The Department for Transport is shortly to consult with the travel industry on extending Atol protection to dynamic packages eg packages involving a flight plus hotel accommodation.    

As was the case a number of years ago when the industry first started offering dynamic packages, the question has arisen as to whether this will lead to increased VAT liability, potentially due to the common misconception that the Tour Operator’s Margin Scheme (TOMS) applies to the sale of holiday packages. 

The test is not one of whether a package is sold.  In general terms the TOMS only applies if the constituent elements are bought in from a third party and sold on, and importantly only where the travel business is acting as a principal or undisclosed agent as opposed to a disclosed agent. In addition TOMS can apply if stand-alone passenger transport or hotel accommodation is bought and sold as principal – it does not have to be sold in a package.  For example, if an airline creates a package consisting of a flight on its own aircraft and hotel accommodation it has arranged as disclosed agent, there is no TOMS liability.  If the hotel accommodation is bought in the travel business’ name however, potentially with an undisclosed mark-up added before on-selling as part of the dynamic package, the margin scheme would apply to this element of the package.  The flight element would effectively remain VAT free.  Even where the flight is bought in from a third party and sold on as principal, VAT mitigation strategies including the transport company arrangements could be used to remove the VAT cost created by having to account for TOMS VAT on the flight. 

In short, unless the contractual arrangements with underlying suppliers and customers change, there should be no impact on the VAT position.  Furthermore, due to the existence of the widely used  VAT mitigation structures supported by HMRC, there are few situations in which it is necessary for travel businesses to be suffering a VAT cost in relation to the sale of passenger transport as principal. 

 If you would like to discuss these structures or any of the above in more detail please contact Julie Park on 01962 735350