The Tour Operators’ Margine Scheme is a special rule governing how tour operators (including trip and conference planners) charge VAT on the services they provide.
The VAT, or value-added tax, is the UK’s consumption tax. As a general rule, sellers of goods and services charge a rate of 17.5% (due to rise to 20%), with exceptions and exemptions in certain industries. However, Revenue & Customs has instituted a number of special procedures, referred to as “schemes,” under which certain businesses can claim or charge VAT at privileged rates. These include the Capital Goods Scheme, the Second-Hand Goods Margin Scheme, and the Tour Operators’ Margin Scheme.
The details of the Tour Operators Margin Scheme are covered in Notice 709/5. It can be used by any businesses who sell travel, accommodation, and related services. The definition of this term is relatively flexible: it can include traditional tour operators as well as conference services companies, bus service operators when they buy hotel rooms for clients as part of a travel package, and hotel owners who buy bus services (such as transport or tours) for their guests. It can be applied with respect to tour services regardless of whether they take place in Britain or in any other country (inside or outside Europe), but cannot be applied to tour services or packages which are sold to other agents or companies for the purpose of resale to end customers.
In essence, all VAT-registered businesses must account for the tax on the sale price of their supplies, and can also reclaim any VAT they pay on goods for sale. What the Tour Operators Margin Scheme does is allow eligible tour operators to charge and account for VAT solely on their own revenue margin, the difference between what they paid to arrange for travel services and what they are charging their customers. Travel services include hotel accommodation, transport services, trips, the cost of supplying tour guides where applicable, and fees for airport lounges, again where applicable. If meal catering or admission to events (such as sports events) are part of the package, the same rules apply to those.
If you are attempting to evaluate the tax implications of the Tour Operators Margin Scheme for your UK business, you should familiarize yourself with the relevant publications directly and, if necessary, speak to a lawyer who specializes in tax law. More specific examples, and instructions on how to calculate tax owing, can be found in Notice 709/5.