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.

• From: HM Revenue & Customs
• Published: 14 December 2009
• Last updated: 18 April 2024 — See all updates

1. Overview

This notice cancels and replaces Notice 709/5 (6 September 2019) and provides guidance about the Tour Operators’ Margin Scheme (TOMS) from 1 January 2021 and on the temporary 5% reduced rate of VAT that applies between 15 July 2020 and 31 March 2021.

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 (VAT Notice 700).

This notice should be read in conjunction with Travel agents (VAT Notice 709/6).

This notice has been updated to reflect legislative changes that temporarily apply a 5% reduced rate on supplies of catering, holiday accommodation, shows and other attractions.

All references in this notice to ‘temporarily reduced rated’ or ‘temporary reduced rate’ are to supplies made between 15 July 2020 to 31 March 2021 that temporarily benefit from the reduced rate.

The UK will maintain a UK version of the TOMS. This notice tells you about the UK version of TOMS and applies to supplies made in both Great Britain and Northern Ireland unless otherwise stated. All references to the UK in this notice apply to these situations.

1.2 The law

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) regulation 14(1)(n)
• Value Added Tax (Reduced Rate) (Hospitality and Tourism) (Coronavirus) Order 2020, Article 4 — introduction of new Groups into Schedule 7A to the Value Added Tax Act 1994 (VATA)

Under this law, HMRC has certain powers, including powers to specify how to work out the value of supplies covered by the TOMS (see section 5 and sections 8 to 13).

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

2. Introductions to TOMS

2.1 TOMS

It’s 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).

TOMS is a simplification measure in that it treats a bundle of supplies made to the same person as a single supply made in the UK. In most respects it continues the principles of the EU TOMS.

2.2 Who TOMS 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
• coach operator who buys in hotel accommodation in order to put together a package
• company that arranges conferences, including providing hotel accommodation for delegates

2.3 Who must use TOMS

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

• Margin Scheme supplies
• other types of supply (for example an in-house supply) packaged or supplied with Margin Scheme supplies (see paragraph 2.9 and paragraph 2.11)

2.4 Which supplies TOMS covers

TOMS does not apply to:

• supplies you have arranged as a disclosed agent or intermediary and your commission is readily identifiable (see paragraph 2.14 and paragraph 6.7)
• in-house or agency supplies you make which are not packaged or supplied with Margin Scheme supplies (see paragraph 2.12 and paragraph 2.13)
• supplies that are incidental to your other supplies (see paragraph 3.5)

If you’re unsure as to whether or not you must use 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 TOMS

TOMS applies to travel services that are enjoyed both within and outside the UK.

2.6 How TOMS works

If you’re 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 TOMS, you cannot reclaim any VAT charged on the travel services and goods you buy in and resupply, any tax on such goods or services is accounted for in the relevant country by the providers of those services (hotels, airlines and so on).

As a tour operator based in the UK, you only account for VAT on 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. This is the margin you make on your Margin Scheme supplies, see paragraph 2.7.

The scheme also brings to account VAT on any in-house supplies you make as part of a package.

Section 5 explains how to work out your output tax using 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 TOMS, see paragraph 4.3.

2.7 Margin Scheme supply

A Margin Scheme supply is a ‘designated travel service’ as defined in law, see part TL5 of section 13.

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 Margin Scheme supply, other than for the purpose of resupply.

2.9 Margin Scheme supplies

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 together 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.

If you make a mixture of in-house supplies and Margin Scheme supplies, they must all be accounted for using 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 8 and section 9.

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

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 TOMS

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 account for any VAT on your commission under the normal rules (that is, not using TOMS) — see travel agents (VAT Notice 709/6).

But if you use TOMS, because you also 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 a country outside the UK your supply is outside the scope of TOMS and normal place of supply rules apply. Further guidance and more examples can be found in place of supply of services (VAT Notice 741A).

2.16 Temporary reduced rate and TOMS

The temporary reduced rate for hospitality and tourism will have an effect on the mechanics of the TOMS calculation.

The temporary reduced rate applies to supplies:

• in the course of catering
• of hotel accommodation
• shows and similar attractions

2.16.1 Margin

The reduced rate does not apply to making arrangements of such supplies so where you make margin scheme supplies the margin remains taxable at either standard rate or zero-rate paragraph 4.9.

Relevant supplies you buy in will be subject to the reduced rate, which although not recoverable as input tax may reduce the cost applied to the margin.

2.16.2 In-house

In-house supplies will be subject to the temporary reduced rate. These should be recorded separately using the normal tax point rules and following the guidance in Notice 700, section 30 on changes in tax rates. Input tax should be deducted as normal at the rate shown on the invoice.

2.16.3 Calculation

The scheme calculations at sections 8 and 9 have been amended to include the appropriate additional steps.

2.16.4 Provisional percentage

As there is no change to the VAT rate applied to the margin, tour operators without any in-house supplies should continue to use the existing provisional percentage for the rest of this TOMS year and to calculate next year’s as normal.

TOMS users with in-house supplies may also follow the treatment above this will ensure that the reduced rate is accounted for in a simple way.

You may recalculate the provisional percentage to be applied for the period of the temporary reduced rate as follows.

1. Rework the last annual calculation before the reduced rate came into force on the assumption that the reduced rate was in place for relevant in-house supplies for the full year.
2. This will give you a revised provisional percentage (RRPP) to be applied for the duration of the reduced rate (15 July 2020 to 12 January 2021).
3. Do the next year-end calculation as normal remembering to enter the reduced-rate supplies in the appropriate steps.
4. Rework that year-end calculation on the presumption that the reduced rate did not apply.
5. That is your revised standard rate provisional percentage going forward.

If your year end falls within the period of the reduced rate you will need to go back to step 1 for the year just ended. Alternatively, you may continue to use the RRPP calculated above in step 2 for the whole period of the reduced rate.

3. Supplies to businesses

3.1 Making supplies to business customers

Supplies to business customers must be accounted for under the TOMS, this includes supplies to be consumed by the business (for example, a business trip by an employee) and supplies to other businesses for subsequent resale (wholesale supplies).

However, you may opt out of the TOMS for business to business wholesale supplies — read paragraph 3.2

3.2 Wholesale supplies

Business to business wholesale (B2B) supplies fall within the TOMS. However, you may opt to treat these supplies outside of the TOMS if you wish.

Normal place of supply and liability rules apply if you treat your supply as outside of the TOMS.

Normal place of supply rules for the major travel supplies are for:

• passenger transport, where it takes place
• accommodation, where it is situated
• live entertainment, where it is physically performed

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

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 TOMS and must be accounted for using the scheme.

This means that businesses will not be entitled to receive a VAT invoice for supplies made to them using TOMS — see paragraph 4.19 for further details on invoicing requirements.

3.4 Supplying educational school trips which include Margin Scheme supplies

These must be accounted for using TOMS (unless the body they are supplied to will resell them as wholesale supplies, see paragraph 3.1). If you’re unsure whether or not your supply will be resupplied, then you should use 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, you:

• do not buy in any supplies of accommodation or passenger transport for resale (a definition of passenger transport can be found in The VAT treatment of passenger transport (VAT Notice 744A))
• 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

The following are examples of services outside of and within TOMS.

Example 1

If you are a hotelier who buys in occasional car hire for guests and the income is less than 1% of your gross annual turnover — your supplies can be outside TOMS.

Example 2

If you are a hotelier who arranges occasional taxi trips for guests and the income is less than 1% of your gross annual turnover — your supplies are within TOMS.

Although the turnover from these supplies is less than 1%, the resupply of taxi trips is considered to be passenger transport.

Example 3

If you are a hotelier who arranges the services of guides for guests (the gross income from this is 1% of your gross turnover) and you also buy in car hire (the income from this is also 1% of your gross annual turnover) — your supplies are within 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, for example your supply of arranging the Margin Scheme supplies
• full value of:
  • taxable (including zero-rated) in-house supplies
  • taxable agency commission
  • any other taxable (including zero-rated) supplies you make in the UK

4.2 Making TOMS supplies from within a VAT group

You can make TOMS supplies from within a VAT group unless any other member of the group has an overseas establishment:

• that makes supplies outside the UK which would be taxable (including zero-rated) supplies if made in the UK
• which supply goods or services that will become, or are intended to become, Margin Scheme supplies

4.3 VAT you can reclaim on purchases

You may reclaim (outside TOMS) UK VAT incurred on your overheads and on purchases relating to your in-house supplies, subject to the normal rules see VAT guide (VAT Notice 700).

4.4 VAT you cannot reclaim

You cannot reclaim VAT on purchases that you make to resell as Margin Scheme supplies.

4.5 Work out what type of supply you’re making

When you sell a Margin Scheme package you’re 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’re making a single supply of arranging 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 service depends on where your business is established.

Your place of supply will be the UK if you have an establishment in:

• the UK and nowhere else
• many countries, but you have sold the package from your establishment in the UK

Your place of supply will be outside of the UK and TOMS will not apply if you have establishments in many countries but you sold the package from an establishment outside the UK.

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:

The place of supply of:

• passenger transport, where it takes place
• accommodation, where it is situated
• live entertainment, where it is physically performed

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

4.8 VAT liability of the Margin

Your Margin liability is:

• standard-rated when the tour is enjoyed in the UK
• zero-rated when enjoyed outside the UK

The temporary reduced rate does not apply to the margin.

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

4.9 If you make a Margin Scheme supply of transport that’s partly inside the UK

How you treat this depends on whether the journey has stops or not, see paragraph 4.10 and paragraph 4.11.

4.10 How to treat a journey without stops

If a journey begins or ends outside the UK, it may be treated as being enjoyed wholly outside the UK. 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.

4.11 How to treat a journey with stops

Generally where a journey involves travel inside and outside the UK, which involve a stop or stops, within the UK, the journey cannot be regarded as either being enjoyed wholly inside or outside of the UK. In order to account for this type of journey within TOMS, it is necessary to apportion between the UK and non-UK 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 UK split), but whatever the method used it should produce a fair and reasonable result.

4.12 How to treat cruises and connected flights

Cruises — Apportionment on the basis of ‘days in and days out’ of the UK, based on the itinerary, is acceptable. For this purpose, the days on which the vessel leaves a non-UK port until it arrives in an UK port are regarded as outside the UK, and the days on which a vessel leaves an UK port until it reaches a non-UK port are regarded as inside the UK.

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 scheduled to be within 6 hours of the scheduled arrival of the first flight.

4.13 When your supply becomes taxable (the tax point)

You must use one of the following 2 methods 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).

4.14 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.

You receive a deposit of £120 on booking, 3 months before departure. A tax point is not created as the payment is less than 20% of the selling price.

You receive a further £200, 2 months before departure. A tax point would then be created as the total received (£320) amounts to more than 20% of the selling price.

A further £100 is paid 1 month before departure. A tax point would be created at this point as the aggregate total received is more than 20% of the selling price.

If the traveller departs and pays the remaining balance on return, a tax point for the remaining balance (£780) is created on the day of departure.

4.15 Using the Cash Accounting Scheme for the TOMS

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

4.16 Using the Annual Accounting Scheme for the TOMS

You can use the Annual Accounting Scheme for 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
• 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 Cash Accounting Scheme (VAT Notice 731).

4.17 Using the Flat Rate Scheme for new businesses for the TOMS

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 VAT Notice 733: Flat Rate Scheme for small businesses.

4.18 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 UK, or consist of transport alone see Travel agents (VAT Notice 709/6). If you’re authorised to self-bill the commission paid to the agent, see VAT guide (VAT Notice 700) you must ensure that VAT is added as appropriate.

4.19 Issuing a VAT invoice for TOMS sales

VAT invoices cannot be issued for supplies accounted for under 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.

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.

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. TOMS 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
• work out the output tax due
• work out net values for the supplies

5.2 How the year-end calculation works

There are now 2 TOMS accounting methods, the:

• market value calculation
• cost-based calculation

Market value calculation

The market value calculation is set out in section 8 and works on the basis of extracting the market value of in-house supplies from the full package price. 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 Margin Scheme supplies on which a margin is then calculated using the formula set out in section 9.

You may also be making in-house supplies for which a market value cannot be applied. These supplies should continue to be included in the cost-based calculation in section 9.

Cost-based calculation

The formula for this calculation is in section 9 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 in-house and Margin Scheme 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

You should, in principle, use the market value method where you can establish a market value for in-house supply. 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

If all your in-house supplies and all your margin scheme supplies are liable to VAT at 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 any of your supplies are zero-rated, reduced rated or outside the scope of VAT.

Example

You supply 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 on the 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. See paragraph 2.16 about the treatment of the temporary reduced rate for hospitality and tourism.

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, reduced 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 VAT Notice 700/45: how to correct VAT errors and make adjustments or claims.

If you use the Annual Accounting Scheme, see paragraph 4.16.

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 VAT 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 in 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 our Written Enquiries Section.

5.9 Separate calculations for UK and non-UK supplies

You can make separate calculations for UK and non-UK supplies if you make supplies (including packages), which are enjoyed outside the UK, 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-UK calculation, all supplies which are enjoyed wholly outside the UK. But if you supply a package that is enjoyed partly in the UK and partly outside the UK , the entire package must be included in the calculation for UK only supplies. The related direct costs being entered to standard-rated, zero-rated or reduced rated steps within the UK and UK only calculation depending on where the supplies are enjoyed.

5.10 Changing between the full and separate UK or non-UK 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 have 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.

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 TOMS

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 VAT helpline for further guidance.

5.14 TOMS 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 TOMS calculation, selling price and costs

6.1 How to work out the selling price of your TOMS supplies

The first step is to add up the selling prices of your supplies with tax points (see paragraph 4.13) during the financial year.

The selling price should include:

• the total VAT-inclusive selling price of all your Margin Scheme supplies
• 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
• forfeited deposits and cancellation fees received from customers who cancel bookings where these exceed 20% of the agreed price, when totalled, if you use method 2 to calculate tax points
• 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

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
• any discount you agree with your customer
• forfeited deposits and cancellation fees received from customers who cancel bookings if you use method 1 to calculate tax points, or you use method 2 and have received 20% or less of the agreed price

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 Margin Scheme 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’re 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 — for example, in-house supplies
  • 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)
• hire purchase (HP), leasing and finance charges for the purchase of assets (including those used in making in-house supplies)
• market research
• commission paid to agents

This list does not in itself have force of law, but sections 8 to 13 of this notice do.

6.5 Direct costs of making in-house supplies

You must include the VAT-exclusive direct costs incurred in making your in-house supplies (packaged with margin scheme supplies) in your year-end TOMS calculations. Advice on what to do if the costs also relate to in-house supplies that are sold stand-alone can be found in section 7.

If all your in-house supplies and Margin Scheme supplies are liable to VAT at standard rate (see paragraph 5.5), 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’re 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 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 Insurance (VAT Notice 701/36).

6.9 If you suffer bad debts

The rules for claiming bad debt relief are detailed in Relief from VAT on bad debts (VAT Notice 700/18). The procedures for reclaiming VAT on bad debts incurred within TOMS are exactly as those detailed in that notice, with the following exception. Under 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). 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 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) the place of supply and liability will depend on the exact nature of the service (see paragraph 4.6).

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 do not 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 consider 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, aircrafts or vessels are used to provide transport both inside and outside the TOMS

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.

If the form of transport is:

• road or rail, the method of apportionment will normally be made on a mileage basis
• air, the method of apportionment will usually be based on hours flown
• sea, the method of apportionment will 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 paragraph 6.5 and paragraph 7.4).

The following list of items has been provided in order to assist you in calculating the value of these costs. The list does not in itself have 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 paragraph 6.5 and paragraph 7.8).

The following list of items has been provided in order to assist you in calculating the value of these costs:

• 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)

This list in itself does not have force of law, but sections 8 to 13 of this notice do.

7.8 If premises are used to provide accommodation both inside and outside TOMS

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 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 Partial exemption (VAT Notice 706).

7.12 Conferences that do not 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 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’re bought in and resupplied to a business customer, they must be accounted for under 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 TOMS

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, 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’re unsure about whether your shoot is outside the scope of VAT please contact the VAT helpline.

8. Market Value calculation (annual adjustment)

This section has 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.

Calculate the value of sales of Margin Scheme packages

Step
M1	Total the VAT-inclusive selling prices of all your in-house and Margin Scheme packages supplied during the financial year including any that are not ‘market value’ packages.

Working out the market value

Step
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
M2.5	Total the VAT inclusive market value of the reduced-rated in-house supplies at M1: carry forward this figure to step 21.5 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, M2.5 and M3

Working out selling value of Margin Scheme supplies and non-market value in-house supplies

Step
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)

This section has 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.

Working out the total sales of Margin Scheme packages

Step
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 in-house and Margin Scheme packages supplied during the financial year.

Working out the purchase prices of Margin Scheme supplies

Step
2	Total the VAT-inclusive purchase prices of the standard-rated Margin Scheme supplies to be enjoyed in the UK included in the total at step 1.
3	Total the VAT-inclusive purchase prices of the Margin Scheme supplies (to be enjoyed outside the UK) included in the total at step 1.

Working out the direct costs of in-house supplies.

Steps 4 to 7 should not include costs relating to an in-house supply accounted for under section 8 (market value)

Step
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.
4.5	Total the VAT-exclusive direct costs to you of the reduced-rated in-house supplies included in step 1. Add a percentage of that amount equivalent to the reduced 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.

Working out the ‘costs’ of agency supplies

Step
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.
8.5	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 reduced-rated.
9	Total the VAT-inclusive amounts paid by you to your principals in respect of the agency supplies included in step 1 not already accounted for in step 8 and 8.5.

Working out the total margin

Step
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

Step
12	Calculate the margin for the standard-rated Margin Scheme supplies to be enjoyed in the UK 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 Margin Scheme supplies to be enjoyed outside the UK 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

Step
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
14.5	Calculate the margin for the reduce rate in-house supplies by applying the following formula: total at step 4.5 ÷ 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
18.5	Calculate the consideration for the reduced rate agency supplies by applying the following formula: total at step 8.5 ÷ 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

Step
20	Calculate the output VAT due on the Margin Scheme supplies 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
21.5	Calculate the output VAT due on the reduce rate in-house supplies by applying the following formula: total at step 4.5 + total at step 14.5 + total calculated at step M2.5 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
22.5	Calculate the output VAT due on the reduced rate agency supplies by applying the following formula: total at step 18.5 × the VAT fraction

Working out sales values

Step
23	Calculate the VAT-exclusive value of the standard-rated Margin Scheme supplies by deducting the total at step 20 from the total at step 12.
24	Note the value of the zero-rated Margin Scheme supplies 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
25.5	Calculate the VAT-exclusive value of your reduced rate in-house supplies by applying the following formula: total at step 4.5 + total at step 14.5 + total calculated at step M2.5 of section 8 - total at step 21.5
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

Step
30	Calculate the total output VAT due on your Margin Scheme supplies by adding the totals at steps 20 to 22.5 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 Margin Scheme supplies

This section has force of law.

Working out the provisional percentage

Step
1	Calculate the VAT-inclusive amount of your standard-rated Margin Scheme supplies for the preceding financial year by adding the totals from steps 4, 4.5, 12, 12.5, 14, 14.5, 18 and 18.5 of section 9, together with the total M2 and M2.5 in the market value calculation in section 8.
2	Calculate the VAT-inclusive standard-rated percentage of the total selling price of all your Margin Scheme supplies 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

Step
3	Total the VAT-inclusive selling prices of the Margin Scheme supplies supplied during the prescribed accounting period.
4	Calculate the provisional VAT-inclusive amount of your standard-rated Margin Scheme supplies 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 standard rate VAT fraction

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

This section has force of law.

Step
1	Total the VAT-inclusive selling prices of your Margin Scheme supplies supplied during the financial year.
2	Total the VAT-inclusive purchase prices of the Margin Scheme supplies 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 Margin Scheme supplies and Margin Scheme packages by applying the following formula: total at step 3 × the standard rate VAT fraction.
5	Calculate the VAT-exclusive value of your Margin Scheme supplies 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 Margin Scheme supplies when the simplified calculation applies (all supplies standard-rated)

This section has force of law.

Step
1	Calculate the VAT-inclusive standard-rated percentage of the total selling price of all your Margin Scheme supplies 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 Margin Scheme supplies and Margin Scheme packages supplied during the prescribed accounting period.
3	Calculate the provisional VAT-inclusive amount of your standard-rated supplies of Margin Scheme supplies 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 standard rated VAT fraction
5	Calculate the provisional VAT-exclusive value of all of your Margin Scheme supplies 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

This section has force of law.

TL1

1. This section shall come into effect on 1 January 2021. 2. Where a tour operator, in the same financial year, supplies:- (a) Margin Scheme supplies or Margin Scheme packages which are to be enjoyed wholly outside the United Kingdom, and (b) Margin Scheme supplies or Margin Scheme packages which are to be enjoyed wholly or partly within the United Kingdom, 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 Margin Scheme supplies enjoyed wholly outside the United Kingdom from supplies of Margin Scheme supplies enjoyed wholly or partly within the United Kingdom, 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 Margin Scheme supply, 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 Margin Scheme supplies 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 Margin Scheme supplies, 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 standard 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 Margin Scheme supplies, 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 Margin Scheme supplies, 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 Margin Scheme supplies, 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 Margin Scheme supply 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 Margin Scheme supplies, (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 (VAT Notice 700), (i) ‘Margin Scheme Supply’ has the same meaning as ‘designated travel service’ in paragraph 3(1) of the Value Added Tax (Tour Operators) Order 1987

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Published 14 December 2009
Last updated 18 April 2024 + show all updates

1. 18 April 2024

   Sections 2.4, 2.15, 3.1 and 3.2 have been updated to include information about business to business wholesale (B2B) supplies.

2. 31 December 2020

   This page has been updated because the Brexit transition period has ended.

3. 29 July 2020

   Information about provisional percentage has been added.

4. 9 July 2020

   The notice has been updated to reflect the changes announced on 8 July 2020 regarding the temporary reduced rate of VAT on certain supplies to hospitality, holiday accommodation, or charge for admission to certain types of attractions.

5. 6 September 2019

   Paragraph 6.1 on how to work out the selling price of your Tour Operators Margin Scheme supplies has been updated with information about what the selling price should and should not include.

6. 27 February 2019

   Following the measure on 'unfulfilled supplies' announced in the Budget 2018, paragraph 6.1 on how to work out the selling price of your Tour Operators Margin Scheme supplies has been amended.

7. 14 December 2018

   Paragraph 5.8 has been amended as the address for the VAT Written Enquiries team has changed.

8. 14 December 2009

   First published.