If you buy in hotels, flights, transfers or excursions and sell them on to travellers, you can't just charge standard VAT on the full price the way a normal shop does. You probably have to use the Tour Operators' Margin Scheme, known as TOMS. Get it wrong and you'll either overpay VAT or face a nasty correction from HMRC.
TOMS is one of the most misunderstood corners of UK VAT. The rules are special, the calculation is unusual, and the year-end adjustment trips up plenty of otherwise tidy businesses.
This guide explains, in plain English, who has to use TOMS, how the margin calculation works, and what it means for your VAT registration and bookkeeping. It's written for UK travel agents, tour operators and any business that resells travel as part of what it does.
What is the TOMS VAT scheme?
TOMS is a compulsory VAT scheme for businesses that buy in travel services and resell them without materially altering them. Instead of charging VAT on the full selling price, you account for VAT only on your margin, which is the difference between what your customer pays you and what you pay your suppliers.
There's a trade-off built in. Because you only pay VAT on the margin, you also can't reclaim the VAT on the travel services you buy in to resell. HMRC's guidance is blunt about this: you cannot reclaim VAT on purchases that you make to resell as Margin Scheme supplies.
The scheme exists for a practical reason. Without it, a UK operator buying a hotel room in Spain would have to register for VAT in Spain. TOMS lets you account for the VAT in one place, on your margin, instead.
Who has to use TOMS?
You must use TOMS if you buy in and resell travel facilities as a principal, or as what HMRC calls an "undisclosed agent" (one acting in its own name). It applies even if travel isn't your main line of business.
HMRC gives examples: a hotelier who buys in coach passenger transport, or a coach operator who buys in hotel accommodation, both fall within the scheme. So the trigger isn't your job title, it's what you're actually selling and how.
You don't use TOMS if you act purely as a "disclosed agent", arranging a booking in the supplier's name for a commission. In that case you charge normal VAT on your commission, not on a margin. More on that distinction below.
If you run a travel business and you're not sure which side of the line you sit on, this is exactly the kind of thing worth checking early. Our accounting support for travel agencies is built around these scheme-specific rules.
What counts as a designated travel service?
A "designated travel service" is something you've bought in from someone else and resell to a traveller without materially altering it, supplied from your UK establishment.
These are always within TOMS when bought in and resold:
- Accommodation
- Passenger transport
- Hire of a means of transport
- Trips and excursions
- Tour guide services
- Airport lounge access
Some supplies, including catering, admission tickets and the use of sports facilities, fall into the scheme only when they're bought in and sold on without material alteration for the direct benefit of the traveller, as part of a package alongside the supplies above.
The phrase that does the heavy lifting is "without material alteration". If you genuinely transform what you bought, it may become an in-house supply instead, which is taxed differently (see below).
How is VAT calculated under TOMS?
The core idea is simple, but the mechanics need care.
Your margin is your VAT-inclusive selling price minus the VAT-inclusive cost of the travel services you bought in. You then work out the VAT due on that margin.
The margin is standard-rated when the travel is enjoyed in the UK and zero-rated when it's enjoyed outside the UK. The standard VAT rate is 20% for 2025/26, and the zero rate is 0%. To pull the VAT out of a VAT-inclusive UK margin, you use the VAT fraction: at 20%, that's 1/6 (because 20 / 120 = 1/6).
So for a UK-enjoyed package:
VAT due = (selling price - bought-in cost) x 1/6
In practice the calculation runs on an annual cycle, not deal by deal:
- During the year, you account for VAT provisionally using percentages worked out from your previous year's TOMS calculation.
- Immediately after your financial year-end, you do the full annual calculation, splitting your total margin between UK-enjoyed (standard-rated) and outside-UK (zero-rated) supplies.
- You enter the difference between the VAT actually due and the VAT you paid provisionally as an adjustment, on the VAT return for the first VAT period ending after your financial year-end.
That annual adjustment is the step businesses most often forget. It's also where good bookkeeping pays off, because the calculation is only as reliable as the cost and sales data behind it. If your records aren't kept cleanly through the year, the year-end becomes a scramble. That's where our bookkeeping services earn their keep for travel businesses.
Illustrative example: working out the VAT on a package
Illustrative example. Coastline Breaks Ltd is a small UK tour operator. It sells a UK short-break package for £1,200 (VAT inclusive). To put the package together, it buys in:
- Hotel accommodation: £600
- Coach transfer: £150
- Guided excursion: £90
These are all bought-in travel services, resold without material alteration, and the whole trip is enjoyed in the UK.
| Item | Amount (VAT inclusive) |
|---|---|
| Selling price to customer | £1,200 |
| Less: hotel | £600 |
| Less: coach transfer | £150 |
| Less: excursion | £90 |
| Margin | £360 |
The bought-in costs total £600 + £150 + £90 = £840. The margin is £1,200 - £840 = £360.
Because the package is enjoyed in the UK, the margin is standard-rated. The VAT due is the margin times the VAT fraction:
£360 x 1/6 = £60 VAT due
So on a £1,200 package, Coastline accounts for £60 of VAT, not £200. And, crucially, it does not reclaim the VAT buried in that £840 of bought-in travel costs, because that's the deal under TOMS.
Now change one fact. If the same package were enjoyed entirely outside the UK, say a city break in Lisbon, the margin would be zero-rated. The VAT due on the margin would be £0. The figures are illustrative and rounded for clarity; your own calculation runs across the whole year, not a single sale.
Do TOMS sales count towards the VAT registration threshold?
This is the question that catches new operators out. The headline turnover from selling holidays can look huge, but for VAT registration it's only your margin that counts, not the full selling price of TOMS supplies.
For 2025/26 the VAT registration threshold is £90,000 of taxable turnover in any rolling 12-month period. For a TOMS business, taxable turnover for this test is built from the total margin on your taxable (including zero-rated) Margin Scheme supplies, plus the full value of any taxable in-house supplies.
So a travel agent could turn over several hundred thousand pounds in package sales and still sit below the registration threshold, because only the margin slice counts. Equally, a high-margin operator can hit £90,000 of margin faster than expected. It pays to track this properly rather than guess.
If you're weighing up registration, timing or structure, our tax advisory team can model it for your numbers.
Disclosed vs undisclosed agent: a quick decision guide
The single most important question for a travel business is whether you're acting as a principal or undisclosed agent (TOMS applies) or as a disclosed agent (normal VAT on commission).
Use these steps:
- Whose name is the booking in? If you sell the travel in your own name, you're likely a principal or undisclosed agent, so TOMS applies.
- Are you naming the actual provider to the customer? If you clearly arrange the booking in the supplier's name and your role is to introduce the customer, you're acting as a disclosed agent.
- What are you actually paid for? A readily identifiable commission for arranging a booking points to disclosed agency. A margin you make from buying and reselling points to TOMS.
HMRC's rule is that if you act as a disclosed agent (you name the provider of the Margin Scheme supplies), you're not making Margin Scheme supplies yourself, so you account for VAT on your commission under the normal rules, not under TOMS.
| Disclosed agent | Undisclosed agent / principal | |
|---|---|---|
| Booking made in | Supplier's name | Your own name |
| VAT charged on | Your commission | Your margin |
| Scheme used | Normal VAT rules | TOMS |
| Reclaim VAT on bought-in travel? | Not applicable (you don't buy to resell) | No |
Getting this classification right matters, because it changes how much VAT you pay and what you can reclaim. It's rarely as obvious as it looks, and the same business can act in both roles on different transactions.
What about in-house supplies?
In-house supplies are services you make from your own resources, or things you bought in but then materially altered or further processed. A coach you own and operate yourself, or a hotel you run, would typically be in-house.
In-house supplies aren't taxed on the margin. When they're packaged up with Margin Scheme supplies, you apply the normal VAT rate for that type of supply, and you can reclaim input VAT relating to them under the usual rules. HMRC sets out methods (market value or cost-based) for splitting a mixed package between its Margin Scheme and in-house parts.
For most small travel agents reselling third-party hotels and transport, in-house supplies won't feature. But if you own real travel assets, the split matters, and it's worth getting professional eyes on the apportionment.
Frequently asked questions
Is TOMS optional?
No. TOMS is a compulsory scheme. If you buy in and resell travel services as a principal or undisclosed agent, you must use it for those supplies. You don't get to choose normal VAT instead.
Can I reclaim the VAT on hotels and flights I buy in?
No. Under TOMS you cannot reclaim VAT on the travel services you buy in to resell as Margin Scheme supplies. That's the trade-off for only paying VAT on your margin. You can still reclaim VAT on general business overheads and on purchases relating to genuine in-house supplies, subject to the normal rules.
What VAT rate applies to my margin?
The margin is standard-rated at 20% for travel enjoyed in the UK, and zero-rated (0%) for travel enjoyed outside the UK, for 2025/26. To extract the VAT from a VAT-inclusive UK margin you apply the 1/6 fraction.
When do I do the TOMS calculation?
You account for VAT provisionally through the year using percentages from your last calculation, then do the full annual calculation immediately after your financial year-end. The adjustment goes on the VAT return for the first VAT period that ends after your financial year-end.
Does my full holiday turnover count towards VAT registration?
No. For the VAT registration threshold (£90,000 for 2025/26), only the margin on your TOMS supplies counts, plus the full value of any taxable in-house supplies. The full selling price of bought-in packages is not what's tested.
What if I only ever sell in the supplier's name for commission?
Then you're likely a disclosed agent and TOMS doesn't apply to those sales. You charge normal VAT on your commission instead. Check each arrangement, because many travel businesses act as both principal and agent depending on the deal.
Get TOMS right from the start
TOMS rewards clean records and punishes guesswork. If you're a UK travel agent or tour operator and you want your margin calculation, year-end adjustment and registration position handled properly, we can help.
Book a free call with a Zmartly accountant who understands travel VAT, and we'll map out exactly how TOMS applies to your business. See our accounting for travel agencies to get started.
