Tour Operators Margin Scheme: How it Works?
The Tour Operators Margin Scheme simplifies VAT rules for Tour Operators. We will focus on the schemes applicable in the EU and the UK.
What is Tour Operators Margin Scheme?
The Tour Operators Margin Scheme allows for a simplification of the VAT treatment of travel agents’ activity.
This special scheme is introduced is standard in all EU countries, as it is regulated via Directive as the special scheme for travel agents and is applicable to all EU Member States. Also, the UK has a similar VAT regime generally known as the TOMs (Tour Operators Margin Scheme).
Travel agencies or tour operators usually buy and resell goods and services from other suppliers, which are finally supplied as a travel pack to the final customers. For example, travel agents will contract accommodation, entertainment performances, transport, on-site excursions, etc. Therefore, the final price charged to the client includes the payment of the actual services contracted, as well as the travel agency’s margin for the travel organization.
When the special scheme applies, from a VAT perspective, this type of service is considered as a single service supplied by the travel agent to the traveler. In consequence, the special VAT treatment regulated by this scheme impacts on:
- the place of supply of the service,
- the calculation of the taxable basis,
- and the input VAT deduction.
How it works?
Firstly, concerning the place of supply, this service is taxable in the country where the travel agent is established. However, in the case of EU countries, when the travel services are fully or in part enjoyed outside the EU, the service transaction of the travel agent is exempt when it comes to the transactions performed outside the EU. As for the UK, it is only relevant that the travel package is arranged from a UK establishment, irrespective of where the actual services are performed.
Secondly, we must refer to the calculation of the taxable basis. When the Tour Operators Margin Scheme applies, the travel agent must calculate VAT based on their margin profit, instead of on the full price for the travel package.
The taxable margin is the difference between the total amount paid by the traveler or customer (VAT excluded) and the actual costs for goods and services that benefit the traveler directly, and that were purchased from other suppliers by the travel company.
Finally, the tour operator cannot deduct the input VAT paid concerning the supplies contracted for the travel package. This does not impact other business expenses related to their economic activity, which should normally be deductible.
The following general rules apply to the tour operators’ margin scheme:
- This is a mandatory tax scheme once conditions are met.
- The place of supply of this single transaction is generally where the tour operator is established.
- The tax base here is the same as the profit margin excluding VAT (gross margin).
- The input VAT paid on the goods and services contracted is not deductible.
- The customers must generally be private individuals (B2C). If the customer is another taxable person, we need to check country by country how this is implemented. In the UK, for example, this tour operator’s service B2B would only fall into TOM’s when the service is directly enjoyed by the customer, but not when they will resell it.
- When the travel agent is established in the EU, this scheme may only be applied to trips within the European Union countries. When the trip is made both within the EU and outside EU countries, the special scheme should only be used for the part of the travel service that refers to supplies in the EU.
Services that are included in the travel agent’s margin scheme
These are some examples of the type of services that always fall under Margin Scheme supplies:
- passenger transport
- hire of means of transport
- services of tour guides
- use of special lounges at airports
- in some cases, catering, admission tickets, etc.
Have a look at the different VAT rates applicable in the EU.
Who is included and not included in the scheme?
It is important to note that, for the special scheme to apply, the tour operator must exclusively buy and resell services to the final customer:
- All the services that are part of the travel pack must have been contracted from other suppliers for the benefit of the final customer.
- It does not apply in the case of mere intermediaries or disclosed agents, only putting in contact with different parties.
- In case the tour operator offers services supplied directly by the tour operator, using its own resources and structure, these services are outside the scope of the special scheme and must tax according to general rules.
Let’s imagine that a French traveler books a package holiday for a total selling price of EUR 3,000. They will spend the holidays in Spain. The package includes accommodation and some excursions.
- The Spanish service providers for accommodation and excursions charge EUR 2,500 to the French travel agent, including some Spanish VAT for the accommodation services.
- The French travel agent sells the holidays package for a total selling price of EUR 3,000 to the final customer.
- The tax base is = EUR 500, the profit margin excluding VAT.
- French VAT is calculated on the EUR 500 agent’s fee.
- VAT liability is EUR 500 x 20 / 200 = EUR 83,4 of VAT.
The formula to obtain the VAT amount is = Margin x VAT rate / 100 + rate.