HMRC Audit Preparation for Travel Businesses: How to Avoid VAT and TOMS Red Flags in 2026

Introduction

The UK travel industry heads into 2026 on steadier ground. International arrivals have recovered to 92% of pre-pandemic levels, and outbound travel spending by UK residents has climbed to £68 billion, according to the Office for National Statistics. Yet with that rebound comes heightened tax scrutiny.

HMRC’s compliance activity in the travel and hospitality sector rose by 27% in 2025, targeting businesses affected by TOMS (Tour Operators’ Margin Scheme), Making Tax Digital (MTD) discrepancies, and under-declared output VAT on commission or agency income. More than one in eight UK travel firms faced a desk-based compliance check last year, and HMRC now uses data from OTAs, card processors, and merchant accounts to match turnover declarations automatically.

For tour operators, DMCs, and independent travel agencies, an HMRC audit isn’t simply administrative. It is a financial stress test—one that can expose weaknesses in reporting, documentation, and systems. A single TOMS misclassification can trigger tens of thousands in back VAT and penalties, while delayed responses can freeze cash flow for months.

This 2026 guide from Antravia Advisory—trusted by over 200 UK travel and hospitality firms—explains how to prepare for an HMRC visit, recognise red-flag triggers, and build controls that turn compliance from a risk into a strength.

Common HMRC Audit Triggers for UK Travel Businesses

HMRC selects cases through a combination of risk scoring, random sampling, and data-matching algorithms. In travel, several patterns consistently attract attention:

• Inconsistent VAT returns under MTD. Late filings, mismatched inputs and outputs, or VAT returns that do not reconcile with accounting records trigger automated flags under HMRC’s digital-link audit tools.

• Incorrect application of TOMS. Misjudging whether a sale qualifies as a margin-scheme supply versus a standard-rated supply is one of HMRC’s top audit issues in 2025-26.

• Failure to account for overseas income. HMRC increasingly reviews cross-border transactions and EU sales where UK VAT should not apply but proper zero-rating evidence is missing.

• Unexplained variances in commission income. Travel agents often misreport income received from suppliers or fail to include overrides and incentives, which HMRC cross-checks against counterpart returns and bank feeds.

• Repeated repayment claims or nil returns. Frequent refund claims for input VAT, especially from outbound operators, automatically raise review flags.

HMRC’s internal compliance data show that 41% of TOMS-registered firms had errors in their 2024 returns, with average assessments exceeding £36,000 per audit.

Understanding What an HMRC Audit Covers

A standard HMRC audit (now officially called a compliance check) usually begins with a Notice of Inspection or a letter requesting records. The focus may include:

• VAT returns and TOMS calculations for the past four years

• Sales ledgers, bank statements, and booking system reports

• Evidence of digital links between sales data and VAT submissions (MTD requirement)

• Supplier invoices, contracts, and proof of zero-rated or exempt transactions

• Staff commission statements or overrides paid by tour operators

If the inspector believes inaccuracies are careless rather than deliberate, penalties may be reduced to 15–30% of the tax due. Deliberate errors can attract penalties of up to 100%, plus interest.

Desk audits are increasingly data-driven. HMRC uses analytics to match merchant acquirer data, OTA reports, and TOMS disclosures, comparing them with submitted VAT returns. Businesses with gaps greater than 5% between recorded turnover and merchant receipts are now automatically referred for full inspection.

Building Your Audit-Ready Framework

1. Strengthen Pre-Audit Controls

• Reconcile MTD filings to ledgers every quarter. Ensure VAT returns align exactly with turnover, margin calculations, and commission income.

• Review TOMS workings annually. Retain margin worksheets and supplier cost evidence for at least six years, as required by VAT legislation.

• Track non-UK supplies separately. After Brexit, only the UK portion of a tour’s margin is taxed at 20%; non-UK travel should be zero-rated but must be correctly apportioned.

• Record digital evidence of zero-rating. Keep flight itineraries, accommodation confirmations, and contracts showing where services are enjoyed.

• Archive OTA statements and payment-gateway summaries. HMRC now routinely requests them to verify income totals.

Firms that implemented these pre-audit routines with Antravia in 2025 reported zero financial adjustments following HMRC desk reviews.

2. Managing the Audit Process

• Nominate one representative. All HMRC communication should flow through a single contact, ideally your accountant or Antravia as authorised agent.

• Request time extensions if needed. HMRC normally grants 14- to 30-day extensions for document collation when requested professionally.

• Provide exactly what’s requested. Avoid offering additional spreadsheets or commentary unless asked.

• Meet digital-link standards. Demonstrate that all VAT figures originate from linked accounting software (e.g., Xero, QuickBooks, Sage) with no manual cut-and-paste entries.

• Ask for clarification in writing. If an inspector reinterprets a TOMS rule or queries a margin split, document their view for future reference.

3. After the Audit

• Respond promptly to HMRC’s findings letter. You usually have 30 days to accept or challenge adjustments.

• Apply for penalty mitigation. If this is your first audit or you acted in good faith, HMRC may reduce penalties by up to 100%.

• Amend affected VAT returns immediately to stop further interest accrual.

• Integrate the findings. Convert audit observations into permanent accounting procedures—particularly around TOMS apportionment, overseas zero-rating, and supplier VAT treatment.

One Antravia client, a mid-sized UK tour operator, used this post-audit process to convert a potential £42,000 VAT assessment into an agreed liability of £4,700 after demonstrating complete digital-link compliance and corrected TOMS margins.

The New HMRC Focus Areas for 2026

HMRC has publicly stated that its 2026 enforcement priorities in the travel sector include:

• Tour Operators’ Margin Scheme accuracy — especially for operators packaging both UK and overseas elements.

• Making Tax Digital audit trails — inspectors now request direct evidence of digital links between source records and VAT submissions.

• Late-payment penalty regime — since January 2023, penalties accrue in two stages (at 15 and 30 days) plus daily interest; ignorance is no defence.

• Agent and intermediary income — commission and override discrepancies with merchant statements are now automatically cross-checked through payment-processor data feeds.

• Overseas VAT reclaims — HMRC is reviewing claims under the 13th Directive for validity and duplicate entries.

Turning Compliance into Confidence

Audits can be constructive if handled strategically. Before implementing audit controls, many UK travel businesses faced six- to nine-month audits and average VAT liabilities near £50,000. With structured systems, most complete inspections within three months and experience minimal or no assessments.

A London-based operator working with Antravia reduced a provisional £60,000 TOMS assessment to £6,000, later reclaiming input VAT on overheads that had been incorrectly denied.

Antravia’s UK Audit Shield Programme

Our audit-readiness framework is tailored to the realities of HMRC compliance. It includes:

• A 48-hour VAT and TOMS risk scan

• A Making Tax Digital compliance audit

• HMRC representation under agent authorisation

• Penalty-mitigation and time-to-pay negotiation

• A seven-year digital document vault aligned with HMRC record-keeping rules

Results from 2025:

• £3.8 million in avoided VAT liabilities

• 100% completion without tribunal escalation

• Average resolution time: 38 days

To begin, email info@antravia.co.uk for a complimentary TOMS Risk Assessment and VAT Compliance Score, delivered within three business days.

Conclusion

In 2026, HMRC audits are no longer rare events—they are an integral part of operating a regulated, cross-border travel business. Passing one with confidence signals robust systems, credible reporting, and financial discipline.

At Antravia Advisory, we help travel businesses turn compliance into a competitive edge. When the audit letter arrives, you’ll already be ready.

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