Tour Operators' Margin Scheme (TOMS)

Key facts

TOMS applies to businesses that buy in and resell travel services (flights, hotels, transfers) without material alteration.
VAT is calculated on the margin (selling price minus the cost of bought-in services).
You cannot reclaim input VAT on the bought-in travel services that fall within TOMS.
In-house supplies (e.g. your own coach transport) are treated separately under normal VAT rules.
Most TOMS businesses use an annual calculation with provisional quarterly payments.

How the Tour Operators Margin Scheme Works

The Tour Operators’ Margin Scheme is a mandatory VAT accounting scheme for businesses that purchase travel services from third-party suppliers and resell them to travellers. Instead of charging VAT on the full selling price, the business calculates VAT only on its profit margin.^[1]

TOMS exists because travel packages often include services supplied in other countries (e.g. a hotel in Spain or a flight to Greece). Without TOMS, UK tour operators would need to register for VAT in every country where they buy in services — an impractical burden.

Important: TOMS is not optional. If your business falls within the scope of the scheme, you must use it. This includes businesses that would not normally consider themselves “tour operators” — such as conference organisers, corporate travel arrangers, and event management companies.

Who Must Use TOMS?

TOMS applies to any VAT-registered business that:^[1]

Buys in travel, accommodation, or passenger transport services from third-party suppliers
Resells those services (either individually or as part of a package) acting as principal — not as a disclosed agent
Supplies those services to travellers (broadly, the end consumer or a business not reselling the service onward)

Common examples include traditional holiday tour operators, online travel agencies selling as principal, corporate hospitality and event businesses, and schools or charities organising trips where they buy in and resell travel components.

How the Margin Is Calculated

The core calculation under TOMS is straightforward:^[1]

Margin = Selling price − Cost of bought-in travel services

VAT due = Margin × 1/6 (to extract VAT from the VAT-inclusive margin)

Worked Example

A tour operator sells a holiday package for £2,400. The bought-in costs are:

Component	Cost	TOMS Treatment
Hotel accommodation (bought in)	£1,200	Margin scheme supply
Flights (bought in)	£600	Margin scheme supply
Airport transfers (bought in)	£100	Margin scheme supply
Total bought-in costs	£1,900

Selling price: £2,400
Margin: £2,400 − £1,900 = £500
VAT due: £500 × 1/6 = £83.33

Without TOMS, VAT on the full selling price would be £2,400 × 1/6 = £400.

Input Tax Under TOMS

A key feature of TOMS is that you cannot reclaim input VAT on the bought-in travel services that form part of a margin scheme supply. Because you are only accounting for VAT on the margin, the input tax on the bought-in component is effectively absorbed into the cost price.^[1]

However, you can reclaim input VAT on:

General business overheads (office rent, utilities, equipment)
Marketing and advertising costs
In-house supply costs (see below)
Any costs not directly attributable to margin scheme supplies

In-House Supplies

If you provide some travel services using your own resources rather than buying them in, those elements are called “in-house supplies” and are treated under normal VAT rules — outside TOMS.^[1]

For example, if a coach operator sells package holidays using its own coaches for transport but buying in the hotel accommodation:

Coach transport (in-house) — standard VAT rules apply; you charge output VAT on the value and reclaim input VAT on related costs
Hotel accommodation (bought in) — falls within TOMS; VAT calculated on margin only

Tip: You must apportion the selling price between in-house and margin scheme elements on a fair and reasonable basis. HMRC expects you to use the cost ratio method — splitting the selling price in proportion to the costs of each element.

Annual Calculation

Most TOMS businesses perform an annual calculation at the end of their financial year, rather than calculating the margin supply by supply. During the year, provisional VAT payments are made on each return based on estimated margins.^[1]

The annual calculation process works as follows:

Calculate total selling prices for all margin scheme supplies in the year
Calculate total bought-in costs for those supplies
Determine the overall margin (selling prices minus costs)
Calculate VAT at 1/6 of the overall margin
Compare with provisional VAT already paid during the year
Make an adjustment (additional payment or reclaim) on the next VAT return

Record-Keeping Requirements

TOMS businesses must maintain detailed records that separate margin scheme supplies from in-house supplies and standard business costs. Key records include:^[2]

Selling prices for each holiday or travel package
Direct costs of bought-in travel services, allocated to each supply
Separate records for in-house supply elements
Annual calculation workings
Apportionment methodology used for mixed packages

Frequently Asked Questions

Who must use TOMS?

Any VAT-registered business that buys in and resells travel services — such as accommodation, passenger transport, and holiday packages — to travellers must use TOMS. This includes tour operators, travel agents acting as principal, event organisers, and any business that packages bought-in travel services for resale.

How is the TOMS margin calculated?

The margin is the difference between the selling price charged to the customer and the direct cost of the bought-in travel services. VAT is then calculated as one-sixth of the positive margin. If the margin is negative (you made a loss), no VAT is due on that supply.

Can I reclaim VAT on bought-in travel services under TOMS?

No. Input VAT on travel services that fall within TOMS (the “margin scheme supplies”) cannot be reclaimed. This is because VAT is only being charged on the margin, not on the full selling price. However, you can still reclaim VAT on your general business overheads (office rent, equipment, etc.) in the normal way.

What is an in-house supply under TOMS?

An in-house supply is a service you provide using your own resources rather than buying it in — for example, transport in your own coaches or accommodation in your own hotels. In-house supplies are excluded from TOMS and are subject to normal VAT rules, meaning you charge VAT on the full value and can reclaim related input VAT.

Sources

Tour Operators Margin Scheme (VAT Notice 709/5) — GOV.UK
VAT guide (VAT Notice 700) — GOV.UK

Tour Operators’ Margin Scheme (TOMS)