HMRC corrects error in tour operator VAT advice
16 Sep 2019
HMRC has admitted to an error in its information about applying the tour operators margin scheme (TOMS), and has now published a correction and details of how businesses who have paid too much VAT from 1 March 2019 can correct the overpayment
16 Sep 2019
The beginning of March saw changes to HMRC’s VAT policy on retained payments and deposits to ensure that businesses account for VAT on retained deposits when customers do not take up supplies.
In updating its guidance on this topic, HMRC acknowledges it made an error in its publication Tour Operators Margin Scheme VAT Notice 709/5, paragraph 6.1, bullet point 4.
The mistake was to say that a business should include all forfeited deposits and cancellation fees in TOMS calculations when in fact it should only include them in certain circumstances, because of the special rules applying to TOMS supplies.
Businesses making TOMS supplies may choose between two different methods for determining when their supply becomes taxable. Method one is to account for VAT when the traveller departs or the accommodation is occupied. Under method two, businesses account for VAT when taking payment if it exceeds 20% of the sale price. If a business receives a deposit of 20% or less then method one applies.
In its commentary on the changes, RSM pointed out as method two usually results in an earlier tax point, and method one is better aligned to how businesses in the sector usually account for their income, method one is much more widely used.
In its latest brief, HMRC now recognises that where method one is used, but there is a cancellation or no-show, no tax point will ever arise. It states that businesses that have chosen to use method one must not include money paid for supplies customers fail to take up in their TOMS calculation, as a tax point never occurs.
Businesses that have chosen to use method two must include money paid for supplies their customers fail to take up in their TOMS calculation where they have paid more than 20% of the price of the supply.
If the customer has paid 20% or less of the price of the supply, businesses must not include the amount received in the TOMS calculation. They must treat this in accordance with method one.
Paragraph 6.1 of VAT Notice 709/5 has been corrected to reflect the correct treatment for VAT on payments made for unfulfilled TOMS supplies.
However, RSM’s commentary pointed out that ‘there continues to be some uncertainty regarding the validity of the policy in light of decisions given by the European Courts. This does, therefore, leave a difference between the VAT due on a hotel no-show depending on whether hotels rooms are bought and sold by intermediaries or supplied directly by the hotel business.’
HMRC says any business that has accounted for too much VAT from the 1 March 2019 as a result of following the incorrect advice in paragraph 6.1 of Notice 709/05 may correct this by following the normal error correction procedure.
By Pat Sweet