Travel agents: the VAT on commission depends on the booking

A travel agent selling holidays as an agent pays VAT only on what it earns for arranging them, and the rate on that commission depends on what was arranged. Arranging a scheduled flight is zero-rated. Arranging travel insurance is usually exempt. Selling a UK tour operator's packages earns commission at the standard rate, and commission paid by a hotel abroad is usually outside UK VAT altogether. For an agency that does all four, sorting the income into the right lines is the first job in travel agency accounting.

Agent first, then the rate

The split applies only to sales made as an intermediary. HMRC's notice for travel agents and VAT puts it plainly: "What matters is how you are acting, not what you call yourself." You are an intermediary if your principal has agreed that you act for it, you routinely name that principal on tickets or in your booking terms, and you take no significant commercial risk on what you arrange.

Sell in your own name, or as principal, and the sale goes into the Tour Operators' Margin Scheme instead, with VAT worked out on the margin.

How each kind of commission is taxed

• Flights. If you are the first intermediary arranging zero-rated passenger transport, such as a scheduled flight or a journey into or out of the UK, your service of arranging it is zero-rated too. A sub-agent working for another agent charges the standard rate instead.

• A UK tour operator's packages. Acting as intermediary for a tour operator established in the UK, your commission is standard-rated. Many operators self-bill, issuing the invoice for your commission themselves. HMRC's notice says getting the VAT right remains your responsibility even then.

• Hotels abroad. Under HMRC's place of supply rules, an intermediary's service to a business customer is supplied where that customer belongs, and arranging hotel rooms does not count as a service tied to land. Commission from a hotel in Spain is therefore outside the scope of UK VAT. Where you act for the traveller instead, the service is supplied where the hotel stay is supplied, which is also outside the UK. The travel agents' notice warns that the hotel's own country may have rules of its own.

• Travel insurance. Arranging it is exempt when it is sold on its own, or with travel that carries no UK VAT. Sold with travel that does carry UK VAT, it stays exempt only if you tell the traveller in writing the price of the insurance and any fee charged on top of the premium.

The exempt line has a cost

Exempt income limits what you can reclaim. VAT on costs used for exempt work cannot normally be recovered, and nor can the exempt share of shared overheads such as rent and booking systems. HMRC's notice on partial exemption lets a business reclaim the lot anyway if the VAT linked to exempt work is no more than £625 a month on average and no more than half of all the VAT it pays on costs. A quicker version of the test looks at whether total VAT on costs is within £625 a month and exempt sales are no more than half of all sales.

Commission from hotels abroad does not cause the same problem. The travel agents' notice lets an intermediary reclaim VAT on costs linked to supplies made outside the UK that would have been taxable had they been made here.

Exempt insurance commission and outside-the-scope hotel commission also drop out of the VAT registration test, which counts only income that is neither exempt nor outside the scope. An agency close to the threshold should add up its zero-rated and standard-rated commission and leave the rest out.

One agency's year

Illustration, not a real client. A VAT-registered agency in Hounslow acts only as an agent. Over a year it earns:

• £40,000 of commission from UK tour operators, on which £8,000 of VAT is added under their self-billing.

• £22,000 of fees for arranging scheduled flights, zero-rated.

• £9,000 of commission from hotels abroad, outside the scope of UK VAT.

• £6,000 of travel insurance commission, exempt.

The VAT on its costs comes to £5,400 for the year, or £450 a month. That is within £625 a month, and £6,000 of exempt sales is far below half the total, so on HMRC's quicker test it can treat itself as de minimis and reclaim all £5,400, subject to the usual check at the year end.

The costly mistake would be on the flights. Had its booking system treated the £22,000 of flight fees as standard-rated prices with VAT included, it would have paid HMRC a sixth of them, about £3,667, that was never due.

I have said before that turnover is a vanity metric: "The number that matters is not what you sold. It is what you kept." For an agent, what it kept is the commission, and that is the figure the VAT rules work from.

Splitting the books

• Give each kind of commission its own account in the books: flights, UK operators, hotels abroad and insurance.

• Check that self-billed invoices from UK operators show VAT at the standard rate.

• Where insurance is sold with travel that carries UK VAT, make sure the written note of the premium goes out with the booking.

• Run the de minimis check on every return, and again at the year end.

Agencies that also sell packages in their own name have a fifth stream to keep apart, and any commission that is not readily identifiable, such as variable commission, goes into the margin scheme with it. Our page on agency commission and the margin scheme for travel agencies shows how the two sit side by side.

Make the split before your next return goes in, because each return filed on the wrong rates is one more to correct later.

About the author

Harvey Dhillon is 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 Global Residence Index on Unsplash.