In The Squa.re Limited v HMRC [2023] TC08700, the First Tier Tribunal (FTT) found that a company operating the Tour Operators Margin Scheme for VAT could not claim a VAT repayment on a negative margin.

  • The Squa.re Limited (TSL) provided serviced apartments to business and leisure travellers, operating the Tour Operators Margin Scheme (TOMS) for VAT purposes.
    • The accommodation was leased by TSL from the owners of the properties.
  • In some cases, TSL was committed under the terms of a lease even where the accommodation could not be supplied on to a customer at all, or could not be supplied on at a profitable amount.
    • This meant that the value of direct costs exceeded the value of supplies made under TOMS.
  • In January 2017, TSL submitted a VAT error correction notice seeking repayment of £272,894 on the basis that VAT was overpaid under the TOMS.
    • TSL argued that the TOMS does not exclude the possibility of a negative margin. This meant that in TSL's view, VAT had been overpaid when the full cost of bought-in accommodation was taken into account.
  • TSL subsequently prepared VAT returns on the basis that a negative margin was allowed.
  • HMRC rejected TSL's error correction notice and raised assessments in respect of subsequent VAT returns on the grounds that TSL could make a zero margin on a supply within the TOMS, but that a negative margin was not permitted.
  • TSL Appealed to the First Tier Tribunal (FTT).

The TOMS is a VAT scheme which applies to businesses that buy in and re-sell travel, accommodation and certain other services, either as Principal or undisclosed agent.

Under the scheme, VAT is not recoverable on direct costs (supplies bought in for resale), but it may be recovered on overheads outside of the scheme. VAT is paid on the margin made on sales: the difference between the amount received from customers and the amount paid to suppliers.

The FTT found that:

  • The TOMS does not provide for the benefit of a negative margin.
  • Under the terms of the UK implementation of the TOMS, only a global calculation is undertaken.
    • It is permissible in the global calculation to include a negative margin calculated in respect of discrete supplies of designated travel services.
    • There is no basis on which to permit an overall negative margin.

TSL’s appeal was dismissed.

Useful guides on this topic

Margin scheme
The VAT margin scheme allows businesses to calculate their output VAT liability on the profit margin they make on the goods they sell.

Agents and principals
What is an agent for VAT purposes? When do the agency rules apply? 

Correcting VAT errors
What are the VAT error correction time limits? Can you correct errors through the VAT return? Do you have to notify HMRC?

Appeals: VAT
How do I appeal a VAT penalty?  How can I request a Statutory Review? How do I appeal an HMRC decision?

External link

The Squa.re Limited v HMRC [2023] TC08700


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