VAT and TOMS: A simplification or complexity?

Tourism remains one of the pillars of the European economy, contributing to around 10% to the EU’s GDP and supporting millions of jobs across hospitality, transport and other related sectors. Although traditionally characterised by strong seasonality, tourism has increasingly evolved into a year-round activity, driven by changing consumer behaviour, improved connectivity and the rise of digital booking platforms.

Within this evolving landscape, tour operators continue to play an important role. Their activities typically involve multiple supplies and often performed across several Member States. This is where the Tour Operators’ Margin Scheme (“TOMS”) becomes relevant. Introduced as a simplification mechanism for VAT in the travel industry, TOMS significantly affects how operators account for VAT on travel packages. Yet, decades after its introduction, the scheme remains one of the most debated areas of VAT.

Is it truly a simplification, or does it create more challenges than it resolves?

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Background Information and Legal Basis

The TOMS was first introduced in 1977, upon the adoption of Article 26 of the Sixth VAT Directive. In essence, this scheme is mandatory for all travel agents who buy in and re-supply a package of travel services, such as accommodation, flights, transport and excursions, in their own name and without materially altering those services. For the purposes of this article, the terms "travel agent" and "tour operator" are used interchangeably.

Today, TOMS is set out in Articles 306 to 310 of the VAT Directive and implemented in Malta through Part Four of the Fourteenth Schedule to the VAT Act.

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How the Simplification Works

The core principle of TOMS is the "single supply" concept. For VAT purposes, all components of a travel package supplied by a travel agent are regarded as one single supply.

The place of taxation of this single supply is deemed the Member State where the travel agent has established his business or has a fixed establishment from which the services are provided. This removes the need for travel agents to register for VAT purposes in every Member State where each package component would otherwise be considered supplied.

Moreover, VAT is not charged on the travel agent's turnover, but rather charged, at the standard rate, on their "margin". The margin is the difference between the total amount, exclusive of VAT, paid by the traveller and the actual cost to the travel agent of supplies provided by other taxable persons for the traveller's direct benefit.

Where the travel package includes some or all of the elements to be enjoyed outside the EU, the margin may be partly or fully exempt, depending on the proportion of non-EU services involved. For instance, a Maltese operator selling a Christmas travel package to consumers covering Italy and Switzerland must treat the margin attributable to the Swiss portion as exempt, in accordance with Article 309 of the VAT Directive (which provides for exemption pursuant to Article 153) or its transposition into Maltese VAT legislation.

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Challenges and Inconsistencies

Despite its intention to simplify matters, TOMS presents several challenges and inconsistencies across Member States.

One key drawback is that travel agents are not entitled to deduct input VAT incurred on purchases made in respect of the subsequent travel package supply. This blocked input VAT can have significant commercial implications. For example, a Maltese operator supplying a French hotel stay will not be able to recover French input VAT charged on that hotel room. Such VAT becomes a cost for the Maltese operator, which may in turn reduce its profitability and potentially make the package more expensive compared to a direct booking by the customer.

The significance of this issue should not be understated. The 2017 EU TOMS Study identified non-deductibility as perhaps the most significant material issue of TOMS, estimating that blocked input VAT on direct costs of B2B supplies amounts to approximately €1.15 billion annually across the EU. When combined with irrecoverable TOMS output tax (that is, VAT paid on the margin), the total impact is estimated at circa €1.44 billion. This represents a substantial hidden cost within the EU travel industry and creates competitive distortions, particularly for Travel Management Companies (TMCs), MICE organisers and wholesale operators.

Notwithstanding the above, input VAT on general business overheads such as rent, advertising and electricity remains deductible.

Another long-standing issue, possibly the main weakness, is the lack of uniform application of the scheme across Member States. The origin‑based place of taxation rule has been particularly interpreted and implemented differently. By application of such a rule, non‑EU operators are often not subject to VAT on the supply of travel services within the EU, creating an unlevel playing field between them and EU‑established operators. The competitive implications of this are significant:

• Non-EU operators face no VAT recovery barriers, as they are not subject to the scheme's non-deductibility provisions;
• Perhaps most tellingly, this disparity has driven what commentators have termed "VAT migration", the relocation of significant numbers of EU tour operators to Switzerland and other non-EU jurisdictions specifically to avoid these disadvantages.

The current regulatory framework is therefore beneficial to non-EU operators to the detriment of EU-established companies, undermining the competitiveness of the European travel industry.

In addition, as indicated above, the margin of a travel agent must be taxed at the standard rate of VAT regardless of the rate applied to the individual travel facilities when supplied outside TOMS. It should be noted that the supply of travel services, as a package, is not included in Annex III of the VAT Directive and therefore, cannot benefit from a reduced rate of VAT.

As for the calculation of the margin itself, settled case-law concluded that VAT payable must be calculated separately on a transaction-by-transaction basis, with no possibility of applying a global margin. This approach can be administratively burdensome, especially for businesses with high transaction volumes or a mix of different types of supplies.

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Future Reforms

Whilst the initial purpose and objectives of TOMS were to facilitate VAT compliance for travel agents, its practical difficulties have become increasingly evident.

In light of this, the European Commission has recognised the need to reform and modernise TOMS to address its shortcomings, many of which have been outlined above. A public consultation was launched between July 2025 and October 2025 to seek stakeholders’ views on the current VAT rules and how they could be made fairer, simpler and more sustainable.

For travel agents, tax professionals and other stakeholders, this marks an important first step in the broader reform of VAT rules affecting this sector. The upcoming proposals may offer an opportunity for clearer and more consistent legislation. However, they will also require close monitoring and, ultimately, timely adaptation to any changes introduced in the months and years ahead.