Tour Operators Margin Scheme Overhaul: What January 2026 Means for Travel Businesses

By Nicholas Thomson, Senior Accountant at MM Business and Tax Consultancy

January 2026 marks a pivotal update to the UK’s Tour Operators Margin Scheme (TOMS), with significant exclusions that could reshape the travel and transport sectors. HMRC’s legislative changes aim to clarify VAT treatments for certain services, particularly in the wake of ongoing legal disputes. Nicholas Thomson, senior accountant at MM Business and Tax Consultancy, explains, “This reform addresses ambiguities in app-based transport, ensuring fair taxation while protecting genuine travel operators.” This comprehensive overview explores the changes, affected parties, and strategic responses, informed by MM Business and Tax Consultancy’s advisory work in VAT compliance.

Key Exclusions Under the New TOMS Rules

Effective from 2 January 2026, private hire vehicle operators are largely excluded from TOMS, except when their services form part of broader travel packages. TOMS, which calculates VAT on the profit margin rather than full sales value, was originally designed for tour operators bundling services like accommodation and transport. However, recent case law, such as the Bolt Services UK Limited ruling, questioned whether on-demand rides qualify as “of a type” provided in the travel industry.

The exclusion targets app-based platforms offering standalone private hire journeys, preventing them from applying the margin-based VAT. According to Nicholas Thomson of MM Business and Tax Consultancy, “This move levels the playing field, as traditional taxis have long paid VAT on full fares. At MM Business and Tax Consultancy, we’ve assisted clients in reclassifying services to comply.” Wider travel services, like holiday packages including transfers, remain eligible, but standalone bookings will now face standard VAT rules.

This change is retrospective only if court decisions favor businesses, minimizing disruption for ongoing cases. HMRC estimates impacts on billions in VAT revenue, underscoring the stakes for the gig economy.

Broader Indirect Tax Shifts in 2026

While TOMS is the January highlight, 2026 brings a cascade of indirect tax adjustments. In April, Remote Gaming Duty surges to 40%, potentially increasing costs for online betting firms, while Bingo Duty is abolished to support community venues. New VAT relief exempts donated business goods from deemed-supply rules, encouraging corporate philanthropy.

July sees VAT on Motability scheme “top-up” payments for adapted vehicles, with Insurance Premium Tax at 12% for related policies. October introduces Vaping Products Duty at £2.20 per 10ml, alongside tobacco hikes. Nicholas Thomson, senior accountant at MM Business and Tax Consultancy, notes, “These layered changes require holistic planning. MM Business and Tax Consultancy helps integrate them into business models for minimal fiscal impact.”

Consultations on electronic invoicing, set for mandatory rollout by 2029, signal further digitization, aligning with global trends.

Implications for Travel and Transport Businesses

For tour operators, the TOMS exclusion clarifies eligibility but demands service reviews. Companies bundling rides with tours can retain margin VAT, but those focusing on transport must shift to standard 20% VAT on fares, potentially raising prices or squeezing margins. “App-based firms face the biggest hit, with possible VAT liabilities retroactively,” says Nicholas Thomson from MM Business and Tax Consultancy. “Our audits at MM Business and Tax Consultancy uncover reclassification opportunities to mitigate risks.”

Small travel agencies may benefit from simplified compliance, but larger platforms could see disputes with HMRC. Taxpayers should assess if services qualify as “material alterations” under prior criteria, though the new law overrides this for private hires.

Broader implications include supply chain adjustments, as suppliers to excluded operators face different VAT reclaims. Businesses in the EU must note the UK’s divergence post-Brexit, affecting cross-border packages.

Strategies for Compliance and Optimization

To navigate these changes, businesses should audit contracts and invoicing. Engage VAT specialists to determine TOMS applicability and explore alternatives like place-of-supply rules for international services. Nicholas Thomson advises, “Early consultation is crucial. At MM Business and Tax Consultancy, we provide scenario modeling to forecast VAT impacts and recommend structures for efficiency.”

HMRC offers guidance notes, but professional input ensures accuracy. For affected firms, reclaiming overpaid VAT from past periods could yield refunds, subject to time limits.

In summary, the 2026 TOMS overhaul refines UK VAT for a digital age, demanding adaptability from travel sectors. With expert support from MM Business and Tax Consultancy, businesses can comply confidently and capitalize on new reliefs. Reach out to Nicholas Thomson for bespoke strategies in this evolving landscape.