HMRC has published Revenue and Customs Brief 9 (2019) which relates to the VAT Tour Operators Margin Scheme (TOMS) and retained payments and deposits.
From 1 March 2019, changes to HMRC’s VAT policy on retained payments and deposits (see Revenue and Customs Brief 13 (2018)) ensure that businesses account for VAT on retained deposits when customers do not take up supplies.
HMRC updated its guidance on this topic immediately before the change began. When doing so HMRC made an error in Tour Operators Margin Scheme (VAT Notice 709/5), paragraph 6.1, bullet point 4. The error was to say that you should include all forfeited deposits and cancellation fees in TOMS calculations when in fact you should only include them in the circumstances described below.
The correct treatment for TOMS supplies under UK legislation is different from other types of supply. There are special rules for when VAT must be accounted.
Businesses making TOMS supplies may choose between 2 different methods for determining when their supply becomes taxable. They can either use:
- method 1 and account for VAT when the traveller departs or the accommodation is occupied
- method 2 and account for VAT when taking payment if it exceeds 20% of the sale price – if they receive a deposit of 20% or less then the treatment in method 1 applies
See paragraph 4.14 of VAT Notice 709/5.
The correct treatment of payments made for unfulfilled TOMS supplies
Businesses that have chosen to use method 1 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 2 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 1.
HMRC is correcting paragraph 6.1 of VAT Notice 709/5 to reflect the correct treatment for VAT on payments made for unfulfilled TOMS supplies.
Claims for overpaid VAT
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. How to correct VAT errors and make adjustments or claims (VAT Notice 700/45) explains this.