Does the Tour Operator Margin Scheme apply when reselling airline tickets?

Does the Tour Operator Margin Scheme apply when reselling airline tickets?


A recent tribunal case with the European Court of Justice has raised the question of whether buying and reselling airline tickets is subject to the standard VAT regime or the special scheme for Tour Operators.

 

What is TOMS?

 

Under standard UK and EU VAT rules a business is allowed to recover VAT on its costs provided that they are incurred for business purposes. Buying and reselling goods or services typically allows businesses to recover the VAT on the cost of purchasing the goods or services on the grounds that they would charge VAT when resold to customers.

 

There is an important exception to this where buying and reselling certain types of services will not follow this rule. Specifically, services such as accommodation, passenger transport or catering will fall under the so-called Tour Operator Margin Scheme (TOMS) if bought and resold without material alteration by a business.

 

When TOMS was introduced in the early days of the current VAT system it was meant to help Tour Operators, that bought such services from foreign suppliers, packaged them and sold them to local consumer clients. TOMS allowed the tour operators not to charge VAT to their clients but at the cost of not recovering the input VAT charged by suppliers. For many tour operators this was not an issue as the suppliers were often based overseas and VAT recovery in such cases was difficult anyway.

 

However, over the years the TOMS regime has been expanded to cover all businesses that buy and resell services without material alteration such as those mentioned above, even if they were not Tour Operators. Moreover, the regime is mandatory and therefore many businesses will have their services fall under this regime.

 

Finally, in the past few years there have been a number of instances where the functioning of the regime has been challenged by both tax authorities and tax payers, especially on the question of whether individual services also fall under TOMS, not just the typical package of services.

 

C-793/23 Dragoram Tour

 

The case C-763/23, Dragoram Tour involves a Romanian travel agency, Dragoram Tour which bought airline tickets and sold them to private individuals without any other accompanying services.

 

The business believed the airline tickets should follow the standard VAT rules and not fall under the TOMS regime as they were not sold as a package.

 

The case went through the national courts and was eventually referred to the European Court of Justice (CJEU).

 

The CJEU’s decision

 

The CJEU ruled that the TOMS regime must be applied to all taxable persons who buy and resell airline tickets without material alteration, even if no other services are provided (i.e. there is no package of services). The application of TOMS is mandatory according to the Court and the interpretation of the CJEU is in line with its previous jurisprudence.

 

The decision of the CJEU does not have an impact in the UK, however it is worth noting that HMRC’s guidance on the UK TOMS rules also states individual services that are bought and resold without material alteration will fall under this regime.

 

If you have any questions around this case or around the TOMS regime do reach out to us.