Travel business owners ask this often: is travel VAT exempt, or zero-rated? The short answer is that passenger transport in the UK, including train travel, is zero-rated. But for a travel agent or tour operator, that one fact is rarely the end of the question — it’s the start of a more important one: how does that zero-rating interact with the Tour Operators’ Margin Scheme (TOMS)?
When your businesses is 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.
If you run a travel business, VAT treatment is often not standard, and in many cases the Tour Operators’ Margin Scheme applies — see our complete guide to TOMS VAT for travel agents for a full explanation of how the rules work in practice.
VAT exempt versus zero-rated: the quick version
VAT exempt and zero-rated are not the same thing, and the difference affects what you can reclaim. Exempt supplies (education, healthcare, insurance, postal services) carry no VAT, and you can’t recover the VAT on costs related to them. Zero-rated supplies — most food, children’s clothing, and UK passenger transport — carry VAT at 0%, but because they’re still technically VAT-able supplies, related input VAT can usually still be reclaimed. That distinction matters more to your VAT return than the rate itself.
For a full explanation of how VAT and TOMS apply to UK travel agents, see our complete guide to VAT & TOMS for Travel Agents.
VAT on train travel UK
Train travel in the UK is zero-rated. If you sell package holidays or travel services that include a rail element, that portion is zero-rated for VAT purposes — but you need to retain the ticket or booking evidence to substantiate it on your VAT return, and HMRC will expect to see that evidence in the event of a review.
This is why train travel plays a significant role in the travel industry, especially in the UK where it is a popular mode of transportation. As mentioned already, train travel in the UK is zero-rated for VAT purposes. This means that when you sell a travel package that includes train tickets, the VAT element relating to those tickets is zero-rated. However, it’s crucial to keep accurate records and receipts to substantiate the zero-rated VAT claim. This includes retaining the train ticket receipts, as mentioned before, because they are required evidence in case of HMRC audits.
Where this gets complicated: TOMS
Here’s the part that catches most travel businesses out. If you’re a tour operator or travel agent acting as principal — buying in components like accommodation, transport, or excursions and reselling them in your own name — the zero-rated train element doesn’t sit in isolation. It becomes part of a margin calculation under TOMS, where VAT is due on your margin rather than on the value of each component separately.
Getting this wrong is one of the most common, and most expensive, TOMS mistakes: treating a zero-rated component as if it removes that part of the booking from the margin calculation entirely, when in fact it still needs to be correctly allocated within it. Errors like this often go unnoticed for years, surfacing only at HMRC review — by which point correction is disruptive and costly.
If you’re a travel agent or tour operator, this is the part that actually affects your VAT position — see our full guide to TOMS VAT for travel agents for how margin calculation, principal-versus-agent status, and zero-rated components fit together.
How can LAS Accounting help ?
We work exclusively with UK travel agents, tour operators, and travel agencies, and TOMS VAT compliance is a core part of what we do. If you’re unsure whether a zero-rated element of your bookings is being handled correctly within your margin calculation, that’s exactly the kind of question worth resolving before your next VAT return, not after an HMRC enquiry.
Talk to a specialist — or see how we support travel agents, tour operators, and travel agencies specifically.
