Fuel costs hit holidays London travel agents already sold

Travel agents in London and across the UK face autumn fuel prices on holidays they sold months ago, and the law limits what they can pass on. Agents selling UK breaks face a second cost that is easy to miss: VAT paid through the year on margin they no longer make.

Diesel and jet fuel have both jumped

UK diesel averaged 199.52p a litre in the week of 5 October, passing the July 2022 record of 199.22p in the government's weekly road fuel prices, which go back to 2003. Jet fuel averaged $190.18 a barrel worldwide in the week to 9 October, more than double last year's average, IATA's jet fuel price monitor shows.

For a small agency, fuel is the trigger rather than the cause of trouble. The cause is selling at last year's prices and paying this year's costs.

What an organiser can pass on

The Package Travel and Linked Travel Arrangements Regulations 2018 bind the organiser: the business that puts the package together, including an agent that builds its own. Once a package is booked, its price can only rise if the contract:

• says expressly that it can

• limits rises to changes in the fuel cost of carrying passengers, third-party taxes and fees, or exchange rates

• gives the customer a matching cut if those costs fall

• says how the change is worked out

The customer must get the rise in a form they can keep, with the reason and the calculation, at least 20 days before the package starts. Above 8 per cent of the total price, they can cancel without a fee and be refunded within 14 days.

The squeeze lands on packages sold months ago. A surcharge above 8 per cent lets customers walk away, so an agency facing a large rise may well absorb it rather than lose the booking.

VAT on margin that has gone

An agency that buys in hotels and transport and sells them in its own name must use the Tour Operators' Margin Scheme (TOMS). VAT falls on its margin, what the customer pays less what it pays suppliers, not on the full price. Margin on a trip enjoyed outside the UK is zero-rated; on a UK trip it is not.

The catch is how TOMS VAT is paid during the year. Under HMRC's VAT Notice 709/5, VAT returns use a provisional percentage worked out from last year's margins. The real figure is calculated straight after the year end, with the difference on the return for the first VAT period ending after it.

So an agency absorbing this year's higher costs on UK trips pays VAT on each return as if last year's margin still held. It is a cash cost, not a permanent one.

What the numbers look like

Illustration, not a real client. An agency in Ealing builds UK coach holidays from coaches and hotels it buys in. In February, with diesel under £1.42 a litre, it sold 300 places on Lake District Christmas breaks at £900 each, £270,000 in all, priced to keep last year's 20 per cent margin: £180 a place.

The coach company now adds a fuel supplement of £6 a place, well inside the 8 per cent line of £72. If the agency's terms meet all four conditions and notice goes out in time, it can pass that on without a free exit for customers.

Fuel is the trigger, not the whole bill: the VAT squeeze comes from everything the agency absorbs. Say it swallows the £6 rather than issue notices, and hotel rooms it had not yet contracted cost £39 a place more, which it cannot pass on. Its margin falls to £135, 15 per cent, but its returns still use last year's 20 per cent: £54,000 of margin assumed against £40,500 made. That is VAT on £13,500 of margin that never existed, recovered on the return for the period ending January, February or March 2027, after a 31 December year end.

Tenerife packages from Gatwick face the same 8 per cent rule, but zero-rated margin means no VAT squeeze. A full order book does not guarantee a healthy margin.

For travellers: check your cover

• Packages must be protected: refunds, and a way home where transport is included, if the organiser goes bust.

• With a flight, ask for the ATOL certificate. ATOL, run by the Civil Aviation Authority, protects package trips that include a flight. The certificate names who protects your trip, which may not be your agent.

• A flight-only booking that gives you a ticket on payment, rather than an ATOL certificate, is not ATOL protected; nor is a hotel booked on its own.

• A flight and hotel booked separately, with different companies, is usually not a package. If one agent took separate payments for each in one visit, only what you paid that agent is protected if it fails.

What agents should do now

• Check your terms and the calendar. No qualifying clause, no surcharge. Notice for a 19 December departure must arrive by 29 November; for a 1 December departure, by 11 November.

• Rework the numbers on every package still to travel, now, while there is time to act.

• Put the TOMS gap in your cash plan. Compare this year's real margin on UK trips with the provisional percentage, and budget for the extra VAT.

• Settle agent or principal. Packages sold in your own name sit in TOMS; commission sales in an operator's name usually do not. If you do both, see how travel agencies split the two.

From 6 April 2027, under amendments made in April 2026, separate bookings an agent takes in a single visit will count as a package, and a supplier that cancels must refund the organiser within 14 days. Bookings made before then are unaffected.

About the author

Harvey Dhillon is the founder and CEO of Zmartly, a UK accountancy firm for small businesses. He grew up in West London and began his career in investment banking finance at Barclays, before going full-time on Zmartly in 2020. He is a Chartered Management Accountant (ACMA, CGMA).

Featured photo by Jake Hills on Unsplash.