Forfeited customer deposits and other cancellation fees retained by tour operators should not be subject to VAT, HM Revenue & Customs has agreed.

The decision follows Abta highlighting an error in HMRC’s policy relating to inclusion of cancellation fees in Tour Operators Margin Scheme (TOMS) calculations.

The system was resulting ina “significant cost” for many travel firms, Abta found.

As well as saving travel operators tax in the future, any businesses that have paid too much VAT since March 1 can now claim a refund.

The  association’s finance and resources director Carolyn Watson said: “Abta wrote to HMRC in March after disagreement with their interpretation of the VAT principles regarding VAT on cancellation fees in the guidance to its TOMS Notice.

“Thankfully the error in policy has now been updated and businesses will be paying less tax.”

The development comes before an Abta seminar on VAT and TOMS in travel on September 19 and a travel tax briefing on October 23.