UK TOMS explained: what HMRC Notice 709/5 actually means for travel agents

The Tour Operators Margin Scheme is one of the most misunderstood areas of UK VAT. Even experienced travel businesses often assume that if VAT is zero-rated, or if travel takes place outside the UK, TOMS somehow stops applying. That assumption is exactly where problems start.

HMRC Notice 709/5 sets out how the UK expects tour operators and travel agents to apply TOMS in practice. It is not a high-level policy document. It is operational guidance. It explains who is in scope, what counts as a TOMS supply, how margins must be calculated, when VAT is charged at 20 percent, when it is zero-rated, and why businesses can still end up with significant VAT exposure even when the headline rate is zero.

This article is a practical summary of what HMRC is actually saying in Notice 709/5, focused on the parts that matter to UK travel agents and tour operators today.

Why TOMS still matters after Brexit

A common assumption after Brexit was that TOMS would disappear for UK businesses selling European travel. That did not happen.

The UK chose to retain TOMS in domestic VAT law. The scheme still applies to UK-established travel agents and tour operators who sell travel services in their own name and buy in components such as accommodation, transport, meals, guides, or excursions.

The UK leaving the EU changed the VAT rate that applies in certain cases, but it did not remove the obligation to apply TOMS, calculate margins, or report those margins on UK VAT returns.

Many of the issues we see arise because businesses focus on the VAT rate and ignore the accounting mechanics that still sit underneath.

Who HMRC considers to be within UK TOMS

HMRC is very clear on scope.

If a business is established in the UK and sells travel services in its own name, it is within UK TOMS. This applies regardless of where the travel takes place.

Being “established in the UK” is not just about where the company is incorporated. HMRC looks at where the business is run, where decisions are made, and where the resources that deliver the service are located. If those point to the UK, HMRC treats the business as UK-established for TOMS purposes.

If you are a UK travel agent selling tours, packages, or experiences and contracting directly with customers, TOMS is the starting point, not an optional extra.

What counts as a TOMS supply

Notice 709/5 focuses heavily on the nature of the supply, not just the destination.

A supply falls within TOMS when a travel business sells a single travel service in its own name and that service is made up of bought-in components. These components typically include hotels, transport, meals, guides, entrance tickets, or activities.

It does not matter whether the business describes itself as a tour operator, a travel agent, or a curator of experiences. What matters is whether the business is acting as principal and bundling third-party travel services.

This is particularly relevant for food tours, culinary trips, and experience-led travel. These products almost always involve bought-in services, which means they frequently fall squarely within TOMS even when they do not look like traditional package holidays.

The margin is the tax base, not the selling price

One of the core principles in Notice 709/5 is that VAT under TOMS is charged on the margin, not on total revenue.

The margin is defined as the difference between what the customer pays and the direct costs of the travel services that are bought in and resold.

Direct costs are narrowly defined. They include items such as hotel accommodation, transport, meals, guides, and entrance fees that directly relate to the trip. They do not include overheads such as marketing, administration, staff costs, or general operating expenses.

This distinction is one of the most common sources of error. Businesses often reduce the margin by costs that HMRC does not accept as direct travel costs, which leads to understated margins and future exposure.

Zero-rated does not mean outside TOMS

One of the most important clarifications in Notice 709/5 is the difference between a supply being zero-rated and a supply being outside the scope of VAT.

When a UK travel agent sells a tour that takes place wholly outside the UK, the margin is zero-rated for UK VAT purposes. That means the VAT rate applied is 0 percent.

However, the supply is still a taxable supply under TOMS. The margin must still be calculated. It must still be reported on the UK VAT return. It still counts toward taxable turnover.

This is not the same as being outside the scope of VAT. Zero-rating keeps the business inside the VAT system and preserves the right to recover input VAT on overheads, subject to the normal rules.

This is why UK travel agents can have significant TOMS calculations and reporting obligations even when no VAT is ultimately payable.

When UK VAT at 20 percent applies

Notice 709/5 is equally clear that zero-rating only applies when the travel takes place wholly outside the UK.

If any part of the travel takes place in the UK, the position changes, so UK accommodation, UK transport, UK activities, or UK-based elements within a wider itinerary mean that part of the margin relates to UK travel. That portion of the margin is subject to UK VAT at the standard rate.

In these cases, the margin must be apportioned between UK and non-UK elements on a fair and reasonable basis. HMRC expects businesses to be able to explain and justify how this apportionment has been done.

This is an area where many businesses struggle, particularly where tours include pre-tour events, welcome dinners, or short UK segments before international travel.

Why apportionment is a major risk area

Apportionment is not optional. If a tour includes both UK and non-UK elements, the margin must be split.

Notice 709/5 does not prescribe a single method, but it does require the method to be reasonable, consistent, and supported by evidence. HMRC can and does challenge apportionment methods that appear arbitrary or overly favorable to the taxpayer.

This is one of the main reasons we see large TOMS provisions on balance sheets. Even where most travel takes place outside the UK, small UK elements can create disproportionate VAT exposure if margins are high or if the methodology has not been robustly documented.

Why provisions arise even when VAT is zero-rated

A large TOMS provision does not necessarily mean VAT is currently payable. It usually reflects uncertainty.

Notice 709/5 places responsibility squarely on the business to calculate margins correctly, classify costs properly, and apply zero-rating or standard-rating accurately. Where there is doubt, auditors and advisers will often require a provision to reflect potential exposure.

Common triggers include historic periods, especially pre-Brexit years, unclear apportionment, inconsistent margin calculations, or changes in interpretation over time.

Food tours and experience-led travel are particularly exposed because they often sit at the boundary of what businesses intuitively think of as “travel” versus what HMRC treats as a TOMS supply.

Record keeping and evidence expectations

HMRC’s guidance makes it clear that good records are not optional under TOMS.

Businesses must be able to show how margins were calculated, which costs were treated as direct costs, how zero-rating was applied, and how any apportionment was performed.

Poor documentation is one of the fastest ways to turn a technical position into an expensive dispute. Even where the VAT outcome should be nil, weak records can lead HMRC to challenge assumptions and reopen calculations.

Why UK TOMS still matters to European travel

Even though the UK is no longer part of the EU VAT area, UK TOMS still governs how UK travel agents account for VAT on European travel.

This creates a different outcome from EU-established agents and from non-EU agents based in countries such as the United States. That difference is a result of UK policy choices, not EU rules.

For UK businesses, the practical reality is that TOMS compliance remains a live accounting and tax issue, even when selling tours entirely outside the UK.

What UK travel agents should take away

HMRC Notice 709/5 is not about whether VAT is charged. It is about how travel businesses must think about their sales, their costs, and their margins.

Zero-rated does not mean simple. Outside the UK does not mean outside TOMS. And a low VAT bill does not mean low risk.

For UK travel agents selling European tours, especially experience-led or food-based products, understanding how TOMS actually works is essential to avoiding unexpected provisions, audit challenges, and long-running uncertainty.

Final Antravia thought

TOMS is not just a destination tax but a structural accounting scheme. HMRC’s guidance makes that clear, and the balance sheet impact many UK travel agents see today is a direct consequence of misunderstanding that point.

Getting TOMS right is less about VAT rates and more about classification, margin discipline, and evidence. That is where most businesses either get comfortable, or get caught.

If you would like help reviewing how your own tours sit within UK TOMS, or understanding why provisions arise even when VAT is zero-rated, that is exactly the type of work we do at Antravia.

References

HM Revenue & Customs

HM Revenue & Customs. VAT Notice 709/5: Tour operators margin scheme.
Official guidance setting out the scope of UK TOMS, margin calculation rules, zero-rating of travel outside the UK, apportionment requirements, and record-keeping expectations.
https://www.gov.uk/guidance/tour-operators-margin-scheme-for-vat-notice-7095

HM Revenue & Customs. VAT Notice 700: The VAT Guide.
General UK VAT guidance covering place of supply, establishment, taxable supplies, zero-rating, and VAT accounting principles relevant to TOMS.
https://www.gov.uk/guidance/vat-guide-notice-700

HM Revenue & Customs. VAT Notice 741A: Place of supply of services.
Guidance explaining how place of supply is determined for VAT purposes, including establishment and fixed establishment concepts referenced in TOMS.
https://www.gov.uk/guidance/vat-place-of-supply-of-services-notice-741a

Legislative basis (UK)

UK Government. Value Added Tax Act 1994, Schedule 9 and associated provisions as amended post-Brexit.
Primary legislation underpinning UK VAT and the domestic continuation of the Tour Operators Margin Scheme.
https://www.legislation.gov.uk/ukpga/1994/23/contents

UK Government. Value Added Tax (Tour Operators) Order 1987 (SI 1987/1806), as amended.
Secondary legislation implementing TOMS in UK law.
https://www.legislation.gov.uk/uksi/1987/1806/contents

Disclaimer

This article is provided for general information purposes only and does not constitute accounting, tax, or legal advice. Regulations, tax rules, and reporting requirements may change, and their application can vary depending on your business structure and circumstances. Readers should seek professional guidance from a qualified accountant or adviser before making any financial, tax, or compliance decisions. Antravia UK accepts no responsibility for any loss arising from reliance on the information contained herein.