, the VAT you pay is based on your margin. The margin is the difference between what you paid for travel services and what the consumer pays you. This makes VAT a direct cost for your business. In normal VAT systems, you can reclaim VAT on your inputs. Under TOMS, you can't. This VAT you can't reclaim raises your cost of sales and cuts your profits.
Pricing strategies: Because VAT is calculated on the margin, TOMS creates a unique pricing challenge. To stay profitable, you need to manage your margins carefully. This often leads to one of two pricing strategies:
- High-margin strategy: Some businesses raise the selling price of their packages. This means paying more VAT in total, since VAT is a percentage of a larger margin. But it also brings higher gross profits. The risk is pricing yourself out of the market, especially in very competitive segments.
- Volume-based strategy: Other businesses aim for lower margins but higher sales volumes. This can work well in competitive markets. But with less margin on each sale, you need efficient operations to stay profitable.
Competitive dynamics: TOMS also affects how businesses position themselves in the market. Businesses inside the scheme can't reclaim VAT on their purchases, while businesses outside it can. This difference can lead to price differences in the market. It can also shape consumer choices and the wider market.
What challenges does TOMS create for cross-border operations?
TOMS can be a challenge if your business operates in several EU countries. You need to understand and follow the TOMS rules in each country where you are established. These rules can vary a lot.
Is TOMS likely to change?
Yes, TOMS may change, as the EU has been working on reforming VAT rules, including those for TOMS. The aim is to modernize the system and address the challenges of the digital economy. Recent changes have focused on simplifying VAT for cross-border ecommerce, and similar reforms may follow for travel services.
Conclusion
The EU's Tour Operator Margin Scheme is a vital rule for travel and tourism businesses in the EU. TOMS makes VAT accounting simpler, but it also brings its own complexities and challenges. To operate well and stay competitive, you need to stay informed and follow the scheme's rules.
As the travel industry keeps evolving, especially online, we can expect further changes to 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 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 bought in and resold to customers.
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?
Yes. TOMS applies whoever the customer is, so B2B sales of travel services are also covered, not only sales to final consumers.
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.
