Small travel agents: the VAT threshold counts your margin

A travel agency that sells holidays in its own name is tested for VAT registration on its margin, not on the money its customers pay. The threshold has been £90,000 since 1 April 2024. An agency can take several hundred thousand pounds in bookings and stay under it, or cross it in a busy month without noticing, because the figure that counts is not on the bank statement.

Which figure counts

Under the Tour Operators' Margin Scheme, an agency that buys in hotels, flights, transfers or excursions and sells them in its own name pays VAT on its margin: what the customer pays, less what it paid suppliers. HMRC's notice on the scheme applies the same idea to registration. For that test, taxable turnover is the total of:

• the margin on its margin scheme sales, including zero-rated ones;

• the full value of any in-house supplies, such as a coach it runs itself;

• taxable agency commission;

• any other taxable supplies it makes in the UK.

Two parts of that list are easy to miss. Margin on trips enjoyed outside the UK is zero-rated, so no VAT is due on it, but it still counts towards the threshold. And commission earned as a disclosed agent sits outside the margin scheme, yet where it is taxable it is added in too. Our page on how a tour company's margin is measured against the threshold works through a full example.

When you cross it

The test is rolling. At the end of every month, look back over the last 12. If you have gone over £90,000, you must register within 30 days of the end of that month, and your registration takes effect from the first day of the second month after you went over. There is a second test too: if you expect to go over £90,000 in the next 30 days alone, you must register by the end of those 30 days. Register late and HMRC can collect VAT from the date you should have registered. The Budget on 28 October could change the threshold, so check gov.uk afterwards; the rule that it is your margin that counts does not depend on the figure.

Two ways out, and what each costs

• Exception. If the jump is a one-off and you can show HMRC that your taxable turnover in the next 12 months will not go over the deregistration threshold, £88,000 since 1 April 2024, you can apply not to register.

• Exemption. If all or most of what you supply is zero-rated, as it is for an agency whose margin comes from holidays abroad, you can apply for exemption from registration. If some of your supplies do carry VAT, you must also show HMRC that the VAT you could reclaim would normally be more than the VAT you would owe. The price of exemption is that you cannot reclaim VAT on your own costs.

Registering is not always the worse outcome. An agency selling mainly holidays abroad pays no VAT on that zero-rated margin, and once registered it can reclaim VAT on its overheads under the normal rules. Margin on UK breaks is standard-rated, which is where the cost lies.

What it looks like for one agency

Illustration, not a real client. An agency in Harrow sells packages in its own name, most of them holidays abroad. In the 12 months to 30 September 2026 its customers paid it £720,000. The hotels, flights and transfers it bought in cost £628,000.

• Bookings of £720,000 are eight times the threshold, and do not decide anything.

• Its margin of £92,000 is £2,000 over. September was the month it first went over, so it must register by 30 October, and registration takes effect on 1 November.

• If September was a one-off, and its total taxable turnover for the next 12 months will stay under £88,000, it can apply for exception instead.

• Because most of its margin is zero-rated, it could apply for exemption, giving up the VAT on its overheads in return.

Which of those suits it depends on its UK breaks, its overheads and its plans for next year. The choice has to be made before 30 October, not after.

What to do this month

1. Work out your margin for each of the last 12 months from your booking system, not your bank.

2. Add any in-house supplies and any taxable commission.

3. If you are within reach of £90,000, decide now between registering, exception and exemption. Each needs an application at the right time.

4. Keep the contracts that show where you act as principal and where as agent. HMRC decides from those, and our guide to how the margin scheme runs through the year explains what follows from each.

Bookings show how busy you are. The margin decides what you owe HMRC.

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 CHUTTERSNAP on Unsplash.