TOMS VAT: The Tour Operators' Margin Scheme Explained

The Tour Operators' Margin Scheme (TOMS) is the VAT scheme a UK business must use when it buys in travel, such as hotels, flights, coach seats or excursions, and resells it in its own name. You pay VAT only on your margin, the difference between what the customer pays you and what the travel cost you, and you can't reclaim the VAT on what you bought in.

Through the year you pay VAT on a provisional percentage. After your financial year ends you do a full calculation and settle the difference on your next VAT return. The gap between that estimate and the true-up is where TOMS needs the most care, so this guide works through both with numbers.

It's written for travel agents, tour operators, destination management companies (DMCs), and coach and event businesses. The rules come from HMRC's VAT Notice 709/5 on TOMS and VAT Notice 709/6 on travel agents, both read on 21 October 2026, plus one 2026 change in the law that the notice doesn't show yet. Paragraph numbers are HMRC's, so you can check every rule yourself.

What is TOMS, in plain English?

TOMS treats everything you sell to one customer in a single transaction, say a flight, a hotel and a transfer, as one supply: the service of putting the trip together (709/5 paras 2.1 and 4.5). If you sell it from a UK establishment, that supply is made in the UK, so you account for UK VAT once, on your margin (para 4.6).

The hotels, airlines and coach firms you buy from account for VAT on their own services, in their own countries. You can't reclaim the VAT they charge you. In exchange, you only pay VAT on what you add (para 2.6).

The UK has run its own version of the scheme since 1 January 2021, and it deals with UK VAT only (section 1). The EU has its own scheme under its VAT Directive, so if you sell travel enjoyed in an EU country, check that country's rules as well.

Who has to use TOMS?

Tourists on a central London street beside a red double-decker bus, the kind of trade covered by the Tour Operators Margin Scheme

You must use TOMS if you buy in travel and resell it as a principal, or as an undisclosed agent, which means an agent acting in its own name (para 2.3). It applies even if travel isn't your main business and you'd never call yourself a tour operator (para 2.2). HMRC's own examples are:

a hotel that buys in coach transport to collect its guests
a coach operator that buys in hotel rooms to build a package
a company that arranges conferences, including hotel rooms for delegates

It doesn't take a package. One bought-in hotel room, flight or excursion resold in your own name is a Margin Scheme supply (paras 2.7 and 2.9).

There are two narrow ways out. A business that buys in no accommodation or passenger transport for resale can leave out other bought-in travel extras, as long as they bring in no more than 1 per cent of its total gross turnover (para 3.5). And sales made from an establishment outside the UK are outside UK TOMS altogether (para 2.15).

What counts as a designated travel service?

The law calls the things TOMS covers designated travel services, and HMRC calls them Margin Scheme supplies. They're bought in from someone else and resold without material alteration, for the direct benefit of a traveller (para 2.7). These six are always in (para 2.9):

accommodation
passenger transport
hire of a means of transport, such as car hire
trips or excursions
the services of tour guides
use of special lounges at airports

Catering, admission tickets and the use of sports facilities join them only when they're bought in and sold on with one of those six, as part of a package (para 2.10). A traveller can be a business: anyone who receives the travel for their own use, rather than to resell it, counts (para 2.8).

In-house supplies

Anything you provide from your own resources, or buy in and change so much that you sell something different, is an in-house supply (para 2.12). A hotel you run, a coach you own and staff, a ski chalet you staff with your own catering staff, or a conference you build from hired rooms, equipment and staff are all in-house (paras 7.1, 7.6 and 7.12).

Sold on its own, an in-house supply is taxed under the normal rules. Sold in a package with Margin Scheme supplies, it goes through the TOMS calculation, but at its own normal VAT rate, and you reclaim the VAT on its costs as usual (paras 2.13 and 4.3).

To split a package, HMRC wants the market value of the in-house part where one can be established, and a cost-based split where it can't. You can use the cost-based method for everything only if it genuinely reflects how your packages are built, and you can't switch methods to pay less tax (paras 5.3 and 5.4, and TL3).

Undisclosed agent, disclosed agent or principal: which are you?

This is the question that decides whether TOMS applies at all, and HMRC answers it from your contracts and paperwork, not your job title (709/6 paras 1.4 and 1.5). A travel business can act in three ways, and plenty act in more than one.

Principal. You sell travel as your own product. You account for VAT under TOMS (709/6 para 5.2).

Undisclosed agent. You act for a supplier, but in your own name, and the customer isn't told who the supplier is. You account for VAT on your commission, which HMRC treats as a profit margin, under TOMS (709/6 paras 4.1 and 4.2).

Disclosed agent. You're an intermediary, and TOMS doesn't apply to those bookings. HMRC accepts this only if all three of these are true (709/6 para 2.1):

you and the supplier have agreed that you act as its agent, and you can show it, normally with a contract
you routinely name the supplier you act for, for example on every ticket you issue or in your booking terms
you take no significant commercial risk on the travel you arrange

Being paid a commission doesn't settle it either way (709/6 para 1.6). If you've committed to pay for rooms whether they sell or not, that's commercial risk, and it makes disclosed agent status hard to show.

How is a disclosed agent's commission taxed?

Under the normal VAT rules, and the answer depends on what you arranged (709/6 paras 2.4 and 2.6, and 3.4 to 3.7):

Arranging zero-rated passenger transport, such as a scheduled flight, as the first intermediary: your commission is zero-rated too.
Arranging designated travel services for a tour operator established in the UK: standard-rated.
Acting as a sub-agent for another agent, in the UK: standard-rated.
Arranging travel insurance: exempt in the situations 709/6 para 3.4 sets out.

One catch for mixed businesses. If you also sell travel in your own name and use TOMS, any variable commission you earn as a disclosed agent, or commission that isn't readily identifiable, goes into your TOMS calculation (709/5 para 2.14).

Selling to businesses: corporate travel and wholesale

TOMS covers sales to businesses as well as to holidaymakers (para 3.1). Two cases work differently.

Travel a business uses itself, such as a staff trip or delegates' hotels, stays inside TOMS and can't be opted out (para 3.3). So your business customer can't have a VAT invoice for it. No TOMS supply can carry one, because the VAT isn't known until your year-end calculation. The invoice has to say that TOMS applies instead, for example "This is a Tour Operators' Margin Scheme supply" (para 4.19).

Wholesale sales to another business that will resell the travel are within TOMS too. But by concession you may opt them out, and then the normal place of supply rules apply: accommodation is taxed where it's situated, passenger transport where it takes place (para 3.2). HMRC confirmed this position in Revenue and Customs Brief 5 (2024). For a UK DMC selling ground arrangements to overseas operators, it's worth modelling the VAT both ways before choosing.

How is VAT worked out under TOMS?

The idea is simple. The mechanics take more care.

Your margin is your VAT-inclusive selling price less the VAT-inclusive cost of the travel you bought in (paras 2.6 and 6.3). It's standard-rated when the travel is enjoyed in the UK and zero-rated when it's enjoyed outside the UK (para 4.8). The standard rate is 20 per cent, and because the margin already includes the VAT, you take it out with the VAT fraction, which at 20 per cent is one-sixth (VAT Notice 700, para 7.3.1).

So a UK short break sold for £1,200 that cost £840 to buy in has a £360 margin with £60 of VAT in it, not the £200 you'd see on the full price. (Illustrative figures.)

You don't use sale-by-sale figures on the VAT return, though, because the true numbers aren't known until the year is over: discounts, refunds and unsold places all move them (para 5.12). Instead:

Each VAT period you pay VAT on a provisional percentage taken from last year's calculation (section 10).
Straight after your financial year ends, you do the full year-end calculation (section 9, or section 11 if everything you sell is standard-rated).
The difference goes on the VAT return for the first period ending after your year end (TL4).

Sections 8 to 13 of the notice have the force of law, and the step numbers below are HMRC's own.

When does a TOMS sale count? Tax points and deposits

You use one of two methods, and you can't change without HMRC's written permission (para 4.13):

Method 1: the tax point is the traveller's departure date, or the first night in the accommodation if that comes first.
Method 2: as method 1, or when you receive a payment of a certain size, whichever comes first. Each payment over 20 per cent of the selling price creates a tax point, and so do smaller payments once together they pass 20 per cent (para 4.14).

Illustrative example. Under method 2, a customer books a £2,000 holiday and pays a £300 deposit. That's 15 per cent, so there's no tax point yet. A second payment of £200 takes the total to £500, more than £400, so £500 has a tax point that day. The £1,500 balance, paid six weeks before departure, has its own tax point when it arrives.

Under method 2, forfeited deposits and cancellation fees go into your selling price once what you've received is more than 20 per cent of the agreed price. Under method 1 they stay out (para 6.1). And you can't use the Cash Accounting Scheme with TOMS at all, because of these tax point rules (para 4.15).

Worked example: the quarterly provisional VAT

Illustrative example, not a real business. Maya runs a tour operator with a 31 December year end and calendar VAT quarters. She sells walking holidays in the UK and in Spain, all built from bought-in hotels, transport and guides. She has no in-house supplies and earns no commission.

Her year-end calculation for 2025, done the way the next section shows, gave these figures:

Year to 31 December 2025	Amount
VAT-inclusive sales (step 1)	£1,000,000
Cost of travel bought in, enjoyed in the UK (step 2)	£160,000
Cost of travel bought in, enjoyed outside the UK (step 3)	£640,000
Margin on UK-enjoyed travel (step 12)	£40,000

Section 10 turns that into her provisional percentage for 2026: the standard-rated margin as a share of all her sales. £40,000 divided by £1,000,000, times 100, is 4 per cent.

Each quarter she applies it to the VAT-inclusive selling prices of the packages with tax points in that quarter, then takes one-sixth (section 10, steps 3 to 5):

Quarter	Sales with tax points (step 3)	Standard-rated share at 4 per cent (step 4)	VAT for Box 1 (step 5)
January to March 2026	£270,000	£10,800	£1,800.00
April to June 2026	£330,000	£13,200	£2,200.00
July to September 2026	£380,000	£15,200	£2,533.33
October to December 2026	£220,000	£8,800	£1,466.67
Year	£1,200,000	£48,000	£8,000.00

It's quick to run, and it's only an estimate. If the mix of UK and overseas trips shifts, the estimate drifts, and the year-end calculation is where that gets corrected. HMRC expects a new percentage every year (para 5.11).

In your first year there's no previous calculation to borrow from. You set a provisional percentage from previous trading figures, projected costings and margins, or your actual monthly or quarterly figures, and the first year-end calculation corrects any difference (para 5.13).

Worked example: the year-end calculation

Straight after 31 December 2026, Maya does the full calculation for the year (section 9). She can't wait for audited accounts to do it (para 5.8). With no in-house or agency supplies, only these steps have figures in them:

Step	What it is	Amount
1	VAT-inclusive selling prices of all packages with 2026 tax points	£1,200,000
2	VAT-inclusive cost of travel bought in, enjoyed in the UK	£240,000
3	VAT-inclusive cost of travel bought in, enjoyed outside the UK	£720,000
10	Total direct costs, steps 2 and 3 added	£960,000
11	Total margin, step 1 less step 10	£240,000
12	UK margin: step 2 divided by step 10, times step 11	£60,000
13	Non-UK margin, zero-rated: step 3 divided by step 10, times step 11	£180,000
20	VAT on the UK margin: step 12 times one-sixth	£10,000
23	UK margin excluding VAT: step 12 less step 20	£50,000
24	Zero-rated margin, from step 13	£180,000
29	Net value of the year's TOMS supplies, steps 23 to 28	£230,000
30	VAT actually due for the year	£10,000
31	Provisional VAT already paid in 2026	£8,000
32	Adjustment: step 30 less step 31	£2,000 to pay

UK trips took a bigger share of Maya's costs in 2026, 25 per cent against 20 per cent the year before, so the provisional 4 per cent undercharged. She owes another £2,000. It goes in Box 1 of her return for the quarter to 31 March 2027, the first VAT period ending after her year end (step 32 and para 5.7). If the provisional figure had been too high, step 32 would be negative and she'd deduct it instead.

The same calculation sets her provisional percentage for 2027: £60,000 divided by £1,200,000, times 100, is 5 per cent.

Notice that the margin is split between UK and overseas travel in proportion to costs, not by adding up each trip's own margin. If your UK and overseas trips earn very different margins, you can ask HMRC for permission to run separate calculations for travel enjoyed wholly outside the UK. You have to ask in writing at the start of the financial year, and it's never granted retrospectively (paras 5.9 and 5.10, and TL1).

The calculation is required even if you made no profit or everything you sold was zero-rated (para 5.14). Miss it, or get it wrong, and it becomes an error to correct under VAT Notice 700/45 (para 5.7).

What if all your travel is enjoyed in the UK?

If every Margin Scheme supply and every in-house supply you make is standard-rated, you must use the simplified calculation in section 11, with the provisional figures in section 12 (para 5.5). A UK-only short-breaks operator that buys in hotels and coach seats is the typical case.

Running your own coaches changes that. Most UK passenger transport in vehicles that carry ten or more people is zero-rated (709/6 para 3.6), and one zero-rated supply rules the simplified calculation out.

Illustrative example. Last year a UK-only operator sold £500,000 of packages that cost £400,000 to buy in. Its margin was £100,000, which is 20 per cent of sales (section 12, step 1). This quarter it sells £150,000, so the provisional standard-rated amount is £30,000, the VAT for Box 1 is £5,000, and the VAT-exclusive value is £25,000 (section 12, steps 2 to 5).

Which boxes does TOMS use on the VAT return?

Box 1: the provisional VAT each period (section 10, step 5, or section 12, step 4), plus the year-end adjustment on the first return after your year end, added if it's positive and deducted if it's negative (section 9, step 32, or section 11, step 7).
Box 6: a figure built from your margin, never your gross bookings. Section 9, step 29 gives the year's net value, £230,000 in Maya's case against £1,200,000 taken, and the notice says to include it in Box 6. During the year, the same percentages are used to enter net sales values (para 5.11). The notice doesn't say how this year-end figure sits with the net values entered during the year, so agree it with your accountant and don't count the year's turnover twice.
Box 4: VAT on overheads and on the costs of in-house supplies, reclaimed outside TOMS under the normal rules (para 4.3). Never the VAT on travel you bought in to resell (para 4.4).

This is where TOMS differs from the second-hand goods margin scheme, which puts the full selling price less the VAT in Box 6 (VAT Notice 700/12, para 4.4). Borrow that habit for TOMS and you overstate your turnover on every return. Our guide to completing a UK VAT return covers the other boxes.

Foreign currency, discounts and the costs that count

Only direct costs go into the calculation. HMRC lists these as indirect costs, which stay out (para 6.4):

brochures and advertising
inspection trips to research resorts
office costs, and accountancy and legal fees
reps at airports and resorts
bank and card fees, and foreign exchange charges
commission you pay to agents

Put them in and your costs look bigger, your margin smaller and your VAT too low.

On the costs that do count, take off supplier discounts even when they arrive later, and include any Air Passenger Duty you pay (para 6.3). Extra rooms or transport you have to buy because of delays or breakdowns are usually Margin Scheme costs as well, unless someone else meets them or they're a cost of your own in-house supply (para 6.11).

Supplier invoices in euros or dollars must be converted to sterling using one of five methods set out in law, such as the Financial Times rate on the day you pay, or HMRC's period rate for customs. You keep evidence of the rate, and you can only change method at the start of a financial year (para 6.6 and TL2).

If other travel agents sell your packages, your selling price is the full amount the customer paid, even when the agent keeps its commission and sends you the balance. Refunds for unsatisfactory service and discounts you agree with the customer come off (para 6.1).

Does TOMS count towards the VAT registration threshold?

Only at the margin. When you're deciding whether you must register, or may deregister, your taxable turnover is the total of (para 4.1):

the margin on your Margin Scheme supplies, including zero-rated ones
the full value of your taxable in-house supplies, including zero-rated ones
your taxable agency commission
any other taxable sales you make in the UK, including zero-rated ones

The registration threshold is £90,000 of taxable turnover in a rolling 12 months, and you can ask to deregister below £88,000. So an agency can take several hundred thousand pounds in bookings and still sit under it. Zero-rated margin still counts, though, so a business selling only overseas holidays watches its margin, not nil. Our guide on how to register for VAT covers the process.

What changed in 2026: taxis and private hire

From 2 January 2026, a business isn't a tour operator for VAT so far as it supplies passenger transport by taxi or private hire vehicle, unless those journeys are made with, and ancillary to, accommodation or bus, coach, train, ship or air travel it also supplies. The rule is section 53(3A) of the VAT Act 1994, inserted by Finance Act 2026, section 82.

HMRC's impact note says it will mainly affect minicab and taxi operators. It reaches travel businesses too: car transfers you buy in and sell on their own are no longer TOMS supplies, while transfers sold with a hotel stay or a coach trip you supply can stay in. VAT Notice 709/5 was last updated on 18 April 2024, so its examples don't reflect this yet.

Which other VAT schemes work alongside TOMS?

Cash Accounting Scheme: no, because of the TOMS tax point rules (para 4.15).
Flat Rate Scheme: no. You can't join if you're required to use TOMS, and you have to leave when you become a tour operator (VAT Notice 733, paras 3.6 and 12.2).
Annual Accounting Scheme: yes. The year-end TOMS figures go on the annual return for the year the supplies were made (para 4.16).
VAT groups: yes, unless another member of the group has an overseas establishment of the kind para 4.2 describes.
Separate calculations for travel enjoyed wholly outside the UK: only with HMRC's written permission, sought at the start of the financial year (paras 5.9 and 5.10, and TL1).

Our comparison of UK VAT schemes explains the others.

What about VAT on your overheads?

You reclaim VAT on overheads outside TOMS, under the normal rules (para 4.3). The catch is exempt income. Arranging travel insurance can be exempt, and so can foreign currency exchange (709/6 paras 3.4 and 3.5), and HMRC's own guidance says it's usual for tour operators and travel agents to make exempt supplies (VAT Partial Exemption Guidance, PE76100).

Once you have exempt income, some of the VAT on shared costs may not be reclaimable. You're treated as fully taxable if your exempt input tax is no more than £625 a month on average and no more than half of all your input tax (VAT Notice 706, para 11.2). Above that, the partial exemption rules decide how much you keep.

Common TOMS mistakes

Treating gross bookings as turnover. Both the registration test and Box 6 run on margin (para 4.1; section 9, step 29).
Issuing VAT invoices for packages. No TOMS supply can carry one, business customers included (para 4.19).
Reclaiming VAT on bought-in travel. The hotel and transport VAT on Margin Scheme supplies isn't yours to reclaim (para 4.4).
Calling yourself a disclosed agent without passing all three tests. Agreement, routine disclosure and no significant commercial risk (709/6 para 2.1).
Putting indirect costs into the calculation. Card fees, marketing and agents' commission understate your margin and your VAT (para 6.4).
Recording sales net of another agent's commission. The selling price is what the customer paid (para 6.1).
Missing the year-end calculation, or waiting for audited accounts. It's due straight after the year end, with the adjustment on the next return (paras 5.7 and 5.8).
Using last year's provisional percentage again. A new one has to be worked out every year (para 5.11).
Being on the Flat Rate or Cash Accounting Scheme. Neither works with TOMS (para 4.15; Notice 733 para 3.6).
Switching between market value and cost-based methods to pay less. Not allowed (para 5.4 and TL3).
Changing tax point or currency method part way through a year. Both need HMRC's agreement in writing, and neither can normally change part way through a year (paras 4.13 and 6.6, and TL2).
Treating standalone taxi or private hire transfers as TOMS supplies. Since 2 January 2026 they're outside the scheme unless ancillary to accommodation or bus, coach, train, ship or air travel you supply.

TOMS checklist

Run through this before each year end.

We've written down which sales are Margin Scheme, in-house and agency, and why, from our contracts.
Every disclosed agency booking names the supplier, on the ticket or in our booking terms.
Package sales carry no VAT line, and invoices to business customers say TOMS applies.
Our tax point method is fixed, and if it's method 2, payments past 20 per cent are dated.
Direct costs are coded separately for UK and non-UK travel, and for in-house supplies.
Indirect costs are kept out of the TOMS cost codes.
Supplier discounts and credit notes are matched to the bookings they relate to.
Foreign currency costs use one of the five permitted methods, with the rate evidence kept.
This year's provisional percentage came from last year's calculation.
The year-end calculation is planned for straight after the year end, with the adjustment on the next return.
Box 6 carries margin-based figures, not gross bookings.
Our margin-based turnover is checked against the £90,000 threshold every month.
Exempt income, such as insurance commission, is identified for partial exemption.
We're not on the Flat Rate or Cash Accounting Scheme.

Frequently asked questions

Is TOMS optional?

Not for sales to travellers. If you buy in travel and resell it as a principal or an undisclosed agent, you must use TOMS for those sales. Wholesale sales to a business that will resell the travel are also within TOMS, but by concession you may opt them out. A business that buys in no accommodation or passenger transport can leave out other bought-in extras worth no more than 1 per cent of its gross turnover.

Can I reclaim the VAT on hotels and flights I buy in?

No. You can't reclaim VAT on anything you buy in to resell as a Margin Scheme supply. You can still reclaim VAT on overheads and on the costs of genuine in-house supplies, under the normal rules.

What VAT rate applies to my margin?

The margin is standard-rated, at 20 per cent, when the travel is enjoyed in the UK, and zero-rated when it's enjoyed outside the UK. Because the margin includes VAT, you take the VAT out with the one-sixth fraction.

When do I do the TOMS calculation?

You pay VAT each period on a provisional percentage from last year's calculation, then do the full calculation straight after your financial year ends. The difference goes on the VAT return for the first period ending after your year end, and the same calculation sets next year's percentage.

Does my full holiday turnover count towards VAT registration?

No. For the £90,000 threshold your TOMS sales count at their margin. Add the full value of any taxable in-house supplies, taxable agency commission and other taxable sales you make in the UK, including zero-rated ones.

What is an undisclosed agent for VAT?

An agent that sells travel in its own name without telling the customer who the supplier is. HMRC treats its commission as a profit margin and taxes it under TOMS. To be a disclosed agent instead, you need an agreement with the supplier, you must routinely name the supplier, and you must take no significant commercial risk.

Can a business customer reclaim VAT on travel it uses itself?

No. You can't issue a VAT invoice for a TOMS supply, and travel a business uses itself can't be opted out of TOMS. The invoice has to say that TOMS applies.

Can I use the Flat Rate Scheme with TOMS?

No. You can't join the Flat Rate Scheme if you're required to use TOMS, and you have to leave it when you become a tour operator. The Cash Accounting Scheme is ruled out as well.

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Get TOMS set up properly

TOMS rewards clean records and punishes guesswork. Most of the work happens in the bookkeeping, long before the year-end calculation: costs coded by where the travel is enjoyed, sales recorded at the price the customer paid, and the provisional percentage updated every year.

If you're a travel agent, tour operator or DMC and you want TOMS set up from your contracts, the quarters run on the right percentage and the year-end calculation done on time, that's what our accountants for travel agencies and tour operators do. Book a free call and we'll map out how TOMS applies to your business.