Brexit and TOMS: What could happen in the event of a no-deal outcome?

27 December 2018

If the agreed deal and political declaration on the future relationship with the EU successfully pass through the UK and EU Parliament and become binding it would seem that, at least for the transitional period, the UK will remain within the EU VAT regime.

But, it is by no means certain that the deal will be approved, and in the event of a no-deal Brexit the big questions, such as Posted Workers Rights, Denied Boarding Regulations, Package Travel Regulations and, not forgetting, an Air Transport Agreement, will still remain as major concerns for the UK travel industry. However, is there another unexpected area of disruption waiting to bite some UK travel businesses?

Currently, UK established tour operators / travel agents, operating as the principal when buying in and reselling (unaltered) travel services to consumers, are able/obliged to apply the EU VAT Directive Tour Operators Margin Scheme, commonly referred to as TOMS. Under TOMS they are required to register and account for VAT on these sales by reference to where they have business establishments, irrespective of the destination of that travel.

However, will this still be the case if the UK is no longer subject to the EU VAT legislation as a result of no-deal?

For many years it was thought that the EU TOMS legislation applied equally to non-EU established businesses buying in and reselling, as principal, the same types of travel services within the EU. Albeit that, as they were established outside the EU, they would not be liable to pay any EU VAT on these sales. This raised the possibility of non-EU tour operators / travel agents having a competitive VAT advantage over EU based ones.

So if on exiting the EU without a deal, the UK is no longer subject to the EU VAT law, does this mean UK tour operators will have the same advantage over EU based competitors through no longer having to account for UK VAT on travel services that take place in the EU?

Possibly, but possibly not. In 2014 the EU Commission raised a question on whether the EU TOMS legislation applied to businesses established outside of the EU and, having considered the question, the EU VAT Committee opined that it does not. Instead it determined that the legislation as drafted only applies to EU established businesses. Now the TOMS legislation is an EU simplification which overrides what is viewed as the normal rules and, in the absence of it applying then, the normal EU VAT rules will apply.

When viewing the normal rules when applied to travel services, there is a real mixture whereby:

  • The sale of hotel accommodation in the EU is subject to VAT where the hotel is located;
  • The sale of passenger transport is subject to VAT by reference to where the transport takes place; and
  • The sale of attraction tickets (entry to theme park, museums, etc.) and catering (restaurants, cafes, etc.) are taxable where the service is performed.

If enforced, this means non-EU established tour operators, selling travel services which take place in the EU, should be registered for VAT in each EU member state in which those travel services take place.

To date there is little evidence of EU member state tax authorities actively enforcing this interpretation of the legislation. However, could they decide to do so if Brexit results in UK established tour operators having a distinct advantage over their own local businesses?

ABTA’s advice is that, in the event of a no-deal Brexit, UK tour operators should prepare themselves for a requirement to register and account for VAT in each relevant EU member state. And, as there are now less than four months until the UK leaves the EU, and it remains to be seen whether the deal will be ratified, it is vital that companies put contingency plans in place now for 29 March 2019.

Therefore, UK tour operators / travel agents currently applying TOMS should start considering the impact and requirements of this possible outcome.

Join ABTA's Brexit and the Future of UK Travel event on 31 January at our PwC London offices for an industry health check, Brexit impact and future policy priorities.

Damon Wright

Damon Wright | Head of Travel & Leisure, Indirect tax
Profile | Email | +44 (0)7483 365005

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