Guidance

Tour Operators Margin Scheme (VAT Notice 709/5)

How to account for VAT if you buy in and resell travel facilities as a principal or undisclosed agent.

Detail

This notice cancels and replaces Notice 709/5 (August 2004). Details of any changes to the previous version can be found in paragraph 1.1 of this notice.

The legal basis for the Tour Operators Margin Scheme (TOMS) is section 53 of the VAT Act 1994 and the VAT (Tour Operators) Order 1987 (SI 1987/1806). Sections 8 to 13 of this notice, have the force of law under this Order.

1. Overview

1.1 What this notice is about

This notice explains how you must account for VAT if you buy in and resell travel facilities as a principal or undisclosed agent (that is, acting in your own name).

It assumes that you have a knowledge of the basic principles of VAT that are explained in VAT guide (Notice 700).

This notice should be read in conjunction with Notice 709/6 Travel agents and tour operators.

This updated version of the notice has been produced primarily to include important changes to TOMS legislation and practice which came into effect from 1 January 2010. The sections of this notice which have been altered to take account of these changes are:

The changes relate to removal of the opt-in to the TOMS for wholesale supplies (previously detailed in section 3.2), removal of the opt-out for travel supplies consumed by businesses (previously detailed in section 3.3) and the introduction of a new market value calculation (annual adjustment), which is set out in section 8).

In addition to these changes the following sections have been changed:

  • section 4.15 has been amended to clarify the tax point rules under method 2
  • section 4.20 has been amended to reflect the new invoicing regulations for TOMS supplies made to business customers after 1 October 2007
  • section 6.1 has been amended to update what should be included in the total selling price for the annual calculations
  • section 6.4 has been amended to add another typical example of overhead finance charges

1.2 Where to find the law that’s relevant to this notice

The relevant VAT law is in the:

  • Value Added Tax Act 1994, section 53, and Schedule 8, Group 8, item 12
  • Value Added Tax (Tour Operators) Order 1987 (SI 1987/1806) as amended by the Value Added Tax (Tour Operators) (Amendment) Orders of 1990, 1992, 1995 and 2009
  • VAT Regulations 1995 (SI 1995/2518) section 14(1)(n)

Under this law, HMRC have certain powers, including powers to specify how to work out the value of supplies covered by the Tour Operators Margin Scheme (see sections 5 and 8 to 13).

The whole of Sections 8 to 13 of this notice have the force of law. Other parts of this notice represent HMRC’s interpretation of the law, but are not law in themselves.

2. Introductions to the Tour Operators Margin Scheme (TOMS)

2.1 The Tour Operators Margin Scheme

It is a special scheme for businesses that buy in and resell travel, accommodation and certain other services as a principal or undisclosed agent (that is, acting in your own name).

The TOMS is a simplification measure. In many cases it enables VAT to be accounted for on travel supplies without businesses having to register and account for tax in each member state where the services and goods are enjoyed.

2.2 Who the Tour Operators Margin Scheme applies to

It covers anyone who is making the type of supplies detailed in paragraph 2.1, even if this is not your main business activity, or you do not view yourself as a ‘traditional’ tour operator. For example:

  • a hotelier who buys in coach passenger transport to collect its guests at the start and end of their stay
  • a coach operator who buys in hotel accommodation in order to put together a package
  • a company that arranges conferences, including providing hotel accommodation for delegates

2.3 Who must use the Tour Operators Margin Scheme

You are acting as a tour operator and must account for VAT using the TOMS if you are an undisclosed agent (that is, acting in your own name) or a principal (see Notice 709/6 Travel agents and tour operators) in making either:

  • margin scheme supplies
  • other types of supply (for example an in-house supply) packaged or supplied with margin scheme supplies (see paragraphs 2.9 and 2.11)

2.4 Which supplies the Tour Operators Margin Scheme covers

The TOMS does not apply to:

  • supplies you have arranged as a disclosed agent or intermediary and your commission is readily identifiable (see paragraphs 2.14 and 6.7)
  • in-house or agency supplies you make which are not packaged or supplied with margin scheme supplies (see paragraphs 2.12 and 2.13)
  • supplies you make to business customers for subsequent resale by them (that is, wholesale supplies)
  • supplies that are incidental to your other supplies (see paragraph 3.5)

If you are unsure as to whether or not you must use the TOMS, you should contact the VAT helpline. To help us decide, we may ask you to write in with copies of your contracts, brochures, booking terms and conditions, and other sales literature.

2.5 Travel services affected by the Tour Operators Margin Scheme

The TOMS applies to travel services that are:

  • within the UK
  • within the EU (that is, other than the UK)
  • outside the EU

2.6 How the Tour Operators Margin Scheme works

If you are registered for VAT, you must normally account for tax on the full selling price of your supplies, but you can reclaim the VAT charged on purchases (subject to the normal rules).

Under the TOMS, you cannot reclaim any UK or EU VAT charged on the travel services and goods you buy in and resupply, the tax on such goods or services is accounted for in the relevant member state by the providers of those services (hotels, airlines and so on).

But as a tour operator based in the UK, you only account for VAT on the margin you make on your margin scheme supplies see paragraph 2.7, that is, the difference between the amount you receive from your customer (including any amounts paid on behalf of your customer by third parties) and the amount you pay your suppliers.

Section 5 explains how to work out your output tax using the TOMS and the value of your outputs by using the appropriate calculation in sections 8 to 12.

You can still reclaim, subject to the normal rules, VAT on overheads outside the TOMS see paragraph 4.3.

2.7 Margin scheme supply

A margin scheme supply is defined in law as a ‘designated travel service’.

This means it is a supply of goods or services which are both:

  • bought in from another person and resupplied without material alteration or further processing
  • supplied by a tour operator from an establishment in the UK, for the direct benefit of a traveller

2.8 Traveller

A traveller is an entity, including a business or local authority, who receives a supply of a designated travel service, other than for the purpose of resupply.

2.9 Types of supplies that fall within the Tour Operators Margin Scheme

The following are always margin scheme supplies:

  • accommodation
  • passenger transport
  • hire of a means of transport
  • trips or excursions
  • services of tour guides
  • use of special lounges at airports

2.10 Other supplies becoming margin scheme supplies

Supplies such as catering, admission tickets and sports facilities fall within this category, if they are:

  • bought in and sold on without material alteration, for the direct benefit of a traveller
  • provided as part of a package with one or more of the supplies listed in paragraph 2.9

2.11 Margin scheme package

A margin scheme package is a single transaction, which may include one or more margin scheme supplies, or it may also include margin scheme supplies sold together with an in-house supply and an agency supply.

2.12 Supplies of services that are not bought in

These are described as ‘in-house’ supplies and are defined as either:

  • a supply made from your own resources
  • resulting from purchases that you have bought in but materially altered or further processed, so that what you eventually supply is different from what you purchased

2.13 How to account for VAT on in-house supplies

If supplied on their own, that is, not with margin scheme supplies, in-house supplies are taxed under the normal VAT rules, and they are not subject to the TOMS.

You can find examples of in-house supplies in section 7 of this notice.

If you make a mixture of in-house supplies and bought in margin scheme supplies, they must all be accounted for using the TOMS, the in-house supplies will need to be quantified so they can be accounted for under the normal rules. There are 2 different TOMS methods. The cost based method and the market value method. These are fully explained in section 5, section 8and section 9 of this notice.

To determine which method is appropriate for your business you will need to consider if you:

  • can calculate the market value of an in-house supply in a package you must follow the market value calculation in section 8 for those in-house supplies
  • can calculate the market value of in-house supplies but the cost based method is an accurate reflection of your package you may ignore the market value method and follow the cost based method in section 9
  • cannot calculate a market value for an in-house supply in a package then follow the cost based method in section 9 for those in-house supplies

Note: if you can calculate a market value for some in-house supplies and not others you may have to use a mixture of the apportionment methods.

For example:

Package 1: includes an in-house supply A for which a market value can be established. The market value method will be used for the in-house supply.

Package 2: includes an in-house supply B for which a market value cannot be established. The cost-based method will be used for the in-house supply.

Package 3: includes both the in-house supplies A and B. The market value method must be used to extract A from the package and the cost-based method used for remaining parts of the package.

But if the structure of the package is such that the cost-based method is an accurate reflection of the package, then the figures for A can be included in the cost-based calculation and the market value method ignored.

2.14 What agency supplies to include in the Tour Operators Margin Scheme

If you act as a disclosed agent in the making of margin scheme supplies (that is, you name the provider of the margin scheme supplies), you are not yourself making margin scheme supplies and so you must normally account for any VAT on your commission under the normal rules (that is, not using the TOMS) - see Notice 709/6 Travel Agents and Tour Operators.

But if you use the TOMS because you make margin scheme supplies in your own name, and also receive variable commission (or commission which is otherwise not readily identifiable) as a disclosed agent, then you must include your agency income and directly related costs in your TOMS calculations (see paragraph 6.6 and section 8).

2.15 Where your business is established

If your supplies are made from an establishment in another member state, you may have to register and account for tax under that country’s equivalent of the TOMS see paragraph 4.8.

3. Supplies to businesses

3.1 Making supplies to business customers

Whether your supplies to business customers must be accounted for under the TOMS will depend on whether your supplies are to be resold or consumed by that business customer.

If your supplies are to business customers which are for subsequent resale (wholesale supplies), these supplies do not fall within the TOMS - see paragraph 3.2.

If your supplies are for consumption by those customers, these supplies fall within the TOMS provided they meet the definition of margin scheme supplies.

3.2 Wholesale supplies

These supplies do not fall within the TOMS and must be accounted for under normal VAT rules. From 1 January 2010 the option to include wholesale supplies within the TOMS as a concession was withdrawn. If the place of your supply is in another member state, you may be required to register and account for VAT there. Normal place of supply rules for the major travel supplies are for:

  • passenger transport, the place of supply is where it takes place
  • accommodation, the place of supply is where it is situated
  • live entertainment, the place of supply is where it s physically performed

Further guidance and more examples can be found in Notice 741 Place of supply of services.

3.3 Excluding supplies to business customers for their own consumption

You cannot exclude supplies which are consumed by a business or its employees, they fall within the scope of the TOMS and must be accounted for using the scheme. Up until 1 January 2010 businesses were able to exclude certain supplies made to business customers for their own consumption, but from that date such exclusions are no longer permitted. This means that businesses will no longer be entitled to receive a VAT invoice for supplies made to them using the TOMS - see section 4.20 for further details on invoicing requirements.

3.4 Supplying educational school trips which include margin scheme supplies

From 1 January 2010 the arrangement which allowed certain supplies to local authorities for educational school trips to be excluded from the TOMS has been withdrawn. These must now be accounted for using the TOMS (unless the body they are supplied to will resell them as wholesale supplies, see paragraph 3.1. If you are unsure whether or not your supply will be resupplied, then you should use the TOMS to account for VAT.

3.5 Supplies that form only an incidental part of your business

You do not need to use the TOMS if all of these apply:

  • do not buy in any supplies of accommodation or passenger transport for resale (a definition of passenger transport can be found in Notice 744A Passenger Transport
  • buy in for resale some other supplies which are normally margin scheme supplies
  • do not expect your gross total turnover from these supplies to be more than 1% of your total gross turnover

Examples:

I am a hotelier who buys in My supplies
occasional car hire for guests, the income is less than 1% of my gross annual turnover. can be outside the TOMS.
occasional taxi trips for my guests, the income is less than 1% of my gross annual turnover. are within the TOMS. Although the turnover from these supplies is less than 1%, the resupply of taxi trips is considered to be passenger transport.
the services of guides for my guests, the gross income from this is 1% of my gross turnover. I also buy in car hire, the income from this is also 1% of my gross annual turnover. are within the TOMS. Although both types of supply are eligible for exclusion, the total income from both is greater than 1% of the total business turnover.

4. Special Rules

4.1 What taxable turnover is for VAT registration or de-registration purposes

If you’re considering whether you must register for VAT, or whether you may de-register, your taxable turnover is regarded as the total of:

  • total margin on your taxable (including zero-rated) margin scheme supplies
  • full value of taxable (including zero-rated) in-house supplies
  • full value of taxable agency commission
  • full value of any other taxable (including zero-rated) supplies you make in the UK

4.2 Making Tour Operators Margin Scheme supplies from within a VAT group

You can make TOMS supplies from within a VAT group. But, if you make margin scheme supplies, you cannot belong to a VAT group if any other member of the group has an overseas establishment that makes supplies outside the UK. These would be taxable (including zero-rated) supplies if made in the UK. And if they supply goods and services which will become, or are intended to become, margin scheme supplies (that is, which are for resale, whether or not by the other member concerned).

4.3 VAT you can reclaim on purchases

You may reclaim (outside the TOMS):

You must reclaim any such VAT from the appropriate VAT authorities in the other member states concerned, don’t reclaim such VAT on your UK VAT returns. But if you make supplies in any other member state, you may have to register and account for VAT in that country, in which case this refund procedure may not be appropriate

4.4 VAT you cannot reclaim

You cannot reclaim VAT on purchases that you make to resell as margin scheme supplies, whether incurred in the UK or another member state.

4.5 Work out what type of supply you’re making

When you sell a margin scheme package you are regarded as making a single supply of services for VAT purposes. The nature of your service is that of putting together the package or organising the travel services.

Example:

You buy in hotel accommodation and transport to provide a tour. You are making a single supply of the tour rather than 2 separate supplies of transport and accommodation.

4.6 The place of supply of margin scheme services

The place of supply of your margin scheme supplies depends on where your business is established.

I have an establishment in Place of supply
the UK and nowhere else. The UK.
many countries, but I have sold this package from my establishment in the UK. The UK.
many countries, but I have sold this package from my establishment in another member state. Outside of the UK. This supply is outside the scope of UK VAT, but is within the scope of taxation in the member state where the establishment is.
many countries, but I have sold this package from my establishment outside the EC. Outside of the UK and also outside of the EC. The TOMS does not apply.

4.7 The place of supply of in-house supplies

Whether or not in-house supplies are part of a package, normal place of supply VAT rules always apply, for example:

My supply is:

  • passenger transport, the place of supply is where it takes place
  • accommodation, the place of supply is where it is situated
  • live entertainment, the place of supply is where it s physically performed

Further guidance and more examples can be found in Notice 741 Place of supply of services.

4.8 When your place of supply is in another member state

If you’re making either margin scheme (see paragraph 4.6) or in-house supplies (see paragraph 4.7) where the place of supply is in another member state, you may need to register for VAT in that member state. In order to verify this, you should check that country’s VAT registration threshold. You can get more information directly from the VAT authorities in that country. The addresses can be found in Notice 725 The Single Market.

4.9 VAT liability of margin scheme supplies

Your margin scheme supplies are:

  • standard-rated when enjoyed in the EU (for a list of EU territories, see Notice 725 The Single Market)
  • zero-rated when enjoyed outside the EC

The VAT liability of in-house supplies included within a margin scheme package is not affected by these rules.

4.10 If you make a margin scheme supply of transport that’s partly inside the EU

How you treat this depends on whether the journey has stops or not, see paragraphs 4.11 and 4.12.

4.11 How to treat a journey without stops

If a journey begins or ends outside the EC, it may be treated as being enjoyed wholly outside the EC. Temporary stops for refuelling or ‘comfort’ breaks are not regarded as stops, providing that passengers are not able to break their journey at these times. The return trip is treated the same way unless any material difference occurs between the 2 legs, such as a stop.

4.12 How to treat a journey with stops

Generally where a journey involves travel in both EU and non-EU countries, which involve a stop or stops, within the EC, the journey cannot be regarded as either being enjoyed wholly inside or outside of the EC. In order to account for this type of journey within the TOMS, it is necessary to apportion between the EU and non-EU elements of the journey. There are several ways of doing this (for example, using a mileage based split or a nights spent in or out of the EU split), but whatever the method used it should produce a fair and reasonable result.

4.13 How to treat cruises and connected flights

Transport used Treatment
Cruises Apportionment on the basis of ‘days in and days out’ of the EC, based on the itinerary, is acceptable. For this purpose, the days on which the vessel leaves a non-EU port until it arrives in an EU port are regarded as outside the EC, and the days on which a vessel leaves an EU port until it reaches a non-EU port are regarded as inside the EC.
Connected flights If a second or subsequent flight is an international flight, it will not be regarded as a separate journey provided the connection is made within 24 hours of the scheduled arrival of the first flight. If the second or subsequent flight is domestic, it will not be regarded as a separate journey provided the connection is made within 6 hours of the scheduled arrival of the first flight.

4.14 When your supply becomes taxable (the tax point)

You must use one of the 2 methods detailed below to work out the tax point for your margin scheme supplies and any in-house supplies sold within a margin scheme package.

You cannot change from one tax point method to another without written permission from HMRC. A change of method will be allowed only in exceptional circumstances, and will not normally be allowed mid-way through a financial year.

Method 1 - The tax point is the date of departure of the traveller, or the first date on which the traveller occupies any accommodation, whichever happens first.

Method 2 - The tax point is the same as method 1, or the date of receipt of payment of a certain size, whichever happens first (the date of receipt of money includes receipt by a travel agent on your behalf).

4.15 Other considerations

If you receive a single payment that covers the whole of your selling price in respect of a particular supply or package, there is a single tax point when you receive payment.

If you receive more than one payment, you may have more than one tax point. Each time you receive a payment exceeding 20% of the selling price, a tax point for that amount is created. A tax point is also created each time the payments you have received to date (and not already accounted for) exceed 20% when added together.

Any amount left outstanding at the time of departure of the traveller or the first date the traveller occupies any accommodation must be accounted for on the earlier of these dates.

Example of how method 2 works:

A traveller books a package holiday for a total selling price of £1,200.

I have received Has a tax point been created
a deposit of £120 on booking, 3 months before departure. No, payment is less than 20% of the selling price.
a further £200, 2 months before departure. Yes, the total received (£320) amounts to more than 20% of the selling price.
a further £100, 1 month before departure. Yes, the aggregate total received is more than 20% of the selling price.
the traveller departs and pays the balance on return. Yes, the tax point for the balance remaining (£780) is created on the date of departure.

4.16 Using the Cash Accounting Scheme for the Tour Operators Margin Scheme

You cannot use the Cash Accounting Scheme for the TOMS, because of the special tax point rules detailed above.

4.17 Using the Annual Accounting Scheme for the Tour Operators Margin Scheme

You can use the Annual Accounting Scheme for the TOMS. You should include the figures from your annual TOMS calculation on the VAT return for the year in which the supplies were made, for example:

  • your financial year ends on 31 December 2018
  • your Annual Accounting VAT return also covers a period ending on 31 December 2018

Immediately after your financial year-end you must carry out your annual TOMS calculation and declare the figures from it on your VAT return for the period ending 31 December 2018.

You can find further information in Notice 731 Cash accounting.

4.18 Using the flat-rate scheme for new businesses for the Tour Operators Margin Scheme

New businesses cannot use the flat-rate scheme for TOMS supplies as they’re specifically excluded from the flat-rate scheme for new businesses, see Notice 733 Flat rate scheme for small businesses.

4.19 Self-billing

Services provided to you by an agent or intermediary in arranging any UK margin scheme supply are standard-rated, even if those supplies are enjoyed outside the EC, or consist of transport alone see Notice 709/6 Travel agents and tour operators. If you are authorised to self-bill the commission paid to the agent, see VAT guide (Notice 700) you must ensure that VAT is added as appropriate.

4.20 Issuing a VAT invoice for Tour Operators Margin Scheme sales

VAT invoices cannot be issued for supplies accounted under the TOMS. This is because the amount of output tax charged on a supply will not usually be known at the time the supply is made. VAT can only be determined following the end of your financial year, when the end of year TOMS calculation has been performed.

With effect from 1 October 2007 changes were made to the VAT invoicing regulations. These only affect TOMS supplies made to business customers.

From that date, when a TOMS supply is sold to a business for use in its business (for example travel supplies used by its employees) the invoice has to include a reference to indicate that the TOMS has been applied. It is suggested that the reference either refers to the relevant EC Directive or the relevant UK legislation.

Examples of acceptable indications will include the following:

  • this is a Tour Operators Margin Scheme supply
  • this supply falls under the Value Added Tax (Tour Operators) Order 1987

5. Tour Operators Margin Scheme calculations

5.1 The year-end calculation

The year-end calculation will:

  • work out the total margin achieved
  • apportion the total margin between different types of supplies, that is: margin scheme, in-house, agency
  • apportion the total margin between supplies with different VAT liabilities, for example standard-rated, zero-rated, outside the scope or exempt
  • work out the output tax due on margin scheme supplies and packages
  • work out net values for supplies with different VAT liabilities

5.2 How the year-end calculation works

There are now 2 TOMS accounting methods:

  • the market value calculation
  • the cost-based calculation

Market value calculation

Where the market value calculation is used, it is necessary to follow through to the cost-based calculation, as it is possible that packages could consist of in-house supplies with both a market value and without a market value. Many parts of the market value calculation are common to the cost-based method.

The market value calculation is set out at section 8 of this notice and works on the basis of extracting from a package a selling value for the bought in designated travel services. This is done by deducting the market value of in-house supplies from the full package price, leaving the selling value of the bought in designated travel services on which a margin is then calculated using the formula set out in section 9.

Cost based calculation

The formula for this calculation is at section 9 of this notice and it covers every type of supply which might be accountable for via the TOMS. You only need to use the steps that are applicable to your business.

The apportionment of the total margin calculated is based on the direct costs of your supplies, that is, not indirect or overhead costs. See examples of indirect costs at paragraph 6.4.

It works on the principle that you achieve the same percentage margin on all the elements of your packages.

You will find the calculation easier if you record your direct costs according to type and liability.

Example:

If the purchase prices of your standard-rated margin scheme supplies amount to 30% of your total direct costs, the calculation will determine that 30% of your total margin relates to standard-rated margin scheme supplies.

5.3 The market value method

If you’re using the cost-based method for any package you should, in principle, immediately change to the market value method where you can establish a market value for that package. But if you’re satisfied that the cost-based method is an accurate reflection of the structure of any package, that is, you achieve the same percentage mark-up on all components, you may use the cost-based method instead.

5.4 Changing between the market value and cost-based methods

You should not change back and forward between the 2 methods simply because at any given time one method or the other results in less tax being due.

But, if you’re using the market value method for any package, you should immediately change to the cost-based method if it is no longer possible to establish a market value for that package.

5.5 Simpler version of this calculation

There is a simpler version, if the component supplies of all your margin scheme packages are liable to VAT at the standard rate, you must use the simplified calculation in section 11. This achieves the same result as the full calculations at section 8 and section 9, but avoids the need to work out the market value of in-house supplies (if included in packages).

You cannot use the simplified calculation if all of your supplies are zero-rated or outside the scope of VAT.

Example:

You supply margin scheme packages, consisting of in-house hotel accommodation in the UK and bought in coach transport (to collect and return guests). Both the in-house supply of accommodation and the margin scheme supply of passenger transport are standard-rated, which means the simplified calculation must be used.

5.6 What records to keep

To do the market value calculation you must have a record of the market value for each in-house supply (where used) and in addition to the figure, you’ll need to be able to show how it was calculated and why it’s the market value of the supplies in question.

To do either the full or simplified calculation, you must have a record of the total selling price for margin scheme supplies or packages and separate records of the direct costs for margin scheme supplies and the different types of supplies within margin scheme packages, that is:

  • standard-rated and zero-rated margin scheme supplies
  • standard-rated, zero-rated, exempt and outside the scope in-house supplies
  • standard-rated, zero-rated, exempt and outside the scope agency supplies, for which your commission is not readily identifiable

5.7 When to do the year-end calculation

The information is given in TL4 of Section 13, which has the force of law. This means that the full or simplified calculation must be done immediately after your financial year-end and any output tax adjustment entered on the VAT return for the first VAT period ending after your financial year-end.

If you fail to make the calculation or adjustment when you should have done, you must use the voluntary disclosure procedure . See Notice 700/45 How to correct VAT errors and make adjustments or claims.

If you use the Annual Accounting scheme, see paragraph 4.17.

Example:

Your financial year ends on 31 March. Any adjustment must be entered on the VAT return for periods ending April, May or June, whichever applies to you.

5.8 Waiting for audited accounts before carrying out the year-end calculation or adjustment

You cannot wait for audited accounts before carrying out the year-end calculation or adjustment, although they would assist.

If the audit identifies errors in the calculation after you have submitted the relevant VAT return, you must rework the calculation and then follow the procedures outlined in Notice 700/45 How to correct VAT errors and make adjustments or claims.

If you submit quarterly returns, you will find it useful to bring your VAT periods into line with your financial year-end, both for convenience and to allow you the maximum time in which to make the calculation and any adjustment, you will need to apply in writing to:

HM Revenue and Customs
VAT Written Enquiries Team
4th Floor West
Alexander House
21 Victoria Avenue
Southend-on-Sea
Essex
SS99 1BD

5.9 Separate calculations for EU and non-EU supplies

You can make separate calculations for EU and non-EU supplies if you make supplies (including packages), which are enjoyed outside the EC, you may elect to do separate year-end and provisional calculations, for those supplies.

If you choose to make separate calculations, you must include in the non-EU calculation, all supplies which are enjoyed wholly outside the EC. But if you supply a package that is enjoyed partly within the EU and partly outside the EC, the entire package must be included in the calculation for EU only supplies. The related direct costs being entered to standard-rated or zero-rated steps within the EU only calculation depending on where the supplies are enjoyed.

5.10 Changing between the full and separate EU or non-EU methods

This information is given in TL1 of section 13, which has the force of law. You can only switch to separate calculations (or revert to a single calculation) at the start of your financial year, that is, no later than the due date of your first VAT return for that financial year. Permission to do this must be requested, in writing and in advance of the financial year in question, from HMRC. Permission will not be granted retrospectively.

Permission to switch to separate calculations will only be granted if HMRC is satisfied that your records for direct costs and sales are adequate to calculate accurate but separate sets of margins.

5.11 How to account for VAT during the year

Once you have completed one of the year-end calculations at section 8 and section 9 you’ll have percentages enabling you to provisionally account for output tax and enter net sales values on your VAT returns for the next financial year. Section 10 shows you how to do this. If you’ve not yet completed your year-end calculation because it is the first year that you have been required to use the TOMS, see paragraph 5.13.

Revised provisional percentages must be calculated at the end of each year.

If you have used the simplified method at section 11, the provisional percentage calculation is described in section 12.

5.12 Accounting for VAT on each package instead

Precise figures are not usually known at the time your VAT returns are due, for example, you may not know what discounts you have given or received, what refunds may be due to your customers, how many places you can fill, and so on.

The TOMS requires you to account for output tax on a provisional basis on your VAT returns during the year, with a year-end calculation and any adjustment to be done during the next VAT return period.

5.13 If you’ve just started to use the Tour Operators Margin Scheme

If you have just registered for VAT, or have only just started to make margin scheme supplies, you must work out a provisional percentage to use during the first relevant financial year.

This may be based on either:

  • previous trading figures
  • projected costings and margins
  • actual monthly or quarterly figures during the first year (but not for subsequent years)

Whatever method you choose, the first year-end calculation and appropriate adjustment will correct any under or over payment of VAT during this first year.

If in doubt, you should contact the Helpline for further guidance.

5.14 Tour Operators Margin Scheme calculations

If you make any TOMS supplies (even if you make no profit or all your supplies are zero-rated) you must carry out the TOMS calculations specified in this notice.

6. The year-end Tour Operators Margin Scheme calculation, selling price and costs

6.1 How to work out the selling price of my Tour Operators Margin Scheme supplies

The first step is to add up the selling prices of your supplies with tax points, see paragraph 4.14 during the financial year.

The selling price should include:

  • the total VAT-inclusive selling price of all your margin scheme supplies. If you make a charge for payment by credit card this is also part of your total selling price and must be included in this total.
  • the total VAT-inclusive selling price of any in-house supplies which you have supplied together with margin scheme supplies.
  • amounts received relating to any supplies, packaged with margin scheme supplies which you arrange as an agent, if your commission is not readily identified.
  • monies received from customers who fail to turn up.
  • if you sell through an agent, the full amount paid by, or on account of, the customer (even if the agent deducts a commission and you receive only the balance) - if the agent grants a discount to the customer and makes good this discount, your selling price is the amount paid by the customer plus the ‘top up’ amount added by the agent
  • any surcharges made
  • any air passenger duty payable by the customer

The selling price should not include:

  • any refunds made to customers for unsatisfactory service
  • the value of any packages of supplies which do not include any margin scheme supplies, you should account for * VAT on these in the normal way
  • amounts collected by you as an agent, if your commission is readily identified
  • forfeited deposits and cancellation fees received from customers who cancel a booking
  • any discount you agree with your customer

The resulting total should be recorded at step 1 of your year-end TOMS calculations, see section 8, section 9 and section 11.

6.2 How to work out the market value of your margin scheme supplies

The market value method is used to apportion the selling price of your package in order to determine the selling price of your in-house supplies.

There is no set way to calculate a market value for your in-house supplies but there are some general principles that must be considered:

  • the market value must reflect the reality of your business, use of third party comparators must truly reflect your business model
  • market values may be averaged across a range of packages but must be properly weighted and reviewed regularly.
  • the calculation of the market value must accommodate child and other discounted packages.
  • you should keep full details of the business model used to calculate the market value for verification by HMRC

6.3 How to work out the purchase price of your margin scheme supplies

The first step is to add up the total VAT-inclusive purchase prices of the goods and services that you have bought in for resale as margin scheme supplies. You must only include purchases that relate to the supplies that are included at step 1 of the year-end TOMS calculation, see paragraph 6.1 for that financial year.

The cost must:

  • take into account any discounts or price reductions received from your supplier, even if they are received at a later date
  • include any air passenger duty payable
  • not include the cost of any supplies you make which do not include margin scheme supplies
  • not include any indirect costs, see paragraph 6.4

6.4 Indirect costs

Indirect costs are general business costs, which are not directly and specifically incurred in order to make margin scheme or in-house supplies. Only the direct costs of making your supplies should be included in the calculations.

Some examples of indirect costs are:

  • brochures
  • advertising
  • inspection trips made to research resorts, facilities
  • office expenses (things like telephone, IT equipment, office stationery, rent )
  • accountancy, legal and other similar professional services
  • hiring or employing representatives at airports or resorts (see paragraph 6.9)
  • financial services (including bank, credit card transaction fees and foreign exchange charges)
  • HP, leasing and finance charges for the purchase of assets (including those used in making in-house supplies)
  • market research
  • commission paid to agents

The above list does not of itself have the force of law, but sections 8 to 13 of this notice do.

6.5 Direct costs of making in-house supplies

You must include in your year-end TOMS calculations the VAT-exclusive direct costs incurred in making your in-house supplies, but only to the extent that they are supplied with margin scheme supplies as part of a package. Examples of the types of in-house direct costs that you might incur and advice on what to do if the costs also relate to non-TOMS supplies can be found in section 7 of this notice.

If all your margin scheme package supplies are liable to VAT at the same rate (see paragraph 5.5 of this notice), you do not need to work out these costs.

6.6 If you’re billed for your direct costs in a foreign currency

If any of the supplies that you buy to resell as TOMS supplies are billed to you in a foreign currency, you will need to convert the cost into sterling to work out your margin. There are 5 methods available to do this. They are reproduced in part TL2 of section 13.

You must keep documentary evidence relating to the purchase of the currency to show which rate you have used.

Once you have decided which method you want to use, you will only be allowed to change to a different method at the start of your next financial year, that is, no later than the due date of your first VAT return for that financial year. Permission will not be granted retrospectively.

All these methods represent Tertiary Law (see part TL2 of section 13). No other options can be used.

6.7 How to treat commissions you receive for agency supplies arranged as part of a margin scheme

Agency supplies, where the commission is readily identifiable must be excluded from your TOMS calculations (so you must exclude your commission and all monies for the supply that you have arranged).

Agency supplies, where the commission is not readily identifiable must be included in the TOMS calculations (at step 1) so you must include the gross amount paid by the traveller and the net amount paid to your principal (at steps 8 or 9). This ensures that the VAT payable on your commission is calculated, (at step 22 of the end of year you must exclude your commission and all monies for the supply that you have arranged).

6.8 If you supply insurance in a margin scheme package

Travel and holiday insurance can be supplied as part of a margin scheme package, very often, but not always, as an optional extra. The way in which this insurance must be treated for VAT purposes will depend upon the contractual arrangements, and whether it is the traveller or you (the tour operator) who is the insured person.

If, as normally would be the case, the insurance policy issued by the insurer makes it clear that a named traveller, and not you (the tour operator), is the insured person, there is a supply of insurance from the permitted insurer to the traveller. If you arrange for insurance to be supplied by a named company to the traveller under this type of arrangement, you do so as an agent.

If your commission for such a supply is readily identifiable, the full amount paid by the traveller for the insurance must be excluded from the selling price at step 1 of the year-end TOMS calculation. Similarly, the net premium passed on by you to the insurance company must be excluded from the costs. But if the commission value is not readily identifiable, values relating to the insurance must be included in the year-end TOMS calculation (see paragraph 6.7).

If the insurance is being offered ‘free’ by you as part of a package, the full amount paid by the traveller for the package must be included in the selling price at step 1 of the year-end TOMS calculations.

Any costs you incur in relation to such insurance are not to be included in your year-end TOMS calculations.

You may sometimes enter into an agreement with an insurer under which you (the tour operator) are the insured person. The insurer agrees to reimburse you in respect of claims made by travellers for delay compensation, medical costs and so on. This is an indirect cost and therefore outside the TOMS. If any charge (including Insurance Premium Tax) is passed onto the traveller, this should be included at Step 1 of the year-end TOMS calculations.

You can find out more about insurance in Notice 701/36 Insurance.

6.9 If you suffer bad debts

The rules for claiming bad debt relief are detailed in Notice 700/18 Relief from VAT on bad debts. The procedures for reclaiming VAT on bad debts incurred within the TOMS are exactly as those detailed in that notice, with the following exception. Under the TOMS, bad debt relief is restricted to a maximum of the VAT fraction of the profit margin of the bad debt.

To calculate the amount of the relief due, you should refer to the calculation that you should have performed to calculate the provisional amount of output tax due (see paragraph 5.11 of this notice). Step 2 of section 10 (or step 1 of the section 11) of this calculation gives the percentage of your total sales for that year which were liable to VAT. You should multiply the amount of the bad debt by this percentage and then by the VAT fraction (current at the time the supplies were made) to arrive at the amount of bad debt relief claimable.

6.10 Including the cost of representatives and guides in the calculation

The services of your representatives at airports and resorts are not normally supplies in their own right and are not regarded as in-house supplies. The costs incurred in providing these services (whether bought in or in-house) are indirect costs for the purposes of the TOMS.

But personnel providing specialist services (whether bought in or in-house), for example, guiding, is often a supply in its own right.

If the supply is made in-house (see section 7 of this notice) the place of supply and liability will depend on the exact nature of the service (see paragraph 4.7 of this notice).

6.11 Unforeseen costs

If you have to buy in additional accommodation, transport, meals and so on as a result of delays, breakdowns or other unforeseen circumstances, these usually should be treated as margin scheme supplies unless the cost of the additional items is either:

  • ultimately met by someone else
  • a direct cost of your in-house supplies

Examples:

You have an agreement with an airline from which you buy in air transport that any additional costs arising from flight delays will be met by the airline. This cost has been met by someone else.

Your coach breaks down and you have to hire a replacement vehicle (with or without a driver). This is a direct cost of your in-house supply.

6.12 If you don’t use the market value method

HMRC will first ask you to explain why it is not possible to establish a market value. If it is possible, then they will ask you to confirm that the cost based method is an accurate reflection of the actual structure of the package. If it is not an accurate reflection and it is possible to establish a market value, then you will have to calculate and apply that market value as part of the calculation.

6.13 If your market value is not accepted by HMRC

If an officer of HMRC does not believe your market value is reasonable, the officer will first consider whether it is actually possible to calculate a market value and, if so, what that market value is. If they considers it is possible, then the revised market value will be applied to the calculation. If HMRC does not believe it is possible to calculate a market value, then the cost-based calculation method will be used.

7. Types of in-house supplies

7.1 In-house supplies of coach or rail transport

An in-house supply is one made from your own resources or one where what has been purchased has been materially altered when it is supplied on.

You make an in-house supply of coach or rail passenger transport if you (or a member of your VAT group) own or hire a coach or train, provide a driver, fuel, road licences, repairs, and so on. This is because you have put together these separate components, which become passenger transport.

This passenger transport has not been acquired and resupplied by you to the traveller without material alteration or further processing and so cannot be a margin scheme supply.

7.2 In-house supplies of air transport

It’s possible to make in-house supplies of air transport if you make supplies using aircraft owned by you or a member of your VAT group.

Also, if you charter an entire aircraft for a whole season, for example Slot 1 every Wednesday for May to October inclusive, and put your own catering facilities on board or buy them in from a separate source, and buy in transport journeys from a separate source, then your supply of passenger transport will be in-house and not margin scheme.

7.3 In-house supplies of cruises

You can make in-house supplies of cruises if you, or a member of your VAT group, own the vessel on which the cruise is supplied.

Also, if you charter a vessel from the owner for a period of 2 years or more, whether only with deck or engine crew or with both deck or engine crew and ‘hotel’ domestic or catering staff, the vessel need not be in service continuously throughout the period, but the owner must not have the right to use the vessel to make supplies to any other customer, during the charter period, or hire a vessel including deck or engine crew, but employ or engage your own ‘hotel’ domestic or catering staff then your supplies of cruises on that vessel will be regarded as in-house passenger transport.

7.4 If vehicles, air crafts or vessels are used to provide transport both inside and outside the Tour Operators Margin Scheme

Only in-house passenger transport supplied with margin scheme supplies can be included in TOMS calculations.

If your in-house transport is also used to supply passenger transport outside the TOMS (for example coach hire), the direct cost of your in-house transport must be apportioned to take account of this. Thus income and costs relating to your (non-TOMS) in-house supplies must be excluded from your end of year TOMS calculation or adjustment.

Form of transport Method of apportionment will
road or rail normally be made on a mileage basis
air usually be based on hours flown
sea normally be made on the basis of days used on types of supply

If you wish to adopt any other basis for apportionment, you should submit your proposed method in writing to HMRC in advance of when your year-end calculation or adjustment is due.

7.5 Usual direct costs of supplying in-house passenger transport

In order to undertake the end of year TOMS calculation, you will need to work out the direct costs of in-house supplies that are provided as part of a margin scheme package (see paragraphs 6.5 and 7.4).

The following list of items has been provided in order to assist you in calculating the value of these costs. The following list does not of itself have the force of law, but sections 8 to 13 of this notice do.

Form of transport Details
General depreciation on vehicles, aircraft, vessels, (which you or a member of your VAT group own, must be calculated on the same basis as your audited accounts, including, for example, being spread over a number of years)

rental or leasing of vehicles, aircraft or vessels (see also paragraph 6.4 regarding HP, leasing and finance charges)

crew or drivers costs (including employer’s National Insurance contributions)

subsistence paid to crew or drivers

fuel

insurance

repair and maintenance of vehicles, aircraft or vessels
Road or rail transport garaging and parking

bridge and road tolls

ferry costs

road fund licences
Air transport air passenger duty

landing fees
Cruises berthing fees
Chartering an aircraft (see paragraph 7.2) charter fee

catering charges

transfer journeys
Chartering a vessel (see paragraph 7.3) charter fee

‘hotel’ domestic or catering staff

7.6 How an in-house supply of accommodation is made

If you own a hotel and supply accommodation within it, you are making an in-house supply of accommodation.

If you hire, lease or rent accommodation under an agreement whereby you take responsibility for the upkeep of the property and you are required to undertake any maintenance to the fabric of the building (that is, not just cleaning and changing towels or bed linen and so on), you are making an in-house supply of accommodation.

Also, if you buy in accommodation and provide catering staff from separate sources, for example a ski chalet with a chalet-maid, you are making an in-house supply, commonly referred to as ‘catered accommodation’.

7.7 The usual direct costs of supplying in-house accommodation

In order to undertake the end of year TOMS calculation, you’ll need to work out the direct costs of in-house supplies that are provided as part of a margin scheme package (see paragraphs 6.5 and 7.8).

The following list of items has been provided in order to assist you in calculating the value of these costs. This list itself does not have the force of law, but sections 8 to 13 of this notice do.

  • depreciation of buildings, fixtures and fittings, for which you or a member of your VAT group are liable (calculated on the same basis as your audited accounts)
  • catering purchases
  • heating and lighting
  • rates
  • building insurance
  • rental of equipment or furniture
  • repairs, maintenance and cleaning for which you are liable
  • staff costs (including wages and employer’s National Insurance contributions)

7.8 If premises are used to provide accommodation both inside and outside the Tour Operators Margin Scheme

Only the income and costs relating to in-house accommodation supplied with margin scheme supplies can be included in the TOMS calculations (the law relating to this is contained within the steps of the TOMS calculation, see section 8, section 9 and section 11 and paragraph 1(e) of TL5 in section 13).

If your premises are also used to provide accommodation outside the TOMS, the annual direct cost of your accommodation must be apportioned to take account of this.

This apportionment should normally be on the basis of the number of guests or days booked for each type of supply.

It is also likely that some of the costs will relate to the whole premises (for example, rates, insurance, heating and lighting) even though certain parts of your premises are probably not used specifically to provide hotel accommodation (for example, administrative offices, public bars, private accommodation and so on). If so, these costs should be apportioned on the basis of the floor area for the various parts of the building. If you wish to adopt any other basis for the apportionment you should submit your proposed method in writing to HMRC in advance of when your year-end calculation or adjustment is due.

7.9 In-house supplies on camp or caravan sites

Supplies on camp or caravan sites can be in-house accommodation if you rent space on a site, install your own tents or caravans, then sell accommodation in these tents or caravans.

If you buy in accommodation in a tent or caravan for resale, from a third party who provides the tent or caravan as well as the site, your supply is of margin scheme accommodation, and is not in-house accommodation.

Similarly, if you buy in space on a site and sell it to customers for use with their own tent or caravan, you are making a margin scheme supply.

7.10 If you sell an asset for which depreciation has been entered as an in-house cost

You will need to make an appropriate adjustment to in-house costs, within the year-end TOMS calculation, for the year in which the sale takes place.

This adjustment will be either:

  • a reduction to the relevant in-house costs, in respect of any profit made on disposal, based on ‘book values’ in your accounts
  • an increase to the relevant in-house costs, in respect of a loss made on disposal, based on ‘book values’ in your accounts

7.11 How in-house training is supplied

If you organise a training or tuition course by putting together a number of elements, for example, teachers, classrooms, lecture rooms, projectors, lighting, your supply of training is in-house.

This is because you have both:

  • not bought in training as such, only the constituent parts
  • changed the nature of the supplies bought in, to create a training package

But if you simply purchase a place on a course from a third party, and sell it on as part of a package with one of the supplies listed in paragraph 2.9, for example, passenger transport or accommodation, your supply of this place is a margin scheme supply.

If you make exempt supplies of training (education), you will need to read Notice 706 Partial Exemption.

7.12 Conferences that don’t include margin scheme supplies

If you hire a room at a hotel or conference centre, provide necessary equipment (for example, microphones, projectors and other audio-visual aids, manuals or handouts for delegates) and reception staff, your supply of an organised conference will be in-house rather than margin scheme.

This is because although some of the supplies above are bought in by you, they will not be resupplied in the same state, but put to use as ingredients of a different supply, that is, the organised conference.

Refreshments served at the conference venue during the conference hours are not regarded as separate supplies, even if you purchase them from an outside caterer, as they form part of the in-house supply of the conference.

If you simply buy in a place at a conference from a third party, and sell it on as part of a package with one of the supplies listed in paragraph 2.9 (for example, passenger transport or accommodation), your supply of this place is a margin scheme supply.

7.13 Conferences that include margin scheme supplies

If you also supply overnight accommodation or passenger transport for conference delegates, these do not form part of your in-house organised conference. If they are bought in and resupplied to a business customer, they must be accounted for under the TOMS, unless they are resupplied by the business customer (see paragraph 3.2).

Other supplies, for example, restaurant meals (outside the conference hours), theatre tickets or excursions will also be margin scheme supplies, if supplied as part of the conference package with accommodation or passenger transport.

7.14 Accounting for organised shoots within the Tour Operators Margin Scheme

If you organise a shooting event (including clay pigeons) by putting together a number of elements, for example, the right to use the land, host services, beaters, clays) your supply of the event will be an in-house supply.

If you organise a shoot as above, but create a package that includes one or more margin scheme supplies, for example, passenger transport or accommodation, your supply of the shooting event only will be an in-house supply, whilst the passenger transport or accommodation will be margin scheme supplies.

If you simply buy in and sell on the right to participate in a shoot organised by someone else, this will be a normal (non-TOMS) VAT supply, unless it is provided in a package with one or more of the supplies in paragraph 2.9.

In some circumstances, shoots are not organised in the course or furtherance of a business, and are therefore outside the scope of VAT. If you are unsure about whether your shoot is outside the scope of VAT please contact the Helpline.

8. Market Value calculation (annual adjustment)

Section 8 has the force of law.

  Only use this section if you have packages or parts of packages being apportioned by the market value of the in-house element of the package. On completion of all the steps M1-M5 you must then follow the steps in the cost-based calculation in section 9, taking forward the figures from this section as instructed.
Step Boxes requiring ‘raw data’ entry are in white, boxes which ‘process’ that data are in grey.
  Calculate the value of sales of margin scheme packages
M1 Total the VAT-inclusive selling prices of all your designated travel services and margin scheme packages supplied during the financial year including any that are not ‘market value’ packages.
  Working out the market value
M2 Total the VAT inclusive market value of the standard-rated in-house supplies at M1: carry forward this figure to step 21 of section 9
M3 Total the VAT inclusive market value of the zero-rated and outside the scope in-house travel services at M1: carry forward this figure to step 26 of section 9
M4 Total the VAT inclusive market value of the in-house supplies at step M2 + step M3
  Working out selling value of designated travel services and non-market value in-house supplies
M5 Deduct the total at step M4 from the total at step M1: carry forward this figure to step 1 of section 9

9. Cost-based calculation (Annual Adjustment)

Section 9 has the force of law.

  This section applies to packages being apportioned by reference to the costs of the in-house element of the package, and imports the figures calculated by the market value method in section 8, where that method is used for all or some of the travel packages. Do not include values already entered in section 8 unless explicitly instructed.
Step  
  Working out the total sales of margin scheme packages
1 Bring forward the total calculated at step M5 of section 8. If section 8 is not used then enter the VAT-inclusive selling prices of your designated travel services and margin scheme packages supplied during the financial year.
  Working out the purchase prices of margin scheme supplies
2 Total the VAT-inclusive purchase prices of the standard-rated designated travel services included in the total at step 1.
3 Total the VAT-inclusive purchase prices of the non standard-rated designated travel services (supplies enjoyed outside the EC) included in the total at step 1.
  Working out the direct costs of in-house supplies. Steps 4 to 7 can be ignored where a market value is applied to all in-house supplies under section 8
4 Total the VAT-exclusive direct costs to you of the standard-rated in-house supplies included in step 1. Add a percentage of that amount equivalent to the standard rate of VAT.
5 Total the VAT-exclusive direct costs to you of the zero-rated in-house supplies included in step 1.
6 Total the VAT-inclusive direct costs to you of the exempt in-house supplies included in step 1. Deduct any input tax that you are entitled to recover on these costs.
7 Total the direct costs to you of the in-house supplies included in step 1 that are supplied outside the UK, exclusive of any VAT incurred on these costs that you are entitled to recover. Add to the total an uplift equivalent to the percentage VAT rate applicable to such supplies if you have accounted for VAT on these supplies to the VAT authorities in another member state.
  Working out the ‘costs’ of agency supplies
8 Total the VAT-inclusive amounts paid by you to your principals in respect of the agency supplies included in step 1 for which the consideration you receive is standard-rated.
9 Total the VAT-inclusive amounts paid by you to your principals in respect of the agency supplies included in step 1 for which the consideration you receive is not standard-rated.
  Working out the total margin
10 Add the totals of costs at steps 2 to 9 inclusive
11 Calculate the total margin for all the supplies included in step 1 by deducting the total at step 10 from the total at step 1.
  Apportioning the margin
12 Calculate the margin for the standard-rated designated travel services by applying the following formula:

total at step 2 ÷ by total at step 10 × total at step 11
13 Calculate the margin for the zero-rated designated travel services by applying the following formula:

total at step 3 ÷ by total at step 10 × total at step 11
  Steps 14 to 17 can be ignored where a market value is applied to all in-house supplies under section 8
14 Calculate the margin for the standard-rated in-house supplies by applying the following formula:

total at step 4 ÷ by total at step 10 × total at step 11
15 Calculate the margin for the zero-rated in-house supplies by applying the following formula:

total at step 5 ÷ by total at step 10 × total at step 11
16 Calculate the margin for the exempt in-house supplies by applying the following formula:

total at step 6 ÷ by total at step 10 × total at step 11
17 Calculate the margin for the in-house supplies made outside the UK by applying the following formula:

total at step 7 ÷ by total at step 10 × total at step 11
18 Calculate the consideration for the standard-rated agency supplies by applying the following formula:

total at step 8 ÷ by total at step 10 × total at step 11
19 Calculate the consideration for the non-standard-rated agency supplies by applying the following formula:

total at step 9 ÷ by total at step 10 × total at step 11
  Working out your output tax
20 Calculate the output VAT due on the designated travel services by applying the following formula:

total at step 12 × the VAT fraction
21 Calculate the output VAT due on the standard-rated in-house supplies by applying the following formula:

total at step 4 + total at step 14 + total calculated at step M2 of section 8 × the VAT fraction
22 Calculate the output VAT due on the standard-rated agency supplies by applying the following formula:

total at step 18 × the VAT fraction
  Working out sales values
23 Calculate the VAT-exclusive value of the standard-rated designated travel services by deducting the total at step 20 from the total at step 12.
24 Note the value of the zero-rated designated travel services at step 13
25 Calculate the VAT-exclusive value of your standard-rated in-house supplies by applying the following formula:

total at step 4 + total at step 14 + total calculated at step M2 of section 8 - total at step 21
26 Calculate the value of the zero-rated supplies made within the scheme by applying the following formula:

total at step 5 + total at step 15 + total calculated at step M3 of section 8
27 Calculate the value of your exempt in-house supplies made by applying the following formula:

total at step 6 + total at step 16
28 Calculate the value of your in-house supplies which are supplied outside the UK by applying the following formula:

total at step 7 + total at step 17
29 Calculate the total VAT exclusive value of the supplies:

total of steps 23 to 28. Include this total in box 6 of your VAT return.
  Working out the annual adjustment
30 Calculate the total output VAT due on your designated travel services and margin scheme packages by adding the totals at steps 20 to 22 inclusive.
31 Total the provisional output VAT which has been accounted for during the financial year on the supplies included in the total at step 1.
32 Deduct the total at step 31 from the total at step 30. Include the resulting total in box 1 of your VAT return, either as a payable amount where the amount is positive or as a deductible amount where the amount is negative.

10. Accounting for VAT on the provisional value of designated travel services and margin scheme packages

Section 10 has the force of law.

Step  
  Working out the provisional percentage
1 Calculate the VAT-inclusive amount of your standard-rated supplies of designated travel services and margin scheme packages for the preceding financial year by adding the totals from steps 4, 12, 14 and 18 of section 9, together with the total M2 in the market value calculation in section 8.
2 Calculate the VAT-inclusive standard-rated percentage of the total selling price of all your designated travel services and margin scheme packages for the preceding tax year by applying them one of following formulae:

If you have used a market value to value in-house supplies

total at step 1 of section 10 ÷ total at step M1 of section 8 × 100

If you have not used a market value to value in-house supplies

total at step 1 of section 10 ÷ total at step 1 of section 9 × 100
  Working out the VAT return figures
3 Total the VAT-inclusive selling prices of the designated travel services and margin scheme packages supplied during the prescribed accounting period.
4 Calculate the provisional VAT - inclusive amount of your standard-rated supplies of designated travel services and margin scheme packages made during the prescribed accounting period by applying the following formula:

total at step 3 × percentage at step 2
5 Calculate the provisional amount of output VAT due for the prescribed accounting period by applying the following formula:

total at step 4 × the VAT fraction

11. Simplified end-of-year calculation (Annual adjustment)

Section 11 has the force of law.

Step  
1 Total the VAT-inclusive selling prices of your designated travel services and margin scheme packages supplied during the financial year.
2 Total the VAT-inclusive purchase prices of the designated travel services included in the total at step 1.
3 Calculate the VAT-inclusive amount of the supplies included in step 1 by deducting the total at step 2 from the total at step 1.
4 Calculate the total output VAT due on your designated travel services and margin scheme packages by applying the following formula:

total at step 3 × the VAT fraction.
5 Calculate the VAT-exclusive value of your designated travel services and margin scheme packages by deducting the total at step 4 from the total at step 3.
6 Total the provisional output VAT which has been accounted for during the financial year on the supplies included in the total at step 1.
7 Deduct the total at step 6 from the total at step 4. Include the resulting total in box 1 of your VAT return, either as a payable amount where the amount is positive or as a deductible amount where the amount is negative.

12. Accounting for VAT on the provisional value of designated travel services and margin scheme packages when the simplified calculation applies (all supplies standard-rated)

Section 12 has the force of law.

Step  
1 Calculate the VAT-inclusive standard-rated percentage of the total selling price of all your designated travel services and margin scheme packages for the preceding tax year by applying the following formula:

total at step 3 of section 11 × 100 total at step 1 of section 11
2 Total the VAT-inclusive selling prices of all of your designated travel services and margin scheme packages supplied during the prescribed accounting period.
3 Calculate the provisional VAT - inclusive amount of your standard-rated supplies of designated travel services and margin scheme packages made during the prescribed accounting period by applying the following formula

total at step 2 × percentage at step 1
4 Calculate the provisional amount of output VAT due for the prescribed accounting period by applying the following formula:

total at step 3 × the VAT fraction
5 Calculate the provisional VAT-exclusive value of all of your designated travel services and margin scheme packages made during the prescribed accounting period by deducting the total at step 4 from the total at step 3.

13. Tertiary Law

Section 13 has the force of law.

TL1
1. This section shall come into effect on 1 January 1998.

2. Where a tour operator, in the same financial year, supplies:-

(a) designated travel services or margin scheme packages which are to be enjoyed wholly outside the European Community, and

(b) designated travel services or margin scheme packages which are to be enjoyed wholly or partly within the European Community,

the Commissioners of HMRC may, on being given written notification by the tour operator no later than the due date for rendering his first VAT return for the financial year in which the supplies are to be made, allow the supplies under sub-paragraph (a) to be valued separately from those under sub-paragraph (b).

3. Where a tour operator, under paragraph 2 above, has separately valued supplies of designated travel services or margin scheme packages enjoyed wholly outside the European Community from supplies of designated travel services or margin scheme packages enjoyed wholly or partly within the European Community, the Commissioners of HMRC may, on being given written notification by the tour operator no later than the due date for rendering his first VAT return for any subsequent financial year, allow supplies to be made in such subsequent financial year to be valued using the method specified at section 8 of this notice.
TL2
1. This section shall come into effect on 1 January 1998.

2. Where:-

(a) a supply of goods or services is acquired by a tour operator for the purpose of supplying a designated travel service, and

(b) the value of the supply to the tour operator is expressed in a currency other than sterling,

the tour operator must convert such value into sterling for the purposes of steps 2 and 3 of section 8 of this notice or step 2 of section 11 of this notice.

3. For the purposes of paragraph 2 above, the tour operator must use:

(a) the rate of exchange published in the Financial Times using the Federation of Tour Operators’ base rate current at the time such supplies were costed by the person from whom the tour operator has acquired the goods or services, or

(b) the commercial rate of exchange current at the time that the supplies in his brochure were costed, or

(c) the rate published in the Financial Times on the date that the tour operator pays for the supplies, or

(d) the rate of exchange which was applicable to the purchase by the tour operator of the foreign currency which they used to pay for those supplies, or

(e) the period rate of exchange published by HMRC for customs purposes in force at the time the tour operator pays for those supplies.

4. Where the methods at paragraph 3(a) or (b) above are used, the tour operator must publish the rate in any brochure or leaflet in which these supplies are held out for sale.

5. The Commissioners of HMRC may, on being given written notification by a tour operator no later than the due date for rendering his first return of his financial year, allow a different method to be used in that financial year from that used in the previous financial year.
TL3
1. This section shall come into effect on 1 October 2010

2. Where possible the value of any in-house supplies shall be valued by reference to their market value and the value of designated travel services and agency supplies shall be determined by applying the formula set out in section 8 of this notice (hereinafter referred to as the ‘market value calculation’), unless during the relevant period all such supplies are liable to VAT at the same rate, in which case the value shall be determined by applying the formula set out in section 11 of this notice (hereinafter referred to as ‘the simplified calculation’).

3. On completing the steps in the market value calculation the figures produced must be entered into the cost-based calculation as detailed in section 9 together with any packages, or parts of packages, for which the market value calculation is not being done.

4. Where the cost-based calculation in TL4 accurately reflects the structure of the package holidays you may opt to use the cost-based calculation for all packages regardless of whether a market value can be established for some or all of the packages and section 8 calculation may be ignored.

5. Where the market value calculation has been used a tour operator may only cease to use that method where it becomes impossible to continue to determine a market value of the supply in question or where the cost-based calculation accurately reflects the structure of the package. A change of method to gain a more favourable VAT outcome is not permitted.
TL4
1. Subject to sections TL1 and TL3 of section 13 of this Notice, the value of designated travel services, in-house supplies and agency supplies shall be determined by applying the formula set out in section 9 of this notice (hereinafter referred to as the ‘cost-based calculation’), unless during the relevant period all such supplies are liable to VAT at the same rate, in which case the value shall be determined by applying the formula set out in section 11 of this notice (hereinafter referred to as ‘the simplified calculation’).

2. The provisional value of designated travel services, in-house supplies and agency supplies shall be determined in accordance with the formula set out in:-

section 10 of this notice, where the cost-based calculation applies, or

section 12 of this notice, where the simplified calculation applies.

3. A tour operator shall be required to account for VAT on the provisional value of his supplies of designated travel services, in-house supplies and agency supplies on the VAT return for the prescribed accounting period in which the supplies are made.

4. The difference between the amount of VAT due on the value of designated travel services, in-house supplies and agency supplies supplied during a tour operator’s financial year, and the amount of VAT paid on the provisional value of those supplies, shall be adjusted by the tour operator on the VAT return for the first prescribed accounting period ending after the end of the financial year during which the supplies were made.
TL5
1. For the purpose of sections 8 to 13 of this notice:-

(a) ‘in-house supply’ means a supply by a tour operator which is neither a designated travel service nor an agency supply,

(b) ‘market value’ means the selling price of the in-house element of a ‘margin scheme package’ were it to be sold independent of the package in an arms-length transaction to an unconnected person.

(c) ‘cost based method’ means the calculation in section 9 of this notice.

(d) ‘agency supply’ means a supply arranged by a tour operator between 2 other persons, in the capacity of an agent or intermediary for either person, for which the tour operator receives a consideration, the value of which is not readily identifiable,

(e) ‘margin scheme package’ means a single transaction which includes one or more designated travel services,

(f) ‘financial year’ means a period corresponding to a tour operator’s financial year for accounting purposes,

(g) ‘direct costs’ means costs which are directly and specifically attributable to the provision of in-house supplies, to the extent that they are so attributable,

(h) ‘VAT fraction’ has the same meaning as in [VAT guide (Notice 700)](https://www.gov.uk/guidance/vat-guide-notice-700

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Published 14 December 2009