Cancellation income and costs within TOMS
For sales within TOMS, the rules on cancellation income are different. (In fact, the opposite). Where the service which had been booked falls under TOMS, any cancellation income retained is not VATable and does not form part of TOMS turnover, assuming that you are using the "departure date" basis for TOMS accounting. This is because, unlike normal VAT rules, the only "tax point" for TOMS services is departure date (under normal VAT rules, it is the earlier of payment, invoice fate and service date, hence a "tax point" is created as soon as you pay). As such, this should not form part of your TOMS turnover.
Cancellation costs however can still usually form part of your cost of sales for TOMS purposes. This is because the services are still costs of direct travel (plus, now that HMRC have revised their view on non-TOMS cancellations, there is still a "tax point" for these purchases). So, this at least may be a small help in reducing the TOMS VAT liability for the full financial year and may possibly mean that many businesses have a repayment position for their annual adjustment.
Please note that, although the annual adjustment may mean that a repayment is due at year end, total VAT paid under TOMS for the full year (i.e. provisional in-year VAT paid plus the annual adjustment) cannot be a negative. If an overall loss is made for TOMS services in the financial year, the lowest amount of VAT payable is nil.