VAT mistakes UK travel businesses make long before HMRC steps in

UK VAT risks for tour operators, travel agents, DMCs, hotels and event companies - For more info, visit UKVAT.tax

VAT errors rarely look like mistakes

VAT problems in travel rarely start with “wrong bookkeeping.” They start much earlier, as operational assumptions that feel practical in the moment and quietly build risk underneath the surface ---- Most travel companies deal with cross-border suppliers, bundled services, margin-based taxation, deposits and refunds, multiple systems generating transactions, customers and suppliers in different jurisdictions, and complex agency versus principal arrangements. When all of these elements interact, VAT risk is built into daily operations. By the time HMRC intervenes, the problem is no longer technical. It is financial.

The issues below are not obscure edge cases. They are structural VAT failures that appear repeatedly across UK travel businesses and make up a large proportion of HMRC intervention activity.

1. Reverse charge errors on overseas suppliers

UK travel businesses routinely buy services from overseas suppliers, particularly IT systems and booking platforms, digital marketing services, channel management tools, consultants, developers, and offshore contractors. For VAT purposes, many of these services fall under the reverse charge mechanism. In simple terms, the overseas supplier does not charge UK VAT and the UK business must account for VAT itself. Output VAT and input VAT are recorded at the same time and the transaction only remains VAT-neutral if it is handled correctly.

Where businesses go wrong is in assuming VAT recovery exists when it does not. Common failures include reclaiming input VAT that is not legally chargeable, failing to post reverse-charge output VAT, applying the mechanism to the wrong types of services, misclassifying goods as services (or vice versa), and accepting VAT charged by overseas suppliers who do not even hold a UK VAT registration.

The practical impact is that VAT becomes under-declared and Businesses reclaim VAT that does not exist. Systems produce VAT return outputs that do not match actual transaction flows. HMRC eventually reconstructs liability and raises assessments based on what the business should have declared.

If VAT appears reclaimable at source when it is not legally due, the reclaim will be denied in inspection regardless of how it was treated in the accounts.

2. Import VAT errors after Brexit

Post-Brexit VAT on imports remains one of the most mishandled areas of UK compliance. Many travel businesses rely on Postponed VAT Accounting (PVA) and assume that it “handles” import VAT. But It does not and unless the correct values appear on the VAT return, PVA statements reconcile to customs declarations, treatment is consistent across accounting systems, and import values are posted correctly at transaction level.

Common failures include omitting import VAT entirely, confusing postponed accounting with zero-rating, mismatches between customs data and VAT returns, incorrect treatment of duty versus VAT, and the dangerous assumption that freight forwarders have already resolved VAT exposure.

HMRC compares import records, VAT return data and accounting entries. Errors here often surface years later and rarely unwind cleanly.

For more info on Reclaiming VAT outside the UK, visit - VAT.claims

3. Charging VAT incorrectly on UK sales

A surprising number of travel businesses believe that selling to an overseas customer removes UK VAT exposure, but again, it does not. VAT is governed by place of supply, the nature of the service or goods, performance location and contractual structure. Customer nationality does not override tax law.

Common errors include UK services sold VAT-free to foreign clients, events held in the UK wrongly treated as non-taxable, hotel accommodation misclassified as exports, UK transport incorrectly zero-rated, and outbound travel misunderstood. If a supply takes place in the UK, VAT exposure usually exists regardless of where the customer lives.

4. Zero-rating exports without evidence

Moving goods overseas does not automatically remove VAT as Zero-rating depends on documentary proof.

Travel businesses regularly export tour materials, signage, merchandise, marketing assets, equipment for events, and stock for overseas operations. What they often fail to do is retain compliant export evidence within statutory deadlines.

Missing paperwork, incomplete courier data and unsupported VAT returns all lead to the same outcome. If you cannot prove export within legal time limits, VAT becomes due even if the goods physically left the UK.

5. Reclaiming VAT that should never have been charged

One of the most expensive VAT mistakes is reclaiming VAT that never legally existed. Travel businesses regularly pay VAT to overseas suppliers who should not charge it, UK suppliers who invoice incorrectly, intermediaries who apply VAT in error, and contractors who are not properly registered.

VAT is recoverable only when it was correctly charged by a registered supplier for a taxable supply and supported by a valid invoice.

If VAT was charged incorrectly, recovery is denied by HMRC and the financial loss stays with the claimant.

6. TOMS mistakes most businesses never realise they are making

The Tour Operators’ Margin Scheme is consistently misunderstood. We regularly see travel businesses assuming overseas hotels are automatically zero-rated under TOMS, reclaiming VAT on bought-in travel services, applying TOMS selectively instead of structurally, excluding transport incorrectly, combining margin and commission logic, and misunderstanding agency versus principal treatment.

Under TOMS, VAT applies to margin, not revenue. Input VAT on travel services is blocked. Destination does not eliminate liability. Structure determines VAT, not geography. Errors under TOMS accumulate slowly and they rarely surface until audit.

See more info on TOMS here and under our specialist page UKVAT.tax

7. VAT errors caused by systems and software

HMRC audits businesses and not your systems, but systems are often where the exposure is created.

Booking platforms frequently calculate VAT on gross instead of margin. Reverse charge rules are not triggered automatically. VAT codes default incorrectly based on contract types. Refunds fail to reverse VAT. Deposits are mishandled. Intercompany mapping is wrong. Accounting platforms do not handle travel VAT correctly out of the box. They follow default VAT logic designed for standard retail models.

If VAT logic is wrong inside your systems, it will be wrong at scale and Technology multiplies both compliance and error simultaneously.

8. VAT on deposits, cancellations and refunds

VAT follows tax point rules and not necessarily commercial logic. We regularly see deposits treated as non-taxable, cancellation income ignored, refunds issued without VAT adjustment, expired vouchers left uncorrected, and retained payments overlooked.

VAT typically becomes due when money is received, when a legally enforceable right to a service is created, when a deposit converts to payment, or when a cancellation charge is raised. Not when a trip happens. And for VAT, timing matters.

9. Partial exemption ignored entirely

Many travel businesses are partially exempt and do not realise it. This happens when taxable and exempt income streams coexist, such as accommodation with insurance commissions, financial products, mixed supply models and group services.

Without partial exemption calculations, businesses over-recover VAT without knowing it. HMRC does not write these off. Assessments often span multiple years. Annual adjustments are compulsory and lack of awareness does not reduce liability.

10. Intercompany VAT missed inside groups

Group structures do not eliminate VAT and Intra-group charges for management services, IT, marketing, payroll allocation, licensing and treasury functions remain taxable where services cross borders.

Internal billing is not invisible and if services move between entities, VAT must be considered.

How HMRC now finds VAT problems

HMRC no longer relies on chance and VAT enforcement is data-driven. Authorities reconcile VAT returns against customs data, procurement ledgers, card processing data, financial institutions, EU trade records, CDS feeds, and transactional patterns.

Discrepancies surface algorithmically and letters are automatically triggered digitally.

Final Antravia word

Most VAT failures are not aggressive tax planning. They are system breakdowns, process errors and misunderstood rules. Travel businesses are uniquely exposed because VAT touches every commercial process: supplier payments, booking engines, pricing, refunds, contracts and cross-border flows and once VAT becomes historic, it becomes expensive.

How Antravia supports UK travel businesses

Antravia works with UK tour operators, agents, hotels and travel groups on VAT health checks, risk clean-ups, audit defence, TOMS interpretation, cross-border VAT advisory, systems-led VAT failures, major transaction reviews and exposure reconstruction.

References

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

• HMRC, VAT Place of Supply of Services (Notice 741A)
  https://www.gov.uk/guidance/vat-place-of-supply-of-services-notice-741a

• HMRC, Import VAT and Postponed VAT Accounting
  https://www.gov.uk/guidance/check-when-you-can-account-for-import-vat-on-your-vat-return

• HMRC, VAT on Imports (Notice 702)
  https://www.gov.uk/guidance/vat-imports-acquisitions-and-purchases-from-abroad-notice-702

• HMRC, VAT on Exported Goods (Notice 703)
  https://www.gov.uk/guidance/vat-on-goods-exported-from-the-uk-notice-703

• HMRC, VAT Partial Exemption
  https://www.gov.uk/guidance/vat-partial-exemption

• HMRC, Agents and VAT
  https://www.gov.uk/guidance/vat-notice-70034-agents

• European Commission, Council Directive 2006/112/EC
  https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32006L0112

• UK Government, Value Added Tax Act 1994
  https://www.legislation.gov.uk/ukpga/1994/23/contents

• OECD, International VAT/GST Guidelines
  https://www.oecd.org/tax/consumption/international-vat-gst-guidelines.htm

Disclaimer:
Content published by Antravia is provided for informational purposes only and reflects research, industry analysis, and our professional perspective. It does not constitute legal, tax, or accounting advice. Regulations vary by jurisdiction, and individual circumstances differ. Readers should seek advice from a qualified professional before making decisions that could affect their business.