I don't believe that there is VAT on a package holiday or flight. Only the commission a travel agent would receive would have a VAT implication.

A detailed explination can be found here http://forums.moneysavingexpert.com/showthread.html?t=1307553

So it appears that the VAT forms only a very small part of your holiday cost and with the cost of holidays going up rapidly for example TUI (parent company of Thomson / First Choice) having increased their prices by 12% in the last 8 weeks any saving will soon be offset.