The Tour Operators’ Margin Scheme (TOMS): history, law and international reality

Also see our article - UK TOMS vs EU TOMS | Guide for Travel Operators in 2025

The Tour Operators’ Margin Scheme is not a UK invention, and it is not a modern tax idea. It sits at the intersection of European tax law and the commercial need to make international leisure travel workable under VAT. Understanding TOMS properly means understanding when it was introduced, where it came from, and why so many countries still use it in one form or another today.

Where TOMS came from and when it was created

TOMS originates in European VAT law in the late twentieth century.

The legal starting point was the Sixth Council Directive (77/388/EEC), adopted in May 1977. That Directive was the first comprehensive attempt to harmonise VAT across what was then the European Economic Community.

Article 26 of the Sixth Directive introduced a special regime for travel agents and tour operators. Its purpose was explicit, which was to avoid multiple VAT registrations and conflicting tax liabilities when a single holiday package involved services supplied in several countries.

This was not just theory as by the mid-1970s, European tourism had expanded beyond domestic markets. Package holidays regularly crossed borders. Tax systems had not kept up.

Without a special regime, operators would have needed:

• VAT registrations in multiple countries

• separate VAT returns in each place

• country-by-country VAT calculations

• reconciliation of incompatible rules

Article 26 was the first formal attempt to solve that.

The modern legal framework

The Sixth Directive was later replaced by the current European VAT law:
Council Directive 2006/112/EC (often referred to as “the VAT Directive”).

Under that Directive, the travel scheme is now set out in:

Articles 306 to 310 of Directive 2006/112/EC

Those articles formally define:

• what counts as a travel service

• when a business is considered a “taxable dealer”

• how margin is calculated

• how VAT is charged

• where VAT is due

This is the legal backbone of TOMS across all EU Member States today. Art. 306 mandates it for principals dealing in travel facilities; Art. 307 defines "travel agents"; Art. 308 sets the margin as the taxable base (no input VAT recovery); Art. 309 handles mixed supplies; Art. 310 covers accounting periods. The consolidated version is current as of April 14, 2025, matching the provided excerpt

Which countries implemented TOMS first

Once the Sixth Directive came into force, each Member State was required to transpose it into domestic law. Implementation happened progressively through the late 1970s and early 1980s.

Among the earliest adopters:

• France implemented its version in the late 1970s

• Germany followed in the 1980s

• The Netherlands and Belgium introduced national versions soon after

• The United Kingdom incorporated TOMS into domestic VAT law in the 1980s following its EU obligations

• Spain and Italy implemented later but by the early 1990s the core regime existed across the EU

Although the framework was European, administration became national. That is why the rules are legally consistent but operationally different across countries.

How TOMS entered UK law

In the UK, TOMS was implemented through domestic VAT legislation following EU harmonisation obligations.

The core UK legal structure sits under:

• Value Added Tax Act 1994

• Secondary regulations relating to travel services

• HMRC guidance, primarily VAT Notice 709/5

• Tribunal and court decisions that interpret how the scheme applies in practice

The 1994 Act (Schedule 8) and 1987 Order implement the scheme; Notice 709/5 provides operational guidance (e.g., margin apportionment). ECJ/UK tribunal decisions (e.g., on agency vs. principal) shape application.

The UK system mirrored the European model: margin-based VAT charged in the operator’s country.

What changed when the UK left the EU

Brexit did not repeal TOMS as the UK retained the scheme because it remains economically necessary. However, Brexit changed jurisdictional exposure.

Before 31 December 2020, the UK was inside the EU VAT system. UK operators selling EU travel largely sat inside a harmonised framework.

From 1 January 2021, the UK became a third country. The consequences:

• EU supplies from UK businesses are no longer governed by EU TOMS

• UK businesses selling European holidays are now subject to domestic UK VAT rules

• EU operators selling UK travel follow EU TOMS for EU liability, but not necessarily for UK exposure

• Cross-border interaction became significantly more complex

TOMS survived Brexit but it certainly did not make things simpler. UK law retained TOMS domestically, but EU packages sold by UK operators are now zero-rated (no UK VAT on non-UK margins). EU operators selling UK travel use EU TOMS for their liabilities but face UK reverse-charge complexities. Increased registrations (e.g., in Croatia/Germany for non-EU sellers) highlight added complexity

How TOMS works in legal terms

TOMS replaces transaction-by-transaction supply VAT with margin taxation.

The legal logic is that you tax the organiser once, not the supply chain. Under Articles 306–310 of the EU Directive (and under UK law by replacement), VAT is calculated as the difference between:

• what the traveller pays

• and what the organiser pays for bought-in travel services

VAT is applied to that margin in the country where the organiser is established. This deliberately shifts VAT away from the place of consumption and toward the place of administration. Art. 308 defines the margin precisely; no input recovery ensures administrative simplicity over standard VAT. Policy trade-off is intentional per Directive recitals.

Why VAT on hotel costs is blocked under TOMS

Under the margin scheme, VAT on bought-in travel services is not recoverable. This rule originates from the structure of Article 308 of the EU Directive and is preserved under UK law.

It exists because:

• margin is treated as the taxable base

• VAT is assumed to be embedded in the cost of acquisition

• recovery would undermine the scheme mechanically

Reclaiming VAT on hotel costs while charging VAT on margin breaks the design of TOMS.

Countries outside the EU that use similar systems

Although TOMS is an EU legal construct, other countries introduced similar regimes. They are not identical and not harmonised but broadly margin-based.

Notable examples:

Norway
Operates a margin-based taxation model for travel services similar in substance to TOMS.

Iceland
Applies similar margin treatment as part of its EEA alignment with EU VAT.

Switzerland
Does not follow EU VAT law directly, but applies special rules for tour operators that mirror margin taxation in principle.

Japan
Japan’s consumption tax does not use TOMS, but specific agency rules for travel exist that shift taxation toward domestic margin rather than international supply.

Australia and New Zealand
These operate GST systems without a formal TOMS regime, but use agency and principal models to prevent multi-jurisdictional complexity.

In short:
TOMS is European in law but Margin taxation in travel is global in practice.

Why TOMS has never been repealed

TOMS has been criticised for decades as it is seen as administratively heavy, conceptually awkward and financially distortionary.. But it is thought that no alternative works better. Every review of the scheme goes back to the same conclusion, that Standard VAT cannot support cross-border leisure travel and That reality has not changed since 1977. EU reviews (e.g., 2025 consultation) affirm persistence despite distortions (e.g., non-EU advantages post-Brexit). Misunderstandings on agency/principal status are common in case law.

Why travel businesses still get this wrong

Most misunderstandings stem from the same root problem, in that Businesses assume TOMS is a tax option, not a tax regime and so it is treated it like a method.Errors happen when:

• geography is confused with legal structure

• agency is confused with principal status

• VAT is assumed to be reclaimable

• mixed revenues are not separated

• margin is mistaken for profit

And unfortunately, none of these errors are rare.

Final Antravia word

TOMS was created in 1977 because VAT could not cope with tourism and it survived Brexit because it still cannot. This is not a UK technicality and it is a European solution to a global commercial problem.

How Antravia supports travel businesses

Antravia advises on:

• TOMS qualification and classification

• legacy misapplication

• margin calculation structures

• audit defence

• group model design

• cross-border VAT exposure

• UK vs EU hybrid arrangements

  For more info, visit UKVAT.tax

References

• European Commission
  Council Directive 2006/112/EC (Articles 306–310)
  https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32006L0112

• HMRC (UK)
  VAT Notice 709/5 – Tour operators’ margin scheme
  https://www.gov.uk/guidance/vat-notice-7095-tour-operators-margin-scheme

• European Commission – VAT in the tourism sector
  https://taxation-customs.ec.europa.eu/taxation/vat/vat-rules/tourism-sector_en

• OECD – International VAT/GST Guidelines (tourism and cross-border systems)
  https://www.oecd.org/tax/consumption/international-vat-gst-guidelines.htm

• Council Directive 2006/112/EC (consolidated version 14/04/2025) – Articles 306–310 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02006L0112-20250414

• Sixth Council Directive 77/388/EEC of 17 May 1977 – Article 26 (original TOMS provision) https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A31977L0388

• OECD International VAT/GST Guidelines (2017, consolidated with 2021–2024 updates) – Section on tourism and travel services https://www.oecd.org/tax/consumption/international-vat-gst-guidelines.htm

• European Court of Justice case law on TOMS (selected key cases)

  • C-163/91 Van Ginkel Waddinxveen

  • C-31/10 Althoff

  • C-189/11 Commission v Spain

  • C-380/16 Commission v Germany

  • C-552/17 Alpenchalets Resorts

• HMRC VAT Notice 709/5 – Tour operators’ margin scheme (current version November 2025) https://www.gov.uk/guidance/the-tour-operators-margin-scheme-vat-notice-7095

• Value Added Tax Act 1994 (UK) – Schedule 8 Group 8 & The Value Added Tax (Tour Operators) Order 1987 (as amended post-Brexit) https://www.legislation.gov.uk/ukpga/1994/23/contentshttps://www.legislation.gov.uk/uksi/1987/1806/made

• European Commission – Explanatory Notes on VAT rules for the tourism sector (updated 2024) https://taxation-customs.ec.europa.eu/system/files/2024-06/vat_tourism_explanatory_notes_en.pdf

• Norwegian VAT Act § 5A-1 et seq. (margin scheme for travel services – EEA-aligned) https://lovdata.no/dokument/NL/lov/2009-06-19-58

• Swiss Federal Tax Administration Circular No. 26 (2025) – Taxation of tour operators and travel agencies https://www.estv.admin.ch/estv/en/home/mehrwertsteuer/mwst-fachinformationen/rundschreiben.html

• Australian Taxation Office – GST and travel industry (margin scheme equivalents via agency rules) https://www.ato.gov.au/businesses-and-organisations/gst-excise-and-indirect-taxes/gst/in-detail/industry-specific-issues/travel

• New Zealand Inland Revenue – GST and travel services (principal vs agent treatment) https://www.ird.govt.nz/gst/charging-gst/travel-services

• European Commission 2024–2025 public consultation on the future of the Tour Operators Margin Scheme (ongoing as of Nov 2025) https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/14138-VAT-rules-for-the-tourism-sector-review_en

• Post-Brexit UK TOMS guidance – HMRC Revenue & Customs Brief 3 (2021) and subsequent updates https://www.gov.uk/government/publications/revenue-and-customs-brief-3-2021-tour-operators-margin-scheme

Disclaimer:
Content published by Antravia is provided for informational purposes only and reflects research, industry analysis, and our professional perspective. It does not constitute legal, tax, or accounting advice. Regulations vary by jurisdiction, and individual circumstances differ. Readers should seek advice from a qualified professional before making decisions that could affect their business.