Simplifying UK VAT: is the Tour Operators Margin Scheme fit for purpose?

What is it and how does it work?

TOMS is a special VAT accounting scheme for businesses that buy in and then resell travel services in their own name. It was introduced as a simplification for travel agents and tour operators selling EU destination travel services – typically holidays.

Under the normal VAT rules, these businesses would have to register and account for VAT in every EU destination. Instead, the margin scheme means they account for VAT in the country of establishment only on the difference between the sales price and the cost of buying in those services from local destination suppliers, such as hotels and transfer providers.

Notably, VAT on the local destination services is payable by the supplier and not recoverable by the travel agent/operator. This meant that VAT was paid on the total consideration through a combination of output tax paid:

• in the destination (by local suppliers); and
• in the country of the travel agent/operators (on the gross margin),

for all sales to EU destinations (prior to Brexit – see below).

A significant amount of interpretation of the application of the EU and UK TOMS legislation in practice comes from national and European case law. There are also notable infringement proceedings by the European Commission against EU Member States on whether business use and wholesale supplies of travel services fall within or outside of TOMS.

Key features of TOMS

A number of core principles have emerged:

• TOMS applies where a business acting in its own name buys in and resells travel services for the direct benefit of the traveller;
• although introduced as a simplification, TOMS is mandatory where its conditions are met;
• TOMS can apply to both leisure and business travel;
• a single supply of accommodation or passenger transport can fall within TOMS, so there does not have to be a package of services;
• services provided from a business’s own resources (rather than bought-in from third parties) are generally treated as “in-house supplies” and fall outside TOMS; and
• businesses operating within TOMS cannot normally provide customers with a full VAT invoice showing VAT on the underlying travel services, meaning business customers cannot ordinarily recover as input tax any VAT embedded within the cost of those services.

Historically, it has not been necessary for a business to describe itself as a travel agent or tour operator before TOMS could apply. This means that meetings, incentives, conferences and events (MICE) businesses, corporate travel agents (CTAs) and other businesses buying in and reselling travel services may be caught.

TOMS has also applied to certain business-to-business (B2B) wholesale supplies. HMRC currently operates a concession allowing affected businesses to opt out of TOMS in specified circumstances.

Challenges for businesses

Although the legislation may appear relatively simple, applying TOMS can be complex, especially when determining whether it applies to a particular business or transaction.

This creates real challenges for certain business sectors, particularly for MICE businesses and CTAs. These businesses may have to structure their contracts, operations and invoicing carefully to mitigate the potential commercial impact on customers, including the inability to recover VAT as input tax.

Recent events have significantly changed the landscape in which TOMS applies. This raises the question of whether the UK TOMS legislation continues to be fit for purpose, or if it should be subject to significant review to assess its scope and to simplify its application.

Responding to Brexit

Before 2021, UK-established businesses subject to TOMS were liable to pay UK VAT on the margin achieved on all sales involving EU destinations, irrespective of where the traveller was based. VAT zero-rating applied to the margin on non-EU destination sales (under the UK’s slightly divergent application of the EU law which refers to the travel agent being a disclosed agent of the non-EU destination suppliers).

Following Brexit, the UK extended zero-rating to the margin on all non-UK destination sales. However, despite the UK no longer being required to follow every aspect of EU law, no broader changes were made to the scope of UK TOMS at that time. UK businesses such as MICE operators and CTAs must therefore continue to jump through hoops to mitigate the potentially negative impact of TOMS on their business customers.

The UK could allow MICE businesses, CTAs and other appropriate businesses to sit outside TOMS. Although this may sound counterproductive, it would allow the corporate market to significantly simplify its contracting, operations and invoicing. It could also remove the complications for the B2B wholesale market and the need for the current ‘opt-out’ concession.

Reform could also address the different treatment of UK-established and overseas businesses. Supplies made from an establishment outside the UK fall outside UK TOMS and are instead subject to the normal place of supply rules. This may place UK-established travel businesses at a competitive disadvantage where overseas competitors can apply the normal VAT rules to comparable supplies.

Recent developments

More recently, UK courts have apparently revised some of the long-standing conclusions from earlier cases in two recent decisions: HMRC v Sonder Europe Ltd [2025] UKUT 00014 (TCC) and HMRC v Bolt Services UK Ltd [2026] EWCA Civ 720. Both are examples of modern travel-related businesses that did not exist when the TOMS legislation was originally devised in the 1980s.

The concept of ‘material alteration’

Sonder Europe Ltd (Sonder) supplied serviced apartment accommodation for short-term stays by business and leisure travellers. This was similar to, albeit a variation on, the AirBnB type of accommodation supplies. However, to do this, it typically leased in empty apartments on VAT-exempt residential-type two to ten-year leases and then let the apartments out on short-term, non-residential terms.

In applying the decision of the Court of Justice of the European Union (CJEU) in Alpenchalets Resorts GmbH v Finanzamt München Abteilung Körperschaften [2018] Case C-552/17, which determined that single supplies of accommodation can be taxed under TOMS, and that the term ‘accommodation’ was not restrictively defined, it accounted for VAT on its margin only. HMRC argued that:

• Sonder was not a ‘travel business’ under the definition of travel agent for TOMS; and
• Sonder did not just buy-in and resell the accommodation as is. Instead, it materially altered the supply in various ways resulting in it effectively making them in-house supplies.

Setting aside the argument about what type of business Sonder might be described as, the Upper Tribunal ruled that Sonder effectively changed the associated accommodation rights (from residential to non-residential). Hence, there is ‘material alteration’ and so TOMS does not apply, resulting in Sonder being liable for VAT on the full selling price, even though no VAT is being incurred on the inbound leases.

This raises significant concerns for the serviced apartments industry that has historically operated on relatively low margins, and accounted for VAT only on the margin.

It also raises the question of whether the principle of material alteration is consistent with EU legislation, which does not specifically refer to it, and which was otherwise untested in the courts – the CJEU case law generally only deals with examples of where the supplier actually owns the assets, such as aircraft and hotels.

Many UK travel businesses have used the concept of material alteration when determining the VAT treatment of travel services, including passenger transport. If a higher court determines that the UK legislation is inconsistent with the EU law on which it is based, could this also have implications for more businesses than just the serviced apartment trade?

Given that Sonder is no longer a live business, it remains to be seen if the case will proceed to the Court of Appeal, or higher, to perhaps get greater clarity on whether TOMS applies.

The meaning of ‘travel agent’

Bolt Services UK Ltd (Bolt) operates an app-based ride hailing service. It contracts with self-employed drivers and argues that it buys in and resells passenger transport. It is worth noting that most of the drivers will not be VAT registered due to trading under the VAT registration threshold, hence no VAT will be applied to the cost. Bolt maintained that as passenger transport was a recognised travel service under TOMS, relying in part on the decision in Madgett and Baldwin (joined cases C-308/96 and C-94/97), it should be taxed on its margin only.

Bolt won before the First-tier Tribunal and the Upper Tribunal. However, the Court of Appeal subsequently held that Bolt could not apply TOMS because it was not acting as a ‘travel agent’ within the meaning of the legislation and the scheme was not intended to apply to this type of passenger transport. On 29 September 2026, the Supreme Court refused Bolt permission to appeal against the decision of the Court of Appeal.

This, of course, raises a significant question on the historical interpretation that a business did not have to be defined or described as a ‘travel agent’ to be subject to TOMS.

Implications for businesses

In summary, the decisions call into question long-standing interpretations of when and how TOMS applies, with potentially significant implications for businesses previously understood to fall within its scope. A further appeal in Sonder may provide greater clarity on the scope and application of TOMS.

In the meantime, the UK government has amended the UK TOMS legislation for supplies made from 2 January 2026 (s82, Finance Act 2026). Taxi and private hire vehicle journeys supplied on their own by an operator acting as principal are now excluded from TOMS. The exclusion does not apply where the journey is provided in conjunction with other travel services.

Is reform needed?

Brexit, changing business models and recent case law all provide reasons to reconsider the scope and operation of UK TOMS. The objective should not necessarily be to abolish a scheme that remains useful to many travel businesses, but to ensure that it applies only where a margin scheme provides an appropriate and workable result.

The EU’s own review of TOMS adds to the case for timely consideration of the UK rules. Potential changes to the EU regime could affect UK businesses supplying travel services in the EU and may create further competitive or administrative differences if the UK rules remain unchanged. Without reform, UK businesses may continue to face uncertainty over the application of a mandatory regime designed for a much earlier generation of travel businesses.

Author: Damon Wright, Director, K3 Tax Advisory