V3.593 Methods of calculation

Background

European legislation lays down that the taxable amount is the margin achieved by the tour operator1. Until 1 January 1996, the passenger transport element of the margin could be zero-rated; from that date, it became standard-rated (however, the element of any designated travel service which is enjoyed outside the EU is zero-rated2). In response to this change, HMRC devised what might, in other circumstances, have been regarded as tax avoidance schemes that enable the passenger transport element to remain effectively VAT-free. Whilst some of these arrangements have been withdrawn, others remain in place; for details, see 'Avoidance of the TOMS' at V3.594.

The method of calculation is determined in such manner as laid down by HMRC3. The calculations laid down by HMRC were originally based on the cost of the individual elements, and therefore assume that the tour operator achieves the same percentage margin on all elements of the package he provides. This assumption was challenged and a reference made to the ECJ, following which HMRC have accepted that the market value of in-house supplies may be used to apportion the selling price between in-house and bought-in components.

HMRC have laid down two methods of calculation; the standard and the simplified methods. Both calculations provide provisional output tax figures based on the margin achieved in the previous year, corrected by an annual adjustment in the first return ending after the year end.

Beginning to use the scheme

A person who has not previously made margin scheme supplies has

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