In The Squ.are Ltd v HMRC  UKFTT 51 (TC) the First-tier Tribunal rejected an appeal that VAT should be refunded under the Tour Operators Margin Scheme (TOMS) when the taxpayer suffers a negative margin.
TOMS is a scheme whereby a tour operator accounts for VAT on the margin achieved. The objective of the scheme is to adapt the general VAT rules to address the challenges of the activities of travel agents, and similar businesses, which frequently involve multiple supplies in several different jurisdictions.
The appellant ran a business whereby it leased properties in London which it then let on to other parties on a shorter-term basis. It also provided associated services from third parties. The activities achieved a negative margin so the appellant sought a VAT refund.
This was unsuccessful. It was held that as under the scheme no input VAT was recoverable, the margin calculation did not establish a net VAT position (output VAT less input VAT) but instead was a means of calculating the amount of output VAT due. It is conceptually impossible to have negative output VAT, the tribunal noting “a negative margin arises as a consequence of a lack of profitability in the transaction, but VAT is a transaction tax and not a profit tax.”
The tribunal considered the issues of unsold inventory and inventory sold at a loss drawing a distinction between the former, where it had not been possible to find a customer for a property in a particular period, and the latter, where the revenue from the customer had been insufficient to cover the costs incurred. In both cases it was considered practical to factor these costs and revenues into the margin calculation so such losses could reduce the margin achieved and the output VAT due. However, if these resulted in an overall negative margin the margin would be considered to be nil and no VAT could be recovered.