The tour operators margin scheme (TOMS) is compulsory for any business that buys in travel services such as hotel rooms, transport or excursions and resells them in its own name for the benefit of a traveller. Instead of charging VAT on the full price and reclaiming VAT on costs, the business recovers no VAT on those bought in services and pays VAT only on its margin: standard rated when the travel is enjoyed in the UK and zero rated when it is enjoyed outside the UK.

What is TOMS and where is the law?

TOMS is set out in section 53 of the Value Added Tax Act 1994 and the Value Added Tax (Tour Operators) Order 1987 (SI 1987/1806), as amended. HMRC’s guidance is VAT Notice 709/5. Sections 8 to 13 of that notice, which contain the calculations and definitions, have the force of law; the rest is HMRC’s interpretation.

The scheme is a simplification. A package may include a hotel in Spain, a coach transfer and a guided tour, each with its own place of supply and rate. Without TOMS the operator would have to register in every country where services are enjoyed. TOMS instead treats the package as a single supply of arranging travel, made where the operator is established. The hotel and coach providers account for local VAT on what they sell to the operator, and the operator accounts for UK VAT on its margin only.

Who has to use it?

Notice 709/5 says TOMS covers anyone making these supplies, even if it is not their main business and they would not call themselves a tour operator. HMRC’s own examples are a hotelier who buys in coach transport to collect guests, a coach operator who buys in hotel rooms to make a package, and a company running conferences that includes delegate accommodation. You must use TOMS if you act as principal or as an undisclosed agent, meaning in your own name.

The scheme does not apply to:

  • supplies you arrange as a disclosed agent where your commission is readily identifiable; you account for VAT on the commission under the normal rules in VAT Notice 709/6;
  • in house supplies made from your own resources that are not packaged with bought in travel services;
  • bought in services that are incidental to your business, but only if you buy in no accommodation or passenger transport for resale and the turnover from such supplies is not expected to exceed 1% of your total gross turnover.

Sales to business customers for their own use, such as a business trip by an employee, must go through TOMS. Wholesale sales to another business for resale fall within TOMS, but you can opt to treat them outside it under paragraph 3.2. Whether you act as agent or principal is often the deciding question; see agent or principal for VAT.

What is a margin scheme supply?

A margin scheme supply, called a designated travel service in the Order, is a supply of goods or services bought in from another person and resupplied without material alteration or further processing, from an establishment in the UK, for the direct benefit of a traveller. A traveller can be a business or a local authority, as long as it is not buying to resell.

Paragraph 2.9 lists services that are always margin scheme supplies: accommodation, passenger transport, hire of a means of transport, trips or excursions, tour guides and airport lounges. Catering, admission tickets and sports facilities become margin scheme supplies when bought in and sold as part of a package with one of those items.

If you materially alter what you buy, or supply from your own resources, that is an in house supply. Your own coaches, your own hotel or your own guides are in house supplies, taxed under the normal rules for their type and place of supply.

How is the margin taxed?

Under paragraph 2.6 you cannot reclaim VAT charged on the travel services you buy in and resupply. You account for VAT on the difference between what the customer pays, including amounts paid by third parties on their behalf, and what you pay your suppliers. Paragraph 4.8 says the margin is standard rated when the travel is enjoyed in the UK and zero rated when it is enjoyed outside the UK. The margin is treated as VAT inclusive, so the VAT is the VAT fraction, one sixth at the 20% standard rate. You can still recover VAT on overheads and on costs of in house supplies under the normal rules.

When a package mixes margin scheme and in house supplies, the total margin has to be split. The market value method deducts the market value of in house elements from the package price first; the cost based method apportions the margin by direct costs, assuming the same percentage mark up on every element. If every element is standard rated, paragraph 5.5 requires the simplified calculation in section 11 instead.

Journeys partly in and partly outside the UK need apportioning where there are stops in the UK, for example by mileage or nights spent. Paragraph 4.12 accepts days in and out of UK waters for cruises.

When is VAT due on a TOMS supply?

Paragraph 4.13 offers two tax point methods, and you cannot switch without HMRC’s written permission.

  • Method 1: the date the traveller departs or first occupies accommodation, whichever is earlier.
  • Method 2: the method 1 date, or earlier receipt of a payment exceeding 20% of the selling price. Smaller payments create a tax point once the cumulative amount not yet accounted for exceeds 20%.

The Cash Accounting Scheme cannot be used with TOMS because of these tax point rules, but the annual accounting scheme can. New businesses cannot use the Flat Rate Scheme for TOMS supplies. For the standard rules being displaced, see VAT time of supply.

How does the year end calculation work?

During the year you pay VAT on a provisional basis, using percentages produced by the previous year’s calculation. Immediately after your financial year end you must carry out the full year calculation and enter any adjustment on the return for the first VAT period ending after the year end. A business with a 31 March year end makes the adjustment on its return for the period ending April, May or June. You cannot wait for audited accounts; if the audit finds errors, you rework the calculation and correct it through the normal error correction procedure. In your first year you set a provisional percentage from previous trading figures, projected costings or actual figures, and the first year end calculation corrects it.

The calculation is required even if you make no profit or all your supplies are zero rated. For registration, your taxable turnover is your margin on margin scheme supplies plus the full value of in house supplies, taxable commission and other taxable supplies.

Can I issue a VAT invoice?

No. Paragraph 4.19 says VAT invoices cannot be issued for TOMS supplies, because the VAT is not known until the year end calculation. Business customers therefore cannot recover VAT on a TOMS package. When you sell to a business for its own use, the invoice must show that TOMS applies, for example “this is a Tour Operators’ Margin Scheme supply”.

What does a simple calculation look like?

Illustration only. A coach company sells a weekend in York for £600 per person. It buys in the hotel for £400 including VAT and uses its own coach and driver, valued at a market value of £120 including VAT. The coach is an in house standard rated supply, so the company accounts for £20 of output VAT on it and can recover VAT on its fuel and coach costs. The remaining £480 is the selling price of the bought in hotel, giving a margin of £80. The trip is enjoyed in the UK, so the margin is standard rated and the VAT is £80 × 1/6, about £13.33. The VAT charged by the hotel cannot be reclaimed. Because every element here is standard rated, the business would in practice use the simplified calculation, which reaches the same result. Had the hotel been in Paris, the Had the hotel been in Paris, the £80 margin would be zero rated.pound;80 margin on it would be zero rated, although the coach journey would then need its own place of supply analysis.

Where do businesses go wrong?

  • Not realising TOMS applies at all, for example a conference organiser booking delegate rooms, or a hotel buying in taxi transfers; HMRC’s example says even taxi trips under 1% of turnover fall within TOMS because they are passenger transport.
  • Reclaiming VAT on bought in UK hotels and transport.
  • Issuing VAT invoices to corporate clients for packages.
  • Missing the year end adjustment, which then has to be made by voluntary disclosure.
  • Including indirect overheads as direct costs in the calculation.

Related pages cover holiday accommodation and VAT, passenger transport zero rating and the place of supply rules that apply outside the scheme.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.