Following Madge and Mel's wedding, Janice and Madge hitch a ride to the hospital with a stranger who turns out to be the wanted criminal Enrique "The Rat" Lopez. When the pair are held hostage, it's up to the other guests to rescue them.

For their part in capturing Enrique "The Rat" Lopez, the Brits return for their reward, a free holiday. Martin has separated from Kate and brings along the younger, vulgar Brandy, though both insist they are just friends. Mel is opening a shop renting mobility scooters ("You don't have to be a cripple to enjoy your holiday") employing lazy young Paco and his poolside reunion with Madge is passion personified. Mel gets Mick to publicise the opening by having him ride a twenty foot bike whilst wearing tinfoil, which cooks him in the heat. Everyone turns up for the grand opening - largely because of the free champagne. However, due to faulty lighting the shop catches fire.

Noreen, the Oracle's mum ,assumes he is gay when he tells her he is not interested in currently dating women and she seeks advice from Gavin and Troy. Whilst most of the other guests are on a day trip to a water park, the Oracle goes to an internet cafe and meets, online, a woman called Lesley, though, unbeknown to him, Lesley is actually a transvestite. At the water park Mick antagonizes everyone by arguing with Madge and Mel and Martin ends up in the nude when Brandy steals his clothes whilst he is swimming.Back at the bar Mick makes up with Janice when he says it with flowers but Martin sends Brandy packing for humiliating him and she ends up kissing Paco. The biggest humiliation is reserved for the Oracle, however, when his mother 'outs' him from the karaoke stage and performs 'Y.M.C.A.' with the Stewarts and Gavin and Troy dressed as the Village People, causing him to flee in horror.

Having finally convinced his mother that he is not gay, Geoff the Oracle goes to meet Lesley, his internet chat date. However he is shocked to find that Lesley is a transvestite and makes his escape halfway through their dinner, leaving Lesley to cop off with the maitre d'. Mel takes the sea-sick Garveys on a trip to Peacock Island, where he hopes to buy land for development, only to be told that it is a protected nature reserve. Brandy beds Mateo, stealing his pass-key in the process,but returns to Martin, saying that she only has eyes for him.

Gavin gets into an argument over a burger with a hefty woman with a young Indian husband in tow. Madge is shocked to see it is Valma, one of her estranged daughters, who has come to Benidorm by coincidence. Valma is a wealthy landlady but, despite Janice's best efforts to bring a reconciliation, Madge is convinced that she has followed them out to get Mel's money. Someone who is after Mel's money is Gary, a con man, who poses as a property developer. His accomplice is Brandy, who is also his girlfriend, and they fleece the tourists, using the pass-key Brandy stole from Mateo, to access their rooms. Whilst Madge, high on Ecstasy tablets which she mistook for pills, is performing 'Up, Up and Away' at the karaoke night, the two crooks make their getaway.

The Brits count the cost of the burglary. Kate flies out to support Martin, sending Madge packing when she suggests that Martin was an accomplice, and giving him hope of a reconciliation. His mother Diana also arrives, and seems to know the area - and particularly Mateo - better than she should. The Oracle is almost arrested for wasting police time when he lies about trying to foil a whole gang of burglars but gets another date with Chantelle, and Troy confesses to Gavin that he has a son, aged twenty-one. Madge and Mel are entertaining everyone on the trampoline at the new cabaret club when news arrive that the burglars have been caught.

Martin's hopes of marital reconciliation are ended when Kate tells him she has a new boyfriend and leaves without him. However, he does get to meet someone else and there are happy endings too for the Oracle and Chantelle who plan to move in together on return to Manchester,and the gays as Troy introduces Gavin to his son. Wink, an obnoxious friend of Donald, who annoys everybody with his practical jokes, has no such luck as, taking things a joke too far, he literally dies laughing at the karaoke. Madge and Mel have decided to relocate to Benidorm, where Mel is to buy the cabaret club and, as the others return to England, they serenade them all with an oddly affecting version of 'Spanish Eyes'.