VAT for UK Travel Agents and Tour Operators: What you need to know about TOMS

Understand how VAT and the Tour Operators’ Margin Scheme (TOMS) affect UK travel agents. Learn how to stay compliant and protect your margins.

TRAVEL AGENTS FINANCE

10/11/20255 min read

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VAT for UK Travel Agents and Tour Operators: What you need to know about TOMS

Running a travel agency or tour operation in the UK means juggling bookings, customer expectations, and a web of regulatory requirements. At the heart of your VAT obligations lies the Tour Operators’ Margin Scheme (TOMS), a specialised VAT accounting method designed to make life easier for travel businesses.

Introduced under the Value Added Tax Act 1994, TOMS treats a bundle of travel-related supplies such as flights, hotels, and excursions as a single supply. This allows you to pay VAT only on your profit margin rather than on the full package price.

This approach is a major shift from standard VAT rules, where you would reclaim input tax on every component but face multi-country registrations. However, TOMS is not optional if it applies, and getting it wrong can lead to audits, penalties, or eroded margins.

In this guide, we break down what TOMS covers, how to calculate it, key compliance points, and how to avoid common pitfalls. Whether you are a small agency selling bespoke tours or a larger operator managing full packages, mastering TOMS helps you stay compliant and protect your profits.

What Is TOMS and when does it apply?

TOMS is a simplification scheme for UK businesses that buy and resell designated travel services as a principal or undisclosed agent. It applies if you supply these services for the direct benefit of a traveller, meaning anyone receiving them for use rather than resale.

Key Supplies Covered by TOMS

TOMS applies to margin scheme supplies that are bought in and resold without material change. Core examples include:

Accommodation such as hotels or rentals
Passenger transport including flights, trains, or coaches
Vehicle or boat hire
Trips and excursions such as guided tours or safaris
Tour guide services
Airport lounge access

Other items such as catering or admission tickets qualify only if packaged with the above and bought in for resale. A package can be a full holiday or a single add-on bundled with travel.

Who does it apply to?

Travel agents and tour operators selling in their own name, such as online agencies bundling flights and hotels
Hoteliers adding transfers or conference organisers including accommodation
Charities arranging group treks
B2B incentive travel unless sold for onward resale under an opt-out

TOMS does not apply if you act as a disclosed agent and name the supplier while earning identifiable commission. In that case, normal VAT rules under Notice 709/6 apply. Incidental supplies, such as car hire making up less than one percent of turnover, can also be excluded.

Post-Brexit, TOMS was retained but simplified. VAT now applies only to UK-enjoyed supplies at 20 percent, while non-UK margins are zero-rated. As of 2025 there are no major UK changes, though HMRC is reviewing the scheme and the EU is consulting on reforms that could affect cross-border travel.

How to calculate VAT under TOMS

Under TOMS, VAT is paid only on your margin, which is the profit after costs, not on the full selling price. You cannot reclaim input VAT on bought-in services, but you can reclaim it on overheads.

Margin Formula:
Margin = Total selling price (VAT inclusive) − Total VAT inclusive cost of bought-in supplies

VAT is then 20 percent on this margin for UK supplies or zero percent for non-UK.

During the year you use a provisional percentage, based on last year’s results, to estimate VAT on quarterly returns. At year-end you perform a full adjustment on your next VAT return.

Example: Simple package calculation

A travel agency sells a £1,000 UK weekend package:
• £600 flight (bought in, VAT included)
• £300 hotel (bought in, VAT included)
• £100 in-house guide service (VAT exclusive cost £83.33, standard rated)

Calculation:
• Selling price: £1,000
• Bought-in cost: £900
• Margin: £100
• VAT on margin: £20
• In-house VAT: £16.67
Total VAT due: £36.67

For non-UK packages the margin VAT is zero, reducing your liability.

Handling In-House Supplies

If you include your own services, use either the market value method (standalone price if verifiable) or the cost-based method (based on direct costs). Separate UK and non-UK calculations require HMRC approval.

Tax Points and Invoicing

The tax point is the date of departure or accommodation, or when 20 percent or more of payment is received, whichever is earlier. No full VAT invoices are required for TOMS supplies since the margin is not known until year-end. Instead, state “TOMS supply, VAT on margin.”

Compliance and Record-Keeping Essentials

Keep thorough records including:

Selling prices and costs by type and location
Provisional percentage workings and exchange rates used
Full TOMS margins for VAT registration thresholds

Cash accounting cannot be used, but annual accounting is allowed. New businesses cannot apply flat-rate VAT for TOMS.

For B2B wholesale supplies, you can opt out of TOMS if the services are for resale.

TOMS must still comply with Making Tax Digital quarterly reporting, with adjustments made at year-end. Late adjustments can attract penalties of up to £400 plus daily fines.

Common Pitfalls and how to avoid them

Misclassifying agency status
If you act as an undisclosed agent, TOMS applies. Always review contracts to confirm your position.
Missing year-end adjustments
Errors in provisional percentages can cause over- or under-payments. Reconcile quarterly and automate tracking.
Mixing in-house and overhead costs
Separating costs ensures you reclaim VAT on office and marketing expenses correctly.
B2B traps
Corporate travel often falls under TOMS unless you document that it is for resale.
Currency and location errors
Always apply consistent exchange rates and correctly split UK and non-UK supplies.

Protecting Your Margins: Practical Tips

• Use TOMS-compliant accounting software integrated with Xero or Sage
• Seek professional VAT advice, especially for EU sales during 2025 reforms
• Forecast for cash flow, as zero-rating non-UK travel improves liquidity
• Train your team to identify TOMS triggers, such as bundling transport with excursions

Conclusion: Navigate TOMS with Confidence

TOMS is not just a compliance requirement. It helps travel agents and tour operators simplify VAT and protect profit margins in a £286 billion UK tourism industry. By focusing VAT on profits and zero-rating international sales, it provides a fairer framework for domestic operators competing with OTAs.

However, accuracy is critical. Poor record-keeping or incorrect calculations can erase your gains.

At Antravia, we provide tailored accounting for UK travel agents, from TOMS setup to full compliance audits. Contact us today for a free consultation and let us help you turn tax complexity into a competitive advantage. 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.