How to Stay HMRC-Ready: Compliance Tips for Travel and Hospitality Businesses

How to Stay HMRC-Ready: Compliance Tips for Travel and Hospitality Businesses

Introduction: Navigating HMRC Compliance in a Regulated Sector

The UK travel and hospitality sector, contributing £286 billion to the economy in 2024, is a powerhouse of growth, with 42.6 million inbound visits and £32.5 billion in visitor spending last year. Yet, it is also one of the most heavily regulated industries, with HM Revenue and Customs enforcing strict rules on VAT, client money protection, and financial reporting.

For travel agents, tour operators, hotels, and other hospitality businesses, compliance is not just about avoiding penalties. It is about building trust, protecting cash flow, and staying competitive against global OTAs and large chains. Mistakes can lead to audits, fines up to £400 plus daily penalties, or even loss of licenses such as ATOL.

From the Tour Operators Margin Scheme (TOMS) for VAT to ATOL trust accounts and ABTA bonding, the compliance landscape is complex. Add in Making Tax Digital requirements and post-Brexit adjustments, and smaller businesses, which make up more than 80 percent of the UK’s 5,000 travel agencies, face significant challenges.

This guide provides detailed and actionable tips to keep your travel or hospitality business HMRC ready, covering VAT, record keeping, client money protection, and more. Whether you are a boutique agency or a mid-sized hotel, these strategies will help you stay compliant and focused on growth.

1. Master VAT Compliance with TOMS and Standard Rules

Understand your VAT obligations
Travel agents and tour operators selling packages often fall under the Tour Operators Margin Scheme, which taxes only the profit margin (selling price minus bought-in costs) at 20 percent for UK supplies or zero percent for non-UK supplies. Hospitality businesses such as hotels or restaurants typically use standard VAT rules, charging 20 percent on most services but zero percent on certain supplies such as takeaway food. Misclassifying supplies, such as treating a disclosed agency commission as TOMS, can trigger HMRC reassessments.

Actionable tips
• Determine whether TOMS applies. If you sell packages in your own name as an undisclosed agent, use TOMS for flights, hotels, or excursions. Disclosed agents naming suppliers follow standard VAT rules.
• Separate TOMS and standard VAT supplies in your accounts to avoid double taxation.
• Calculate TOMS margins annually, using last year’s provisional percentage for quarterly filings.
• Confirm reduced hospitality rates and reclaim input VAT on overheads such as utilities but not on TOMS supplies.

Example
A travel agency sells a £2,000 UK package including a £1,200 flight and £600 hotel. Margin = £2,000 − £1,800 = £200. VAT = 20 percent of £200 = £40. For a hotel, a £100 room night incurs £16.67 VAT, fully reclaimable if registered.

2. Protect Client Money with ATOL and Trust Accounts

The Air Travel Organisers Licensing scheme, mandatory for UK businesses selling flight-inclusive packages, protects consumers if you fail. Client funds must be held in a trust account until travel is completed. In 2024, more than 20 million passengers were ATOL protected, and non-compliance risks license revocation.

Actionable tips
• Open a separate trust account for ATOL funds, approved by the Civil Aviation Authority.
• Issue ATOL certificates immediately upon booking confirmation.
• Small businesses can use a bond instead of a trust, usually 15 percent of projected turnover.
• Submit annual ATOL returns and reconcile trust account balances. Late filings incur significant penalties.

3. Adhere to ABTA Standards and Package Travel Regulations

ABTA membership, while voluntary, enhances credibility and requires strict financial reporting. The Package Travel and Linked Travel Arrangements Regulations 2018 mandate insolvency protection and clear consumer contracts.

Actionable tips
• Provide ABTA bonding and submit audited accounts annually.
• Include pre-contract information such as itineraries, prices, and cancellation terms.
• Guarantee refunds within 14 days for cancelled packages, backed by insurance or trust funds.
• Train staff on ABTA’s Code of Conduct to prevent mis-selling or unclear terms.

4. Embrace Making Tax Digital for Seamless Filings

Since 2019, Making Tax Digital has required digital record keeping and quarterly VAT filings for businesses with turnover above £85,000. Non-compliance triggers fines and daily penalties.

Actionable tips
• Use compatible software such as Xero, QuickBooks, or Sage to automate VAT and TOMS filings.
• Keep invoices, receipts, and TOMS calculations digitally for six years.
• File VAT returns through MTD’s API system to avoid penalties.
• Adjust TOMS margins at year-end and reflect them in the next VAT return.

5. Implement Robust Financial Controls

Poor record keeping is one of the main causes of HMRC audits in the travel and hospitality sector. In 2024 alone, HMRC issued £1.2 million in penalties for missing or inaccurate records.

Actionable tips
• Keep separate ledgers for TOMS, standard VAT, and non-VAT supplies.
• Use HMRC-approved exchange rates such as Financial Times or Bank of England rates for foreign transactions.
• Maintain clear documentation for all transactions with TOMS and non-TOMS labels.
• Conduct internal audits quarterly to identify and correct issues before HMRC does.

6. Common Pitfalls and how to avoid them

• Misclassifying agency status under TOMS inflates margins. Review contracts to confirm disclosed or undisclosed status.
• Missing ATOL filing deadlines risks license suspension. Schedule reminders in advance.
• Using manual spreadsheets for VAT filings breaches MTD requirements. Use compliant software.
• Incorrectly allocating UK and EU margins causes penalties. Apply accurate geolocation for supplies.
• Underestimating ATOL or ABTA bond levels can leave gaps in protection. Review turnover projections annually.

7. Future Proofing for 2025 and Beyond

HMRC’s 2025 TOMS review and the EU’s VAT in the Digital Age consultation will shape future compliance for travel and hospitality.

Actionable tips
• Monitor HMRC and ABTA updates regularly.
• Consult VAT specialists for guidance on upcoming EU reforms.
• Automate compliance wherever possible to stay ahead of new reporting standards.

Conclusion: Stay Compliant and Competitive

Compliance with HMRC, ATOL, and ABTA regulations is essential for UK travel and hospitality businesses. By mastering VAT under TOMS, protecting client funds, adhering to Making Tax Digital, and maintaining strong financial controls, you can avoid penalties and build a reputation for reliability.

In a market where 62 percent of UK travellers prefer packaged holidays, financial transparency and compliance are powerful competitive advantages.

At Antravia, we provide expert accounting and compliance solutions for UK travel and hospitality businesses, from VAT and TOMS setup to ATOL and ABTA audits.

Contact us

Antravia UK helps travel agents and tour operators structure their businesses for long-term financial success. Speak to us if you’re setting up or reviewing your UK entity and want expert, travel-specific accounting support.

Disclaimer

This content is for general informational purposes only and does not constitute tax or accounting advice. Always consult a qualified professional for your specific situation.

References

• Inbound visits and spend: quarterly, UK | VisitBritain.org
https://www.visitbritain.org/research-insights/inbound-visits-and-spend-quarterly-uk

• Tourism Sector Overview 2025 | VisitBritain
https://www.visitbritain.org/research-insights/tourism-sector-overview

• Making Tax Digital for VAT | HMRC
https://www.gov.uk/government/collections/making-tax-digital-for-vat

• HMRC VAT Notice 709/5: Tour Operators Margin Scheme
https://www.gov.uk/government/publications/vat-notice-7095-tour-operators-margin-scheme/vat-notice-7095-tour-operators-margin-scheme

• VAT and TOMS for UK Travel Businesses | ABTA
https://www.abta.com/advice-and-guidance/running-your-travel-business/tax-and-finance/vat-and-toms

• ATOL Guidance for Businesses | CAA
https://www.caa.co.uk/atol-protection/businesses/atol-guidance-for-businesses

• Package Travel Regulations 2018 | Legislation.gov.uk
https://www.legislation.gov.uk/uksi/2018/634/contents/made

• ABTA Code of Conduct | ABTA
https://www.abta.com/about-abta/abta-code-of-conduct

• VAT for Hospitality Businesses | HMRC
https://www.gov.uk/guidance/vat-for-hospitality-businesses

• HMRC Penalties for Non-Compliance | Gov.uk
https://www.gov.uk/guidance/vat-penalties-and-interest