The Taxi Operators’ Margin Scheme

“I hate VAT” is a phrase I often hear from accountants and other tax professionals. To be fair, these are professionals with regular enough exposure to VAT to have come up against many of its counter intuitive idiosyncracies. A VAT consultant is generally less fluent in other ‘tax speak’ but if pressed on what he or she dislikes about tax is likely to offer the response “TOMS”

The Tour Operators’ Margin Scheme or TOMS is an anomaly; even within the VAT ‘fiscal theme park’. Many VAT advisers never have to consider it or are wise enough to pass TOMS issues on to one of the few TOMS specialists. In recent months, however, 2 high profile VAT Tribunal decisions have put TOMS centre stage in the public conscience (at least the tax equivalent).

The cases Sonder Europe [2025] UKUT 14 (TCC) & Bolt Services UK Ltd, [2025] UKUT 100 (TCC) concern two very different businesses but ultimately consider the same issue – whether the service offered by each involves the provision of a ‘designated travel service’.

Background

For the uninitiated TOMS was introduced to simplify the EU VAT compliance obligations of tour operators. It was recognised that tour operators might be required to register for VAT in every country in which they supplied holiday packages. The solution was to permit tour operators to register in a single EU member state and declare VAT on the margin they achieved on sales of designated travel services to travellers.A designated travel service is one which is bought in and resold without material alteration – think flight and a hotel offered as part of a EU package holiday. Under TOMS the tour operator would calculate the profit on each element of the service and account for standard rated VAT on the margin. VAT is collected in the country in which the business is established. Sales of travel services to non-EU destinations are outside the scope of EU VAT.

The scheme assumes that the charges incurred by tour operators are taxable and therefore that in accounting for VAT on the margin they are broadly declaring a similar amount to what they would, had they subtracted input tax from output tax when preparing the VAT return.

A simple idea in theory but, as with other VAT issues, the envelope inevitably gets pushed.

The TOMS as a feature of tax planning

Bolt Services Ltd, operates a ride hailing service, akin to larger operator Uber. Note that London Taxi licencing regulations stipulate that taxi businesses must act as principal when supplying ride transport services. This means, as Uber found out, that the taxi business is required to account for VAT referencing the full amount paid by the customer. Outside London, taxi operators can still be classed as agents for the drivers and in such cases will only account for VAT on the commission they receive from drivers.

Bolt had advised HMRC that it would be using the TOMS to account for VAT on its ride hailing service thereby mitigating significant VAT on its service. HMRC argued that the services were not subject to the TOMS.

It is clear that taxi operators were probably not a consideration for the lawmakers first drafting the TOMS legislation. However, the question the tribunal had to decide was relatively straightforward:

Was the supply of a taxi bought in for business purposes ? &
Was it supplied on to the customer without material alteration?

The TOMS order refers to the supply being made by a tour operator, but the term is qualified elsewhere in the VAT Act as being any person supplying any services of the type supplied by tour operators. The fact that HMRC’s public notice on the TOMS has always mentioned taxis being supplied as part of a package as being a TOMS supply meant understandably meant that HMRC struggled to convince the Tribunal that the supply was outside of the TOMS.

And so HMRC was defeated. Bolt’s victory was somewhat Phyrric however as the government has already introduced amendments to the TOMS Order which will prevent the use of the TOMS by taxi operators in the course of their normal business.

Sonder Europe Ltd leased a significant number of apartments in the UK from third party landlords for varying lengths. Sonder decorated & furnished the apartments as required. They then granted short term licenses to travellers to occupy the apartments for periods of up to a month.

The Upper Tier Tribunal thought that Sonder’s (repairing and insuring) leases were materially different to the short term interests it offered to travellers.

The supplies were not, therefore, desgnated travel services and thus fell outside the TOMS.

Both cases are being appealed