Is travel VAT exempt or zero rated ?


Quite often the question “Is travel VAT exempt or zero rated ?” is asked of me by worrying business owners in the travel industry.

Admittedly, accounting for businesses in the travel industry has its complexities. However, none of these is mysterious. In this blog I will attempt to clarify some aspects about VAT that any business owner in the travel industry may wonder about.

First things first, if you are not VAT registered, you don’t have to worry about any of this because you will not be impacted by it.

However, if you are VAT registered, by law you have to submit VAT returns every month or every quarter. Submitting returns with errors may incur hefty fines from HMRC. Hence your sleepless nights agonising over VAT exempt and zero rated products or services.

VAT (Value Added Tax) is a type of tax that a business collects 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.

But there are products and services that HMRC classifies as exempt from VAT and others that have VAT… but rated at 0%. Now why would you rate something at 0% ??? Shouldn’t you just leave it as is, you may ask. This is a very pertinent question.

Well, VAT must be charged on all products and services by sellers that are VAT registered. But there are products that the government wants to make affordable for the consumer because they are considered a necessity of life. In order to achieve this goal, the government is not charging the 20% tax on them, thus making the price the consumer pays lower. However, these items have to be marked in some way, so they will be either VAT exempt or zero-rated, depending on what they are.

I agree that this sounds complicated… but we have to make sure we understand the implications in order to avoid HMRC penalties and what not.

So here is my explanation of the difference between VAT exempt and zero rated VAT.

Exempt items are: educational services, healthcare, financial services such as insurance and banking, charitable activities and postal services.

Zero-rated items are most food items and children’s clothing, and… passenger transport in the UK ! So, is travel VAT exempt or zero rated ? Passenger transport in the Uk is zero rated.

Train travel in the UK is zero-rated ! This means that the train travel element in a travel package you offer is zero-rated with respect to VAT. You must keep the train ticket receipt as evidence to substantiate the zero-rated element. There are intricate details about zero-rated passenger travel items that must be taken into account when processing a VAT return.

What is the difference to you ? Well, if you sell any VAT exempt product or service, you cannot claim the VAT you paid when you purchased items related to the cost of the exempt products or services you are selling.

But, if you sell zero-rated items, then you can claim the VAT you paid when you purchased items related to the cost of the exempt products or services you are selling.

I understand that this can be difficult, however I am here to 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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