First Tier Tax Tribunal Decides Against HMRC in Bolt VAT Tax Appeal
Problem: Bolt Services UK Limited has been engaged in a VAT tax dispute with HMRC over the VAT treatment of its mobile ride-hailing services. Central to the issue of the tax dispute with HMRC is: whether their services should be taxed under the standard VAT regime or whether they qualify for the Tour Operators Margin Scheme (TOMS).
This distinction is critical; under the standard VAT regime, a business charges VAT on its full sales but can reclaim VAT on its purchases. However, under TOMS, businesses do not charge VAT on sales and do not reclaim VAT on purchases related to the margin scheme; instead, they pay VAT only on the profit margin between the cost of goods sold and the selling price. This typically results in a reduced VAT liability under TOMS, which is beneficial for companies with lower overhead or input costs.
Bolt argued for TOMS applicability on the basis that their ride-hailing services resemble those provided by tour operators or travel agents, thereby qualifying for the scheme’s beneficial VAT treatment. However, HMRC denied Bolt’s application for TOMS. As a result, Bolt appealed to the First-tier Tribunal challenging HMRC’s refusal to allow Bolt’s hail-riding services as falling within TOMS.
Outcome: The First-tier Tribunal (tax chamber) ruled in favour of Bolt, delivering its decision on 15 December 2023. The tribunal concluded that Bolt’s mobile ride-hailing services from 1 August 2022 should be classified under TOMS, not the standard VAT regime. The tribunal recognised that Bolt’s services are akin to those typically provided by tour operators or travel agents, making them eligible for the more favourable VAT treatment under TOMS.
What is VAT?
Value Added Tax (VAT) is a consumption tax levied on most goods and services in the United Kingdom, governed by the Value Added Tax Act 1994. Businesses with a taxable turnover exceeding the current threshold of £85,000 are required to register for VAT and charge the appropriate rate on their goods and services. The following VAT rates can apply to businesses:
- Standard Rate (20%): This rate applies to most goods and services. For instance, most electronics, furniture, and consulting services attract the standard rate.
- Reduced Rate (5%): Certain goods and services benefit from a lower VAT rate to encourage consumption or provide relief. Notable examples include children’s car seats, home energy, and residential renovations. This rate supports sectors where cost sensitivity is particularly pronounced for consumers.
- Zero Rate (0%): Zero-rated Items are still VAT-taxable, but the rate is 0%. This category includes essential items like food (excluding meals in restaurants or hot takeaways), books, newspapers, children’s clothing, and some medical supplies. Zero rating these goods and services reflects their importance in daily life and supports wider access by making them more affordable.
- Exempt and Outside the Scope: Certain goods and services are exempt from VAT or deemed outside its scope entirely. For example, insurance, some types of education and training, and many medical treatments are exempt. Transactions outside the scope include wages, salaries, and various types of credit.
When a business registers for VAT, it collects the tax on behalf of HMRC from its customers and is responsible for reporting and paying this collected tax typically through quarterly VAT Returns. Simultaneously, it can reclaim the VAT it has paid on business-related purchases and expenses, making accurate record-keeping, and understanding of VAT categories crucial for financial management and legal compliance.
What is the Tour Operators Margin Scheme (TOMS)?
TOMS is a special VAT scheme in the UK designed for businesses that make supplies of travel, accommodation, and certain other services where customers use the service in another country.
Governed by the VAT Act 1994 and the VAT (Tour Operators) Order 1987, TOMS simplifies the VAT process for businesses that would otherwise have to register and account for VAT in every EU member state where their customers travel.
Under TOMS, a business does not charge VAT on each sale to customers. Instead, it calculates VAT on the ‘margin’ — the difference between the cost of goods and services bought (the wholesale cost) and the final selling price to the consumer. Therefore:
- No VAT on Purchases: Businesses using TOMS do not reclaim VAT on the goods and services they purchase for resale as part of travel packages. This is because they will not charge VAT directly on these sales.
- VAT on Margin: VAT is due on the margin made on the supplies of travel packages. This is typically a more favourable treatment as it often results in a lower overall VAT payment compared to the standard VAT regime.
- Simplification: By paying VAT only on the margin, businesses avoid the complexity of multiple VAT registrations and returns across different EU jurisdictions, simplifying accounting and administration.
Businesses eligible for TOMS typically include those that supply travel packages, accommodation, and other tourism-related services as principals or undisclosed agents. It is particularly relevant for, Tour operators, Travel agents, Businesses organising group travel and Companies providing accommodation alongside other significant travel services.
As travel services evolve with technology and business models change, the applicability of TOMS has been subject to scrutiny and legal interpretation, as seen in tax appeals such as Bolt Services vs HMRC.
Comparing VAT Regime and TOMS – Illustrative Example
To show the benefits to businesses falling within TOMS, our expert tax lawyers set out a simplified illustrative example of a travel package company registered in England where the cost of purchased services (e.g., hotel, flights) is £800, and the selling price to the customer is £1,200. This case study shows how VAT affects the company’s financials under the standard VAT regime vs TOMS, and highlights the tax savings where there is a lower input VAT on purchases.
Standard VAT Regime
Selling Price: £1,200
VAT Charged at 20%: £240 (20% of £1,200)
Cost of Goods/Services Purchased: £800
VAT Paid on Purchases (Low input VAT, say 5%): £40 (5% of £800)
Net VAT Payable: £200 (£240 – £40)
Under the standard VAT regime, the travel company collects £240 in VAT and pays £40 in VAT on its purchases, leading to a net VAT payable to HMRC of £200.
Tour Operators Margin Scheme (TOMS)
Selling Price: £1,200
Cost of Goods/Services Purchased: £800
Margin: £400 (£1,200 – £800)
VAT Charged at 20% on Margin: £80 (20% of £400)
Under TOMS, the travel company calculates VAT only on the margin of £400. The VAT it owes is £80 (thereby resulting in a tax saving of £120 when compared with the standard tax regime as above).
In this example, TOMS offers a significant financial advantage when the input VAT on purchases is low. The company pays less VAT (£80) under TOMS compared to the standard regime (£200), illustrating how TOMS can benefit businesses with lower input VAT on their purchases or those that cannot reclaim much VAT.
Bolt’s Tax Appeal for its services to fall within the Tour Operators Margin Scheme
Bolt Services Limited v HMRC TC 09014
Background
Bolt is a provider of mobile ride-hailing services—essentially, on-demand private hire passenger transport services ordered and paid through a smartphone application.
Bolt sought a non-statutory ruling from HMRC that TOMS applied to its ride-hailing services on and after 1 August 2022. Bolt argued that its services should fall within the TOMS because the ride-hailing services are supplied for the benefit of travellers and are of a “kind commonly provided by tour operators or travel agents”.
HMRC’s position was that the TOMS did not apply, which led Bolt to pursue an appeal to the First-tier Tribunal to seek to determine the issue.
Case Analysis & Decision
The First-tier Tribunal ruled in favour of Bolt, allowing the appeal that its services fell within TOMS for VAT purposes. This decision recognised the nature of modern service delivery, particularly in the digital economy, and its implications for VAT legislation.
The FTT had to interpret what constitutes a service “commonly provided by tour operators or travel agents” under TOMS. The tribunal examined the nature of Bolt’s services, including the technology-driven and user-centric aspects, and compared them with the services typically provided within the tourism sector. The FTT noted the necessity to treat similar services neutrally and avoid distortions of competition, acknowledging that strict or outdated interpretations of TOMS might not account for the evolution of service models in the digital age.
By classifying Bolt’s services under TOMS, the FTT recognised the need to ensure that innovative business models are not unduly penalised or advantaged compared to their traditional counterparts.
Free Consultation with Expert Tax Appeal Lawyers
The recent Bolt v HMRC decision marks a significant shift in the application of the Tour Operators Margin Scheme to digital ride-hailing services. This ruling may encourage other businesses (such as Uber) to reassess their VAT strategies, potentially leading to widespread changes in tax liabilities and competitive dynamics. The decision will also likely have wider implications signalling the need for regulatory updates and clarifications as digital services continue to evolve.
If you have any questions regarding the VAT regime or TOMS, our expert tax appeal lawyers are here to help. Please call us on 0207 459 4037 for a Free Consultation today or complete our online booking form.
