According to the spend section of
this page you can do it either way:
How to spend
To spend Flying Club miles:
Please visit http://www.virginholidays.co.uk to make a booking and start spending your miles today!
For those who already have a Virgin Holidays booking, please log in to your ‘Manage My Booking’ account on http://www.virginholidays.co.uk and select ‘Flying Club miles’ within the Payments page.
Yes you can upgrade the cabin using miles for V Hols packages but it’s a bit of a faff as you have to have paid V Hols your final total balance then ring V Hols and ask them to manually ticket your VS flights (if your tickets have not already been issued which isn’t until about 3 weeks before you travel) and then finally ring VS and get them to then process the miles upgrade in the normal way.