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HMRC internal manual

VAT Transport

Zero-rating of passenger transport: Perks, incidental services and ancillary supplies: Passenger perks

Passenger perks offered by airlines and other transport providers may be treated as part of a supply of passenger transport provided that they:

  • are included in the ticket price for the class of travel concerned, with no discount if the perk is not taken up;
  • form an integral part of a supply of transportation (see below);
  • are not gifts of goods (except where currently permitted eg in-flight catering, toiletries); and
  • are restricted to one per customer, although the customer may be offered a choice of options.

The following perks are treated as an integral part of a supply of transportation flight:

  • limousine transport to or from an airport or station; or
  • up to two days car hire for a one way ticket (four days for a return ticket); or
  • car parking at the airport or station; or
  • hotel or similar accommodation provided that it is for no more than one night’s stay with breakfast and there is a direct connection with the zero-rated travel, eg where it is necessary to catch a connecting flight or it is required for the night prior to a take-off or on the night after landing.

This list of options has been agreed between HMRC and representatives of the airline industry. Traders proposing any other perks to be treated in the same way should obtain individual prior approval from HMRC, to ensure that the services are incidental to and directly connected with the transportation supply.

When any of the above services are supplied to the operator, the operator will be able to recover the VAT incurred on the purchase, subject to the normal input tax rules. However, when they are supplied on to the passenger, and the above conditions are met, they will be treated as part of the zero-rated supply of passenger transport.

Perks which are not allowable - restaurant meals, theatre trips and other entertainment provided during a trip or holiday, hotel accommodation and car hire other than as specified above. These perks should be treated as separate supplies and taxed accordingly. This list is not exhaustive.

The provision of perks which are not allowable may mean the operator is liable to use the Tour operators’ margin scheme: see VTRANS021200.

The treatment of passenger perks set out in this paragraph was agreed following a decision of the High Court in the cases of Virgin Atlantic Airways Ltd and Canadian Airlines International Ltd (CO/2848/93 and CO/3595/93), where it was decided that optional extras supplied by those airlines should be treated as part of a single supply of zero-rated passenger transport where they were included in the fare for air travel and there was neither an extra charge for the options, nor a discount if they were not taken up. The agreement was publicised in Business Brief 4/96, dated 13th March 1996: see VTRANS021370.

Since publication of the Business Brief HMRC has accepted that the same principals can apply to other types of transport, e.g trains and ferries and is not restricted to international routes.