Munster’s first independent VAT consultancy practice providing specialist VAT and Indirect tax advisory, assurance and interim management support services to owner managed businesses, small & medium enterprises, accountants and legal practices.

Tour Operator Margins Scheme – Now is the time to look back

Friday, October 1, 2010

by Nick Ryan

It is only some ten months ago since Revenue introduced a radical set of changes for the treatment of tour operator’s supplies under the introduction of the Tour Operators Margin Scheme, TOMS. Although the introduction of the scheme was a measure to bring Ireland in line with EU practices it has brought with it some confusion particularly in regard to its application and who is affected by it.
TOMS not only covers tour operators and travels agents, and care should be taken to determine their status i.e. agent, principal or intermediary , but also organisers of sporting events and conferences, hoteliers and training service providers also qualify for some of their services/supplies. The scheme also impacts on intermediaries as, although an intermediary is not covered by the scheme, rules governing the VAT treatment of their supplies have changed to bring them in line with the introduction of TOMS.
In essence the scheme is designed to enable travel agents and alike to account for VAT on all the travel services they supply in the Member State in which they are established. This is largely an administrative step to avoid the need for travel agents to register in other Member States where they supply travel services.
So what is the travel agent’s margin scheme? Legislation defines it as the difference between the total consideration, or sale price, for the services provided by the travel agent less the cost of the bought in services required to make up this package or margin scheme service. VAT is then accounted for on the margin applied.
The scheme covers bought-in services supplied by a travel agent to a traveller for the travellers’ direct benefit and includes services such as accommodation, flights, tours etc. The services can either be packaged together or provided separately. In house supplies provided by travel agents utilising their own resources are not included as part of the margin scheme and are therefore taxed under the normal VAT rules. Where a travel agent provides a package comprising of both bought in and in house supplies then the travel agent has to apportion the consideration between the two types of services and apply VAT accordingly.
With regard to the recovery of VAT by businesses operating the margin scheme, there is no right to deduct VAT on the bought in goods or services used for the packages sold under the margin scheme. VAT can be deducted subject to the normal rules for other operating costs and goods/services acquired which are not used for the making of margin scheme supplies.
A simplified accounting system can be availed of by travel agents who experience difficulty in identifying margin scheme supplies for deposits received and there are Revenue approved methods for these purposes together with a transitional rule to cover the commencement of the scheme.
Care should be taken on a number of areas particularly to the application of the margin scheme and the VAT liability to be applied covering such areas as the provision of travel insurance, services to businesses and the application of the transitional measures for those travel agents applying the simplified method. There is also the impact of the scheme on intermederiaries whose services are now considered to fall within the VAT net.
For supplies to business customers there are specific requirements a travel agent is required to undertake with regard to the invoicing of their services and this is dependent on whether there is an entitlement to deduct the VAT i.e. on accommodation by the business. Generally this covers the arranging of conferences by travel agents.
Although the scheme is relatively new in Ireland it is surprising how its introduction has fallen under the radar by businesses who may or may not be impacted by it. Schemes such as this are designed to simplify the administration and accounting of VAT though, as often is the case, the application of the scheme can add complexity and confusion leading to costly errors. From my memory as a VAT inspector with UK Revenue & Customs, the mere mention of the Tour Operators Margin Scheme brought fear and dread to the officer concerned having to visit such a business, nothing was straightforward and it always resulted in long drawn out inspections.
Bearing in mind the changes this scheme introduces, we would recommend that all businesses falling under the TOMS umbrella should undertake a review of their VAT accounting procedures to ensure they are managing their VAT in line with Revenue’s guidelines announced in Revenue e-brief 29/2010.