How VAT Is Calculated Under TOMS
The VAT calculation under the Tour Operator Margin Scheme follows a specific structure. Instead of charging VAT on the full selling price, you calculate VAT only on the margin you make.
The basic calculation is:
Selling price to the customer
minus
Direct costs of qualifying travel services bought in
equals
Margin
VAT is then due on that margin at the UK standard rate, which is currently 20 percent.
Worked Example
- Customer pays: £2,000
- Hotel cost: £1,200
- Flight cost: £500
- Total bought-in travel costs: £1,700
Margin: £2,000 minus £1,700 equals £300
Under TOMS, VAT is calculated using the VAT fraction. At a 20 percent standard rate, this is 20/120.
VAT due: £300 × 20/120 = £50
This means £50 of the £300 margin is VAT payable to HM Revenue & Customs (HMRC), and the remaining £250 represents your net profit margin before overheads.
Key Compliance Point
You cannot reclaim input VAT on qualifying bought-in travel services that fall within TOMS. This is a critical distinction from normal VAT accounting. The scheme effectively replaces input tax recovery with margin-based taxation.
Because of this, accurate tracking of direct travel costs is essential. Errors in allocating costs can distort your margin calculation and lead to overpayment or underpayment of VAT.
For detailed technical guidance, HMRC provides further clarification in its official VAT Tour Operators Margin Scheme manual. Travel businesses should ensure their accounting systems are configured correctly to separate TOMS costs from standard-rated supplies.
What Costs Can Be Deducted in the Margin?
Under the Tour Operator Margin Scheme, only certain direct travel costs can be deducted when calculating your margin. The rules are strict, and misclassification is one of the most common compliance errors.
Costs You Can Deduct
You may deduct the direct cost of qualifying travel services that are:
- Bought in from third-party suppliers
- Supplied for the direct benefit of the traveller
- Resold in your own name
Typical deductible costs include:
- Hotel and accommodation charges
- Airline tickets and other passenger transport
- Local transfers and ground transport
- Excursions and attractions purchased from third parties
- Other direct travel components forming part of the package
These costs are subtracted from the selling price to calculate your TOMS margin.
Costs You Cannot Deduct
You cannot deduct general business expenses or internal operating costs. These do not reduce your TOMS margin for VAT purposes, even though they affect your overall profitability.
Non-deductible costs include:
- Your own staff wages and salaries
- Marketing and advertising expenses
- Office rent and utilities
- Administrative costs and overheads
- Professional fees
These expenses are part of your wider business cost base and must be absorbed within your net margin after VAT has been calculated under TOMS.
Practical Accounting Tip
Your accounting system should clearly separate:
- Qualifying bought-in travel services
- In-house or overhead costs
- Standard-rated supplies outside TOMS
Blending these categories increases the risk of incorrect VAT calculations. HMRC’s detailed technical position can be reviewed in its official TOMS guidance, which outlines how direct and indirect costs should be treated.
Accurate cost allocation is not just good bookkeeping. It directly protects your VAT position and ensures your pricing reflects your true post-tax profitability.
Post-Brexit Changes: Does TOMS Still Apply?
Yes. The Tour Operator Margin Scheme continues to apply in the UK following Brexit. However, the VAT landscape has changed significantly for travel businesses operating across borders.
Although the UK has left the EU VAT system, it has retained TOMS within domestic VAT legislation. UK VAT-registered travel businesses must still apply the scheme where the qualifying conditions are met.
That said, the interaction between UK TOMS and EU VAT rules is no longer automatic or harmonised.
Key 2026 Considerations
- UK TOMS now operates independently of EU VAT law
- Certain supplies involving EU travel services may fall outside the scope of UK VAT
- UK businesses selling EU-based travel may face local VAT registration or reporting obligations in specific EU member states
- EU TOMS rules no longer automatically recognise UK operators in the same way as pre-Brexit
In practice, this means the place of supply rules and local VAT obligations must be reviewed carefully for cross-border transactions. Some margins relating to non-UK travel may be treated differently, depending on where the services are enjoyed and where the customer belongs.
HMRC’s updated position can be found in its VAT Tour Operators Margin Scheme guidance, but this does not replace the need to assess EU-side VAT exposure where relevant.
If you operate across the UK and EU, sell packages involving EU accommodation, or market directly to EU consumers, specialist VAT advice is essential. Incorrect treatment can result in unexpected overseas VAT liabilities, penalties, and double taxation risks.
Post-Brexit, TOMS remains in force. The complexity now lies in how UK rules interact with foreign VAT systems.
Acting as Principal vs Acting as Agent
One of the most significant compliance risks under the Tour Operator Margin Scheme is misunderstanding whether your business is acting as principal or as agent. HMRC pays close attention to this distinction because it directly determines how VAT must be accounted for.
Acting as Principal
You are acting as principal if you:
- Sell travel services in your own name
- Contract directly with the customer
- Are responsible for delivering the overall package
- Set the selling price
Where you act as principal and the other TOMS conditions are met, you will generally fall within the Tour Operator Margin Scheme. VAT is then calculated on your margin rather than the full selling price.
Your invoices, terms and conditions, and marketing materials should reflect that you are the supplier of the travel package.
Acting as Agent
You are acting as agent if you:
- Arrange travel on behalf of another supplier
- Do not take responsibility for delivering the underlying service
- Earn commission or a service fee
In this case, normal VAT rules apply to your commission income. You account for VAT on the commission you earn, not on the full value of the travel booking.
Why the Distinction Matters
The principal versus agent analysis affects:
- Your VAT liability
- How your invoices must be worded
- Your contractual structure with customers and suppliers
- Your financial reporting and revenue recognition
HMRC examines the legal and commercial reality of arrangements, not just what you call yourself. Contracts, booking terms, risk allocation, and who controls pricing are all relevant factors. The official position is outlined in HMRC’s TOMS guidance and wider VAT manuals.
Given the potential for VAT underpayment assessments and penalties, travel businesses should review their contractual documentation and trading model carefully to ensure their VAT treatment aligns with their true role.
Invoicing Under TOMS
Invoicing under the Tour Operator Margin Scheme differs significantly from normal VAT invoicing rules. This is an area where many travel businesses make avoidable compliance mistakes.
Under TOMS:
- You do not show VAT separately on the customer invoice
- You cannot issue a VAT invoice in the standard format
- The invoice must not state or imply that VAT has been charged
This is because VAT is calculated internally on your margin, not on the full selling price charged to the customer. Since the VAT element is not directly attributable to a specific line item in the package, it must not be itemised or separately disclosed.
Invoices should clearly show the total amount payable by the customer, but they should avoid any reference to VAT being included or charged. HMRC’s detailed requirements are outlined in its official TOMS guidance.
Why This Causes Confusion
Corporate customers often expect to receive a VAT invoice so they can reclaim input tax. Under TOMS, they cannot reclaim VAT on the margin element of the package because VAT is not charged in the normal way.
This can create commercial friction, particularly in business travel or corporate retreat arrangements. Clear communication in your terms of business and booking confirmations helps manage expectations.
Practical Compliance Tip
Review your invoice templates and accounting software settings to ensure they are configured correctly for TOMS supplies. Automatically generated VAT breakdowns can trigger compliance issues if not properly adjusted.
Getting invoicing right protects you during an HMRC compliance review and ensures your documentation aligns with the technical VAT treatment applied to your margin.
Record Keeping Requirements
The Tour Operator Margin Scheme places a strong emphasis on accurate and well-structured record keeping. Because VAT is calculated on margin rather than turnover, HMRC expects businesses to be able to clearly evidence how that margin has been derived.
You must maintain:
- A detailed breakdown of all bought-in qualifying travel costs
- Clear workings showing how each margin has been calculated
- Evidence supporting whether you acted as principal or agent
- A clear separation between TOMS supplies and non-TOMS supplies
This separation is particularly important for businesses that provide a mixture of bought-in travel services and in-house services such as consultancy, event management, or training. Different VAT treatments may apply, and incorrect categorisation can lead to assessment risk.
Global Margin Method
Many travel businesses use the global accounting method under TOMS. Instead of calculating VAT on each individual transaction, margins are aggregated across an accounting period and VAT is applied to the overall margin.
Where this method is used, HMRC expects robust annual margin calculations supported by detailed schedules. You must be able to reconcile total sales, total qualifying travel costs, and the resulting taxable margin.
HMRC’s technical expectations are outlined in its official TOMS guidance, and failure to maintain adequate records can result in assessments, penalties, and interest charges.
Why Documentation Matters
Poor documentation is one of the most common triggers for VAT enquiries in the travel sector. If HMRC cannot see how your margin was calculated, it may challenge the methodology or disallow certain cost deductions.
Best practice in 2026 is to:
- Maintain digital cost schedules aligned with your accounting software
- Retain supplier invoices and booking confirmations
- Document your principal versus agent analysis
- Review margin calculations annually before filing VAT returns
Strong record keeping is not simply an administrative task. It is a key risk management tool that protects your VAT position and ensures your TOMS calculations withstand scrutiny.
Mixed Supplies: When TOMS and Normal VAT Both Apply
Many UK travel businesses do not operate exclusively under the Tour Operator Margin Scheme. Alongside package travel, they may also supply other goods or services that fall outside TOMS and must be accounted for under normal VAT rules.
Common examples include:
- Branded merchandise or physical goods
- Standalone consultancy services
- Event planning without bought-in travel components
- Training services delivered directly by your own staff
Where these supplies are not bought-in travel services passed on for the direct benefit of the traveller, they will usually fall outside TOMS. Standard VAT rules then apply, meaning VAT is charged on the full selling price and input VAT recovery operates in the normal way.
Operating a Dual VAT System
This creates a dual VAT structure within one business:
- TOMS supplies where VAT is calculated on margin
- Standard-rated or other VAT supplies where VAT is charged on the full value
The accounting treatment must clearly distinguish between these categories. Blurring the two increases compliance risk and can lead to VAT being underpaid or incorrectly reclaimed.
Key Risk Areas
- Incorrect allocation of costs between TOMS and non-TOMS supplies
- Improper VAT invoicing for mixed transactions
- Input VAT recovery errors
- Misclassification of bundled services
For example, if you sell a package that includes both bought-in accommodation and in-house training, careful analysis is required to determine which elements fall within TOMS and which follow normal VAT rules.
HMRC’s position on mixed supplies and margin calculations is outlined in its official TOMS guidance. Given the technical complexity, travel businesses offering diversified services should review their VAT structure annually to ensure compliance and protect margins.
Annual Accounting and the Global Margin Method
Most UK tour operators apply the global accounting method when operating under the Tour Operator Margin Scheme. Rather than calculating VAT on each individual booking, the global method allows businesses to aggregate results over a defined accounting period.
Under this approach:
- All TOMS-qualifying sales are aggregated across the accounting year
- Total bought-in qualifying travel costs are deducted
- VAT is calculated on the overall annual margin
This method recognises the commercial reality of the travel industry. Some trips generate higher margins, while others may be discounted or produce lower returns. The global method smooths out these fluctuations by applying VAT to the total margin across the year rather than on a transaction-by-transaction basis.
How the Calculation Works
At the end of the accounting period:
- Total TOMS sales are calculated
- Total qualifying bought-in travel costs are calculated
- The difference produces the annual margin
- VAT is applied to that margin using the VAT fraction at the standard rate
This requires accurate cost tracking and clear categorisation of TOMS supplies throughout the year. Errors in allocation can distort the annual margin and create VAT exposure.
Compliance Considerations
HMRC expects robust supporting schedules and reconciliation between accounting records and VAT returns. Businesses must be able to demonstrate how annual margin figures have been derived, in line with the official TOMS guidance.
The global method offers administrative simplicity and commercial fairness, but it increases the importance of disciplined year-end review. A structured annual margin reconciliation should form part of your VAT compliance process.
Common TOMS Mistakes
The Tour Operator Margin Scheme is highly technical, and errors are common. HMRC regularly reviews travel businesses for VAT compliance, and mistakes can result in significant assessments, interest, and penalties.
Below are some of the most frequent TOMS errors seen in practice.
1. Charging VAT on the Full Selling Price
Some businesses incorrectly apply VAT to the entire package value instead of the margin. This can lead to overpayment of VAT and distorted pricing. Under TOMS, VAT is due only on the margin, not the full sales value.
2. Reclaiming VAT on Bought-In Travel Services
Input VAT cannot be reclaimed on qualifying travel services that fall within TOMS, such as hotel accommodation or flights purchased for resale. Attempting to reclaim this VAT is a common compliance breach.
3. Treating Agency Sales as Principal Sales
Misclassifying your role can have serious VAT consequences. If you are acting as agent and earning commission, normal VAT rules apply to your commission only. Applying TOMS incorrectly to agency income can result in underpaid VAT.
4. Failing to Separate TOMS and Non-TOMS Revenue
Businesses offering mixed supplies must clearly distinguish between TOMS-qualifying travel services and standard-rated supplies such as consultancy or merchandise. Blended reporting increases the risk of incorrect VAT treatment.
5. Incorrect Margin Calculations
Errors often arise from:
- Including non-qualifying costs in margin deductions
- Omitting certain bought-in travel costs
- Using incorrect VAT fractions
- Poor reconciliation under the global accounting method
Margin calculations must be clearly documented and capable of being reconciled to accounting records.
6. Poor Documentation During VAT Inspections
HMRC expects clear working papers, supplier invoices, contractual evidence, and margin schedules. Weak documentation is one of the most common triggers for extended VAT enquiries.
Detailed technical guidance is available in HMRC’s official TOMS manual, and businesses should review their VAT position annually to reduce risk.
Given the financial exposure involved, proactive review and structured record keeping are essential for travel businesses operating under TOMS.
Is TOMS Mandatory?
If your business falls within the scope of the Tour Operator Margin Scheme, it is mandatory. It is not a scheme you can opt into or out of for convenience.
Where you are:
- VAT registered in the UK
- Buying in qualifying travel services
- Selling those services in your own name
- Supplying them for the direct benefit of the traveller
You are required to apply TOMS when accounting for VAT. Attempting to apply normal VAT rules instead can lead to incorrect VAT reporting and potential assessments from HM Revenue & Customs (HMRC).
Can TOMS Be Avoided?
Businesses that are genuinely structured as agents rather than principals may fall outside TOMS. In this case, VAT is accounted for on commission income under standard VAT rules.
However, this is not simply a matter of describing yourself as an agent. HMRC will examine:
- Contractual terms with customers and suppliers
- Who bears commercial risk
- Who sets pricing
- How invoices are issued
- The overall commercial reality of the arrangement
To operate outside TOMS legitimately, contractual drafting and operational practices must align consistently with an agency model. Any mismatch between documentation and actual trading behaviour increases compliance risk.
HMRC’s interpretation is outlined in its official TOMS guidance, and businesses considering structural changes should seek specialist VAT advice before implementation.
In short, TOMS is compulsory where the conditions are met. Structuring as an agent can change the VAT outcome, but only where the legal and commercial framework genuinely supports that position.
When Should You Seek Specialist Advice?
VAT in the travel sector is one of the most technically complex areas of UK tax law. The interaction between margin-based taxation, cross-border supplies, and principal versus agent rules creates significant compliance risk.
You should seek specialist advice if:
- You operate internationally or sell packages involving overseas accommodation or transport
- You sell retreats, experience-based packages, or bundled services
- You mix agency and principal sales within the same business
- You are restructuring your travel company or updating contracts
- You are unsure whether your supplies fall within TOMS
In these situations, small structural differences can produce very different VAT outcomes. Misclassification can result in VAT underpayments, denied input tax recovery, overseas VAT exposure, and penalties from HM Revenue & Customs (HMRC).
Businesses expanding into EU markets or changing their commercial model should also consider how UK TOMS interacts with foreign VAT systems. The position post-Brexit requires careful review of both UK guidance and relevant overseas VAT rules.
HMRC’s official technical position can be found in its Tour Operator Margin Scheme guidance, but interpretation often depends on the specific facts of your business.
Proactive VAT review is far less costly than defending an enquiry. Where margin calculations, contractual structure, or cross-border supplies are involved, specialist input is an essential risk management tool rather than a discretionary extra.
Official HMRC Guidance
The Tour Operator Margin Scheme is governed by detailed UK VAT legislation and HMRC technical guidance. Travel businesses should ensure they refer to primary sources when reviewing their VAT position.
Key official references include:
- HMRC VAT Notice 709/5: Tour Operators Margin Scheme – The main practical guidance document explaining how TOMS operates in practice.
View VAT Notice 709/5 - VAT Act 1994 (Schedule 9A) – The legislative framework underpinning the margin scheme in UK law.
View VAT Act 1994 - HMRC Internal VAT Manuals – Detailed technical interpretation used by HMRC officers when reviewing compliance.
View HMRC TOMS Manual
These documents are available via the UK government website and provide the formal technical position that underpins TOMS compliance. While they are essential reference materials, interpretation can be complex, particularly for businesses operating mixed or cross-border supplies.
Given the financial exposure involved, reviewing both the legislation and HMRC guidance alongside professional advice is strongly recommended for travel businesses operating under the scheme.
Final Thoughts on Tour Operator Margin Scheme
The Tour Operator Margin Scheme fundamentally changes how VAT applies to UK travel businesses. Instead of taxing turnover, VAT is charged on your margin. On the surface that may appear straightforward. In practice, compliance demands precision and careful oversight.
Operating under TOMS requires:
- Correct classification of supplies
- Accurate tracking of qualifying travel costs
- Proper invoice formatting in line with scheme rules
- Robust documentation and reconciliation processes
- A clear and defensible understanding of principal versus agent status
Many TOMS errors do not immediately trigger alarms. They often sit quietly within accounting systems, gradually eroding profit through overpaid VAT or creating hidden exposure through underpayment. Both outcomes can have significant financial consequences.
With increased digital reporting and structured VAT compliance under Making Tax Digital, travel businesses must ensure their systems, contracts, and pricing models are aligned with the technical requirements set out by HM Revenue & Customs.
If you operate in the travel sector and want clarity around your VAT position, professional review can prevent costly mistakes and ensure your pricing structure accurately reflects your tax obligations. A structured TOMS assessment provides not only compliance protection but also greater confidence in your margins and long-term profitability.
