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What Travel Businesses Should Know About VAT and TOMS – In Light of a Court Case
- UPECO Columnist
- Mar 27
- 4 min read
A Practical Guide for Tour Operators, Travel Agents, and Accommodation Providers
The Tour Operator Margin Scheme (TOMS) is a special VAT scheme intended to simplify VAT for businesses in the travel sector. However, recent legal developments have highlighted confusion and uncertainty around how TOMS should be applied — especially when services are adapted or transformed before resale.
This article breaks down the essentials of TOMS, explains the legal background, and uses real-world scenarios to help businesses determine when the scheme applies — and when it doesn’t.
What Is TOMS?
TOMS is a simplification mechanism for VAT that applies when a business:
Buys in travel services (e.g. hotel accommodation, passenger transport, excursions) from other businesses, and
Sells those services to travellers in its own name.
Key Features:
VAT is charged only on the profit margin, not the total sale value.
The business cannot recover input VAT on the services included in the TOMS calculation.
It is especially useful for avoiding the need to register for VAT in multiple countries, which would otherwise be required when buying or selling travel services in different jurisdictions.
How TOMS Works — A Simple Example
Step | Amount |
You buy a travel package from a third party | £1,000 + £200 VAT = £1,200 total |
You sell it to your customer | £1,500 |
Your profit margin | £300 |
VAT payable under TOMS (20% of margin) | £60 |
Under TOMS:
You cannot recover the £200 input VAT.
You only pay VAT on the £300 profit margin, not the full £1,500.
Who Qualifies for TOMS?
A business is likely TOMS-eligible if:
It buys in travel-related services from other taxable suppliers.
It sells to travellers in its own name, not as an agent.
The service is for the direct benefit of the traveller (i.e. the traveller actually uses or enjoys the service).
The Legal Conflict: Direct Benefit vs. Material Alteration
The original EU law (Principal VAT Directive 2006/112/EC) says that TOMS applies when services are bought and used “for the direct benefit of the traveller.”
However, UK legislation — specifically the VAT (Tour Operators) Order 1987 — adds a condition:
The service must be supplied “without material alteration or further processing.”
This extra wording has caused disputes about whether certain transactions still qualify for TOMS.
The Sonder Case: A Turning Point
In a recent case, Sonder Europe Ltd, a UK-based travel business, leased residential properties for up to 10 years, furnished and maintained them, and then rented them as short-term holiday accommodation.
Sonder believed TOMS applied because the traveller received a direct benefit from the accommodation. However:
HMRC disagreed, arguing that the original lease was materially altered before being passed on to the traveller.
The Upper Tribunal agreed with HMRC, saying the furnishing, maintenance, and transformation into short-term lets meant the original service was not passed on “as-is.”
Why It Matters:
The court ruled that even if the end result benefits the traveller, TOMS doesn’t apply if the bought-in service was substantially changed before being resold.
Comparing UK and EU Law on TOMS
EU Law (PVD) | UK Law (Tour Operators Order) |
“Direct benefit of the traveller” | “Without material alteration or further processing” |
Broad principle | Stricter condition |
No mention of transformation | Disqualifies significantly changed services |
While UK law must still be interpreted in line with EU law (under the European Union (Withdrawal) Act 2018), the court in Sonder held that the UK wording was still consistent with the EU’s original intent.
Real-World Scenarios: Does TOMS Apply?
Scenario | TOMS Applies? | Why? |
You resell hotel rooms or pre-packaged tours without changes | Yes | Services passed on directly |
You lease property, furnish and manage it, then let it short-term | No (as per current case law) | Materially altered before resale |
You buy a coach with a driver and resell individual seats | Possibly not | Courts may view this as altering the original service |
You act as an agent, selling in the supplier’s name | No | TOMS only applies to principals, not agents |
What Should Businesses Do Now?
Review your services: Are you passing on what you bought directly, or modifying it first?
Submit protective claims: If you believe TOMS should apply, even if HMRC disagrees, you may wish to make a protective claim in case a future appeal changes the law.
Monitor legal developments: Sonder may appeal to a higher court, and future rulings could reshape how TOMS is interpreted.
Plan carefully for new business models: Leasing, developing, or transforming travel services may push your business outside TOMS, with full VAT becoming payable.
Final Thoughts
The Sonder decision marks a shift in how strictly TOMS is interpreted in the UK. While the intention of the scheme is to simplify VAT for travel providers, the courts are leaning toward a narrower reading — especially where services are transformed before resale.
If your business is involved in holiday accommodation, transport, or multi-part travel packages, now is the time to review your VAT treatment and ensure you're compliant — or protected in case the legal interpretation evolves.
© 2025 UPECO LTD
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ATTENTION!
This article intends to give only a general informative picture and should not, in any case, be taken as a rule. It is strongly recommended to seek a full and professional guidance specifically for your circumstances before making any decisions.
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