Under the Tour Operators' Margin Scheme (TOMS), services you provide yourself keep their own VAT treatment within a mixed package. You separate their value from bought-in travel and can reclaim VAT on their costs under normal rules. The split uses market value or a qualifying cost-based calculation.
For the wider picture, see how the margin scheme for tour operators works.
What counts as an in-house supply?
An in-house supply comes from your own resources or purchases you materially alter or process. What you sell must then differ from what you bought (709/5 para 2.12).
- A coach you own or hire, operated with your own driver, fuel and maintenance arrangements, provides in-house passenger transport (709/5 para 7.1).
- Accommodation you own is in-house. Rented or leased accommodation also qualifies where you take responsibility for upkeep and maintenance of the building itself. Cleaning and changing towels alone do not meet that test (709/5 para 7.6).
- A catered chalet can be in-house when you buy accommodation and provide your own catering staff separately (709/5 para 7.6).
- Tents or caravans you install on rented pitches provide in-house accommodation (709/5 para 7.9).
- A conference you assemble from hired rooms, equipment and reception staff is an in-house service (709/5 para 7.12).
Sold alone, your in-house service follows normal VAT rules outside TOMS. Sold with Margin Scheme supplies, it enters the TOMS calculation but keeps its own VAT treatment (709/5 para 2.13).
If your bookings include corporate events, see TOMS for company trips and business customers for the customer side of the question.
Should you use market value or the cost-based method?
In principle, use market value where you can establish it. This means the price your in-house service would fetch independently, in an arm's-length sale to an unconnected person. The calculation removes that value from the package price before calculating the bought-in travel margin (709/5 para 5.2 and section 13, TL5).
You may instead use the cost-based method where it accurately reflects your package structure. That means the same percentage mark-up across the components. Where you cannot establish market value, use the cost-based method for that in-house supply (709/5 paras 2.13 and 5.3).
You cannot switch methods simply because one produces less tax (709/5 para 5.4 and section 13, TL3). The method must fit the package, rather than the bill you would prefer.
Keep each market value, its calculation and the reason it represents your service. Comparisons must reflect your business model. Any averages need proper weighting and regular review, including allowances for child prices and other discounts (709/5 paras 5.6 and 6.2). Keep the supporting model available for HM Revenue and Customs (HMRC).
The cost-based calculation shares the total margin according to direct costs. Your booking system's individual package profit figures may therefore differ from the annual allocation (709/5 para 5.2).
If every in-house and Margin Scheme supply is standard-rated, you must use the simplified calculation in section 11. You cannot use it where any supply is zero-rated, reduced-rated or outside the scope of VAT (709/5 para 5.5).
Most United Kingdom (UK) passenger transport in vehicles with capacity for at least 10 people is zero-rated. Running your own coach within mixed packages therefore usually rules out that shortcut (709/6 para 3.6; 709/5 para 5.5).
Which in-house costs belong in the calculation?
For standard-rated in-house supplies, start with direct costs excluding VAT, then add an amount equivalent to the standard VAT rate. This is a calculation adjustment, rather than a total of the VAT shown on your purchase invoices (709/5 section 9, step 4).
The standard rate is 20 per cent, the rate used in the example below.
You reclaim UK VAT on purchases relating to in-house supplies separately, through normal returns and subject to normal rules (709/5 para 4.3).
For accommodation, indicative direct costs include depreciation, catering purchases, heating, lighting, rates and building insurance. Equipment rental, repairs, cleaning and staff costs can also belong here. These are HMRC's examples, rather than a statutory checklist (709/5 para 7.7).
If your property also takes guests outside TOMS, split its annual direct costs using guest numbers or days booked as the usual basis. Shared premises costs may also need allocation by floor area, for example where the building includes administrative offices (709/5 para 7.8).
How the lodge's stays are taxed when sold on their own, outside a package, is covered by HMRC's notice on hotels and holiday accommodation (VAT Notice 709/3).
What does a full cost-based TOMS calculation look like?
Illustrative example, not a real business.
Callum's company leases a Lake District lodge on a long lease. It handles upkeep and repairs, making the stays an in-house accommodation supply. The accommodation is standard-rated (709/5 paras 7.6 and 5.5).
It sells lodge breaks with bought-in UK excursions and walking holidays in France using bought-in hotels. It uses the cost-based method, having concluded that this accurately reflects its package pricing.
The UK Margin Scheme margin is standard-rated, while the margin on travel enjoyed in France is zero-rated. The lodge retains its separate in-house treatment (709/5 para 4.8).
Build the cost total and share the margin
The total margin is shared using each category's proportion of total calculation costs (709/5 section 9, steps 1 to 4 and 10 to 14).
| Step | Calculation | Amount |
|---|---|---|
| 1 | VAT-inclusive package sales | £500,000 |
| 2 | Bought-in travel enjoyed in the UK | £70,000 |
| 3 | Bought-in travel enjoyed outside the UK | £210,000 |
| 4 | Lodge direct costs of £100,000 before VAT, plus 20 per cent | £120,000 |
| 10 | Total calculation costs | £400,000 |
| 11 | Margin: £500,000 less £400,000 | £100,000 |
| 12 | UK Margin Scheme margin: £70,000 ÷ £400,000 × £100,000 | £17,500 |
| 13 | Zero-rated France margin: £210,000 ÷ £400,000 × £100,000 | £52,500 |
| 14 | In-house margin: £120,000 ÷ £400,000 × £100,000 | £30,000 |
Calculate the output VAT
Output VAT means VAT due on your sales. To extract VAT from an amount including VAT at 20 per cent, use one-sixth (700 para 7.3.1).
The bought-in UK element is taxed on its margin. The in-house lodge calculation includes both its adjusted costs and allocated margin (709/5 section 9, steps 20 and 21).
| Step | Calculation | Output VAT |
|---|---|---|
| 20 | UK Margin Scheme margin: one-sixth of £17,500 | £2,916.67 |
| 21 | In-house supply: one-sixth of (£120,000 + £30,000) | £25,000 |
| 30 | Total output VAT for the year | £27,916.67 |
The lodge's £25,000 output VAT outweighs the £2,916.67 on the UK Margin Scheme margin. VAT on the lodge's running costs is reclaimed on the returns under normal rules, separately from this output VAT total (709/5 para 4.3).
Next year's provisional percentage is (£120,000 + £17,500 + £30,000) ÷ £500,000 × 100 = 33.5 per cent. This identifies the provisional standard-rated share of sales, rather than a new VAT rate (709/5 section 10).
What should you check this quarter?
- Identify services you provide yourself, including those assembled from separate purchases.
- Separate standalone sales from services included in mixed packages.
- Record your valuation method and the evidence supporting it.
- Separate direct costs by supply type and VAT treatment.
- Check accommodation cost allocations against guest or booking records.
- Keep recoverable VAT on in-house purchases identifiable for your normal returns.
The annual adjustment compares the year's calculated VAT with provisional VAT already accounted for. It belongs on the return for the first accounting period ending after your financial year-end (709/5 section 13, TL4 paragraph 4).
Our accountants for travel agencies and tour operators can review that split with you.
Frequently asked questions
Is a coach I own and run part of TOMS?
A coach you own or hire and operate with your own driver provides in-house passenger transport. Include it in the Tour Operators' Margin Scheme (TOMS) calculation when sold with bought-in Margin Scheme supplies. It keeps its normal VAT treatment, while standalone sales follow normal VAT rules outside TOMS.
Can I reclaim VAT on the costs of my own hotel or lodge?
You can reclaim UK VAT on purchases relating to your in-house hotel or lodge, subject to normal rules. Claim it through your VAT returns outside the Tour Operators' Margin Scheme (TOMS), even when the accommodation forms part of a TOMS package.
Should I use the market value or cost-based method?
Use market value in principle where you can establish it for your in-house supply. You may use the cost-based method if it accurately reflects your package structure, including the same percentage mark-up across components. Use cost-based treatment where market value cannot be established. You cannot switch methods simply to obtain a lower tax bill.
What if I sell my in-house service on its own?
An in-house service sold without Margin Scheme supplies follows normal VAT rules outside the Tour Operators' Margin Scheme (TOMS). Within a mixed package, it enters the TOMS calculation but retains its normal VAT treatment. Records need to distinguish standalone sales from those included in mixed packages.
Sources
Every rule in this article was checked against these pages on 22 October 2026.
