The Civil Aviation Authority (CAA) said the Department for Transport had provided “much-needed clarity” by confirming that such cases will be covered by the Atol scheme.
Package holiday customers whose trips have been cancelled due to the coronavirus pandemic are entitled to a cash refund, although many travel companies are offering refund credit notes to help their cash flow.
These allow customers to re-book their holiday or request their money back at a later date, but there have been doubts as to whether they are protected by Atol.
The scheme is normally used to stop package holiday customers being stranded abroad or losing money from future bookings when operators collapse, as happened with Thomas Cook in September 2019.
Consumer group Which? has been advising people to reject refund credit notes and “insist on a refund” because of concerns about them being worthless if the issuing firm goes bust.
Transport Secretary Grant Shapps said the move sent a “clear message” that people could book their holidays with confidence.
He told BBC Breakfast on Saturday that it would also prevent travel companies from collapsing, because they could offer holidaymakers credit notes instead of having to pay a refund.
Mr Shapps added: “Up to now anyone who had a package holiday, a holidaymaker, would have been asking potentially for a straightforward refund, maybe because they were aware that if the holiday company itself went down then a credit note would not be honoured.
“What I have done today is said actually we need to make sure we are going to stand behind Atol so that, if you do have possession of a credit note, that will still be honoured, backed by Government, even if that travel company goes down.
“That’s going to both reassure, I hope, consumers, holidaymakers, but also prevent, I hope, the travel companies, who have had a pretty tough time, let’s face it, from going down, because they are not going to have to automatically provide a refund unless that’s what the person wants.”
The announcement covers refund credit notes issued between March 10 and September 30 for package holidays cancelled due to Covid-19.
Consumers remain entitled to a cash refund within 14 days, although thousands have been forced to wait longer to get their money back.
CAA consumer director Paul Smith said: “This news provides much-needed clarity for consumers, who should now feel confident that their money is secure if they have chosen to accept a refund credit note for their cancelled Atol-protected booking.”
Travel trade organisation Abta said the announcement “gives reassurance to consumers and supports the travel industry at an especially difficult time”.
Which? Travel editor Rory Boland said the clarification will be “a huge relief” to customers who have accepted refund credit notes.
He added: “This is a positive step towards restoring trust in the travel industry.”
Some travel firms are offering vouchers rather than refund credit notes.
Although these are often worth more than the original booking, to incentivise customers not to request cash, the CAA said they are not Atol protected.
The Government is the financial backer for the Atol scheme, which is run by the CAA.
Travel firms are required to contribute £2.50 for every package holiday customer. The money goes towards a fund which is used to repatriate or refund travellers in cases of insolvency.