HOW IS VAT CALCULATED FOR TOUR OPERATORS?

travel tour operators

If you are a business owner in the travel industry who worries about how VAT is calculated for tour operators, you have come to the right place, because in the following I will help you out with the answer to this very good question. How is VAT calculated for tour operators ?

Maybe you have asked this question before and received vague answers or no answers at all. Maybe you were made to feel awkward for not knowing what to others seemed obvious ! I can from the start reassure you that this is a very good question and it is important to ask as many questions as you need, otherwise you risk fines from HMRC !

From an accounting perspective, tour operators works differently from other businesses because their purchase and resale of services is different. How is it different and what exactly do you mean ? I mean that the VAT threshold is set differently and this changes how VAT is calculated for tour operators.

Well, imagine you are the owner of a business like Booking.com selling travel packages.  Imagine the millions of pounds that go through that site… !

Now imagine that VAT is applicable to all income.

That would be an insane amount of money.  More than the profit you make.

Luckily for such business owner, this is not how the industry works.

VAT (Value Added Tax) is a type of tax that a business is collecting from its customers on behalf of HMRC. It is currently rated at 20% of the total price of the product sold. So if a business sells a product or a service for £100, the VAT on that will be £20, so the customer will pay £120, the business keeps £100 and gives £20 to HMRC.

In the UK, a business reaches the VAT threshold when its taxable turnover (total sales) has reached £85000 in 12 consecutive months.

As a travel operator in the UK, your business may not have the scope and amplitude of booking.com. You organise and prepare holiday tours, by combining accommodations, meals, transportation and sightseeing, thus creating bespoke packages. It would be unfair to be charged on the total sales you make, because a considerable amount of those sales is actually what you purchased from other businesses.

So while in general businesses in the UK register for VAT when their total number of sales has reached their threshold mentioned above, you as a tour operator based in the UK only account for VAT on the margin you make on your margin scheme supplies. In other words your threshold is not based on your total sales, but on your gross profit.

Now that we have established how VAT is calculated for tour operators, namely that your VAT threshold is based on your margin and not on your total sales, let’s move on to some further very helpful details about this margin that sets the VAT threshold for you.  In your case, the taxable turnover is regarded as follows:

  •  total margin on your taxable (including zero-rated) margin scheme supplies, plus
  •  full value of taxable (including zero-rated) in-house supplies, plus
  •  full value of taxable agency commission, plus
  •  full value of any other taxable (including zero-rated) supplies you make in the UK

Of course, this can be confusing because unless you use HMRC-approved accounting software to calculate the margin, it is extremely difficult to know if you are hitting the threshold or not just yet. This is why I strongly recommend moving your accounting to an accounting software in case you still rely on spreadsheets.

This is indeed worrying for tour operators and other travel businesses because VAT will be due as soon as you have passed the threshold even if you did not know.

If you are running a travel business and are worried about your VAT responsibilities message me, as I can help.

How can LAS Accounting help ?

Managing finances if you are a business owner in the travel industry can be challenging. However, by getting the support of an expert accountant, you have the best chance of navigating the intricacies of accounting for your industry and taking care of your financial health. If you would like to talk to me about how I work with small businesses like you please get in touch.

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