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Med Hotels Wins VAT Travel Case at the Supreme Court

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HotelThe Supreme Court has today issued its judgement in favour of Secret Hotels 2 Ltd (formally known as Med Hotels Ltd) overturning the decision reached by the Court of Appeal in December 2012 and agreeing with the earlier Upper Tier Tribunal (‘UTT’) decision. This is excellent news for Med Hotels and for the wider travel industry.

By way of background, Med Hotels Ltd operated a website via which it marketed hotel, villa and apartment accommodation in resorts throughout the Mediterranean and the Caribbean. In December 2007, HMRC issued Med Hotels a VAT assessment for £7 million for VAT under declared on EU supplies made under the Tour Operators Margin Scheme (‘TOMS’). HMRC argued that Med Hotels was acting as an undisclosed agent (effectively a principal for VAT purposes) and was supplying the accommodation services to the final customer in its own name. Throughout the case, Med Hotels argued that, during the period of the assessment, it was supplying accommodation services for a disclosed principal (i.e. the various accommodation providers) and its agency services were therefore treated as being made outside of the UK for VAT purposes and fell outside TOMS.

Like the UTT, the Supreme Court has based its decision on a strict interpretation of the contracts and terms on the website and has determined that Med Hotels was acting in the capacity of a disclosed agent. When making its decision the Supreme Court stated:

  • It is the contractual relationship between the parties that must determine the VAT treatment;
  • The fact that the agent holds the balance of power with the principal supplier which enables it to impose terms on the supplier does not over turn the contractual position;
  • Under English law it is not permissible to take into account the subsequent behaviour or statements of the parties as an aid to interpreting their written agreements unless the agreements are a sham or liable to rectification;
  • The First Tier Tribunal and Court of Appeal were wrong in their legal analysis of the relationship between Med Hotels, the accommodation providers and the customers; and
  • Under EU law Med Hotels would be seen to be an agent.

Our View

The robustness of the Supreme Court’s emphasis on legal ‘form’ over ‘substance’ is a little surprising if you consider the approach taken in other VAT court decisions. The decision will therefore have much wider application.  Arguably the decision is really saying that the substance should reflect the form although from a commercial perspective this should be the other way around, with commercial arrangements being reflected in the form.  This judge’s view on this point is illustrated by the comments relating to the flawed invoicing which meant the hotel was not in a position to report the final selling price to the customer for VAT purposes. For the travel sector this VAT decision will provide a huge amount of comfort to those agents who have been eagerly awaiting it and of course to those who have already been assessed by HMRC. The important message coming out of the decision is that if you are a disclosed agent it is vital that your documentation and terms and conditions (both supplier and consumer) clearly reflect this position.

If you would like any help with reviewing or updating your contracts in light of the Med Hotels case or if you would like to discuss the decision in more detail, please do not hesitate to contact Martyne Pearson on 01962 737 951 or via email at

The Final Score – VAT and five-a-side soccer centres

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HM Revenue & Customs (HMRC) have issued Business Brief 08/14 accepting a change in their policy following their defeat in the First Tier Tribunal case of Goals Soccer Centres Plc (GSC).

GSC owned and operated a chain of five-a-side soccer centres incorporating artificial pitches with floodlights and high quality amenities. Their core business was pitch hire and at the Tribunal hearing it was accepted that the hire of pitches on their own was a VAT exempt supply when the conditions within the VAT Act Schedule 9 Group 1 were met. The issue at stake was the VAT treatment of GSC’s supply of small sided football leagues in which GSC provided a pitch and the management of a football league competition to the participating teams.  There was no dispute that the management of the competition was a taxable supply at the standard rate. GSC however argued that the pitch hire was a separate supply under a separate contract and not so closely linked with the league management contract as to be artificially split. Therefore their supplies constituted multiple supplies each having its own identity and VAT treatment. HMRC contended that there was a single supply of participation in a football competition liable to VAT at the standard rate. Importantly The Tribunal concluded it would be artificial to combine them as a single supply.

HMRC now accept that, provided the conditions are met, the pitch hire can be exempt from VAT but the management services are standard rated. If there is a single price then businesses must apportion the values. This decision reinforces the key VAT principles established on the CPP case on the complex area of VAT on single and multiple supplies. Businesses which have over declared VAT on pitch hire in similar circumstances may be eligible for a VAT refund.

For more information and advice please contact Malcolm Nichols on 01962 735350

Five a side


Property Conversions and VAT – continuing trends

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We continue to advise our property development clients on the VAT implications of the conversion of commercial premises to either residential or mixed use. The properties tend to be former pubs, but also, following the change in 2013 to the General Permitted Development Order 1995 (relaxing some planning requirements), offices changing to residential use.

The VAT treatment of the property purchase, conversion costs and future income stream has a major impact on the financing and profitability of projects which can often be small scale, fast turnaround projects where margins are tight.

Recent examples include:

• A pub with pre-existing residential accommodation (manager’s flat) converted to residential properties with the question of the availability of the VAT zero-rate for the sale of the new properties (see our blog on the Alexandra Properties case). The benefit of Alexandra is that it provides an absolute VAT saving on the conversion costs;

• Funding of the VAT on the purchase of a commercial property – as the intention was to convert to residential use, we assisted with the commercial negotiations between the vendor and the purchaser to disapply the option to tax. This meant the buyer did not need to fund the VAT on the purchase which helped with their arrangements with the bank. It also resulted in a bottom line SDLT saving for the purchaser.

• Minimising the VAT charged on conversion costs by agreeing appropriate VAT rates with the contractor. This resulted in a significant working capital saving.

Each project is different in terms of the bottom line and working capital VAT impact and we would recommend that VAT is considered at the outset of any project to ensure that VAT cost is managed and minimised, or where there is a VAT cost, it is built into the budget and funding requirements.

If you would like to discuss any of your property projects, please call Sean McGinness or Steve McIntyre on 01962 735 350.

Parliamentary Debate – VAT and Tourism

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A parliamentary debate took place this morning in which various MPs lobbied for the reduced rate of VAT of 5% to be introduced for certain travel services in the UK, initially hotel accommodation and visitor attractions and later for pub and restaurant meals. This is a subject regularly commented on and there appears to be a strong body of evidence to suggest that, over a relatively short period of time, the upside across a number of areas would outweigh the initial dent in revenues.

The following key points were made in support of a reduction:

• The UK is one of only 4 EU Member States applying the standard rate of VAT to hotel accommodation
• According to a report written by a treasury advisor, Professor Blake, whilst the reduction would create a deficit in tax revenues in year one of around £640m, this would be offset in years 2 and 3 by an increase in tourists visiting the UK and spending more, adding £2.6bn to treasury coffers in 10 years. These figures are calculated using the Treasury’s own economic modelling methodology
• In addition to VAT revenues eventually increasing there would also be a significant benefit to the economy in the shape of job creation (particularly for the young), the ability to pay higher wages within the sector, a reduction in benefits payable to those currently unemployed, and an increase in corporation tax from more profitable businesses
• The current high VAT rate for hotels and visitor attractions means that businesses operating just below the VAT registration threshold (£79k) are not incentivised to grow their business in excess of the threshold
• In addition to applying the standard rate of VAT, the UK imposes high levels of APD and visa charges on visitors, meaning the UK loses out to more cost effective EU destinations when tourists are deciding where to holiday
• Business travellers e.g. those attending conferences, spend significantly more during trips to the UK but in deciding where to hold international conferences etc. are deterred by our higher VAT rate (albeit most business travellers can recover the VAT charged on hotel accommodation and venue hire)

The following points were made by the Treasury Minister against the proposal:

• The figures mentioned in the Blake report were brushed over and instead a deficit value in year 1 of £2bn on hotel accommodation alone was cited (this did not appear to take account of offsets mentioned in support)
• There is no evidence that the UK suffers from having higher VAT rates as it is still one of the most visited countries in the world
• The UK has the advantage of applying more VAT reliefs to passenger transport and to cultural activities than other EU countries
• France recently increased its relatively recently introduced 7% reduced VAT rate for restaurant meals to 10% – the suggestion being that the reduced rate had not increased overall revenues as anticipated
• The UK has the highest VAT registration threshold in the EU meaning many small businesses in the industry are not within the VAT net

In summary the Minister (supported by the shadow minister) made it clear that current strategy would simply not allow a deficit in VAT revenues to be created in the short term as this would increase the need for borrowing. This is an issue which will and should continue to be debated, the figures cited in the Blake report are convincing but in the current climate it is clear that there will be no progress whilst a reduction would create an initial deficit.

If you would like to discuss this area further or the impact of VAT on your travel business generally please get in touch with Julie Park on or call on 0208 941 9200

Removal of VAT Extra-Statutory Concessions – Another Blow for the Travel Industry

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Last week, HMRC issued a technical note which announced the withdrawal of a number of VAT extra-statutory concessions. The withdrawal of the concessions has come about further to The House of Lords’ decision in the Wilkinson case which clarified the scope of HMRC’s administrative discretion to make concessions that depart from the strict statutory position. Those concession that have been identified as being beyond the scope of HMRC’s discretion will need to be withdrawn.

The note included five VAT concessions which are due to be removed with effect from 1 April 2015. These include the following Tour Operator Margin Scheme (‘TOMS’) concessions that have been used by the industry for a number of years:

• TOMS and the use of a fixed rate margin (10%) for shore excursions sold by cruise operators – this is the current concessionary treatment which allows cruise operators to use a fixed rate 10% margin to determine the VAT due on sales to cruise passengers of bought-in shore excursions; and

• TOMS and the Airline Charter Option – the concessionary treatment allows tour operators to treat certain supplies of a charter flight, which they have bought-in and sold on to a traveller, as an in-house supply of zero-rated passenger transport.

What’s the Impact?

On first review the impact would seem relatively straightforward:

• Cruise operators will have to account for bought-in shore excursions, which are sold on as principal, using the TOMS; and

• Tour operators who are applying the Airline Charter Option would have to account for UK VAT under TOMS where the charter flight is bought-in and re-supplied as a principal.

However both of these changes will result in additional VAT due to HMRC in respect of EU travel, and the potential erosion of profit margins if businesses are unable to pass the VAT cost on to their clients.

The Wider Impact

Although it could be said that the withdrawal of the TOMS concessions will impact only on a minority within the travel industry, what is more of a concern is the potential wider impact of the updated guidance that will be issued on what constitutes “material alteration” and/or “further processing” (as referred to in the Airline Charter section of HMRC’s note).

It seems the Airline Charter Option is considered to be ultra vires due to the fact that the travel products supplied under the option are not considered to be significantly ‘materially altered or further processed’. However, HMRC’s note does not explicitly state whether the in-house definitions relating to coach/rail, cruises and accommodation are also going to change.

It would seem strange for only the in-house guidance on air transport to change when other areas have not (as the broad thrust of the guidance for all in-house areas is the same and the principles are clearly understood within the industry).

We are currently liaising with the HMRC Policy team to understand the wider implications of the withdrawal of the concessions and their intentions with regard the revised TOMS guidance. We will continue to update you on the position. In the meantime, if you would like to discuss the HMRC note and/or its implications in more detail please do not hesitate to contact Martyne Pearson on 01962 737 951 or via email at

Pension Fund Costs – VAT recovery opportunity?

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HMRC have published their updated policy in relation to VAT recovery by employers for pension schemes. The change in policy is as a result of a European Court of Justice decision from 2013 (PPG Holdings), and may result in businesses being able to recover VAT previously treated as being irrecoverable. It is possible to revisit VAT recovery over the past four years.

Historically, HMRC have sought to distinguish between administration/set up costs of an employees’ pension fund, and the cost of management of the investment activities/assets of the fund. In HMRC’s view VAT on the admin costs was recoverable and VAT on the investment management costs not recoverable. If costs where invoiced from one supplier, HMRC took the view that 30% related to the general management and was recoverable by the employer and 70% related to the management of the investments (HMRC say this would have been recoverable by the pension fund, but it is extremely unlikely that a pension fund would be in a position to recover all, if any, of the VAT).

HMRC’s Brief 06/14 confirms that they have changed the above policy following PPG and now accept that, where a supply of pensions administration and investment management is made from one supplier to the employer, the VAT is recoverable. This is on the proviso that the employer contracts for and bears the cost. If there is a recharge to the pension fund or a set off against contributions, HMRC indicate that the employer can fully recover the VAT but must account for output tax on the recharge to the pension fund (which is likely to be irrecoverable VAT). Therefore although this appears to be good news, it is critical that businesses determine whether the employer entity as opposed to the pension fund will be able/happy to fund the investment management fees without the need to make a recharge or reduce the funding it provides to the pension. Given that many large pension funds currently have significant deficits and given the investment management fees can be significant in value terms, this is a key point to consider before changes are made as any recharge or deemed recharge would effectively put the pension fund back to square one. Similarly the question of corporate tax deductions for the employer arises.

Where an employer receives invoices for separate services, it should review what these services relate to as HMRC have reiterated that, where separate fees are charged solely in relation to investment management of the pension fund’s assets, they do not see this VAT as recoverable. It is unclear from the guidance what stance will be taken in relation to the basic VAT principle of single versus composite supplies – the guidance suggests that the VAT on a single invoice covering both administration and investment advice will be fully recoverable by the employer but if the investment management element is regarded as a single supply with ancillary administration services included, there is a risk HMRC could deny the employer any VAT recovery, meaning the business would be worse off than with the historic 30/70 split.

It is recommended that the VAT recovery policy in relation to your pension scheme is reviewed, along with future arrangements regarding contracting and invoicing from suppliers to ensure that the VAT recovery position is understood and maximised. Pension managers may also wish to consider how the new policy impacts on their supplies. Should you wish to discuss further, please contact Sean McGinness on 01962 735350 or

VAT – Travel, Wholesalers & TOMS – Draft HMRC Guidance Issued

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HMRC have today released their draft brief “VAT: Tour Operators Margin Scheme (TOMS) – position following European Court of Justice infraction decisions”. The brief will be publically available to view on the HMRC website from 31 January 2014.

The brief sets out how UK tour operators and other businesses supplying travel products will be affected by the CECJ decisions which were released last year (see our earlier blogs for more detail concerning the cases). The earlier decisions confirmed that the supply of travel products on a wholesale basis should fall within TOMS. This is contrary to current UK treatment as we apply the normal VAT rules to such transactions. In addition there was concern the decision would lead to the removal of the UK’s VAT transport company arrangements used by the industry to reduce the cost of TOMS VAT.

HMRC have confirmed in the brief that there will be no change to the current VAT treatment applied in the UK at this stage (although this position will be reviewed after a year). This will mean that:

  1. UK travel businesses who sell travel products on a wholesale basis will not have to apply TOMS (although they can choose to do so if this is of benefit to them); and
  2. There will not be a requirement for the UK TOMS calculation to be carried out on an individual transaction basis.

This is excellent news for the UK travel industry, especially for businesses using the ‘transport company’ arrangements, a unique VAT mitigation structure used by the majority of UK established retail tour operators to reduce the amount of VAT due on the sale of a travel package.

Although the UK was not party to the CECJ cases and the original infraction proceedings, it is supposed to amend its VAT legislation in respect of any binding CECJ VAT cases. Therefore, whilst the decision not to amend the UK legislation is good news there will ultimately be a shelf life to applying the current position. However the decision reached by HMRC to maintain the current rules has been influenced by the EU Commission indicating that it has an intention to carry out a review of TOMS, which may result in significant changes to the scheme in the future. It will be interesting to see where the EU Commission gets to with these discussions as TOMS has been on the agenda for the past decade with no real change being implemented.

We intend to stay close to HMRC/Treasury with regard to these matters and will update you on any developments. In the meantime, if you would like to discuss the brief in more detail please do not hesitate to contact Martyne Pearson on 01962 737 951 or via email at

Travel, Wholesalers & TOMS – New HMRC Guidance to be Issued Soon

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Further to our blog “Update on our Meeting with HMRC and Treasury VAT Policy” published on 15th November 2013, we are still waiting on guidance to be issued by HMRC which sets out the UK position on the VAT treatment of wholesale supplies (further to the CECJ decision that was released last year) and the impact that this will have on the HMRC’s sanctioned Transport Company arrangement.

From our discussions with the HMRC VAT Travel Policy Team we have been informed that a business brief is in the process of being drafted and will be released shortly. HMRC have given no indication as to whether the current legislation will change as a result of the earlier decision. We wait in anticipation of the response and will provide an update as soon as we have any news.

If you have any questions regarding the above or would like to discuss the implications of the case in more detail please do not hesitate to contact Martyne Pearson on 01962 737 951 or via email at

Ibero Tours GmbH – CJEU Decision – Travel Agent Funded Discounts

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The European Court of Justice (CJEU) has given its decision on whether a self-funded discount given to travellers buying holiday packages would reduce the VAT payable by the travel agent. The Court has decided against the taxpayer ruling that there should not be a deduction in the amount of VAT paid in these circumstances.

By way of background Ibero Tours is a German travel agent who provided the service of selling a holiday package to the traveller on behalf of a tour operator. In order to sell the holiday package, Ibero Tours offered a self-funded discount. The package price of the tour and the amount payable to the tour operator did not change as a result of the discount given. This is due to the fact that the discount was funded from the agency commission Ibero Tours had earned from the tour operator as a result of selling the holiday package.

The Court decided that there was no legal reduction in the consideration paid for either the sale of the holiday by the tour operator or the commission due to Ibero Tours as agent. Therefore the self-funded discount was merely 3rd party consideration for the supply of the holiday package. This means that travel agents will need to continue to pay VAT on the full amount of commission due under its contract with the tour operator even though it doesn’t retain it in full. The decision is slightly odd in that it focuses heavily on whether the tour operator can reduce the VAT it accounts for, whereas the issue at hand here was supposed to be one of whether the travel agent can reduce the VAT due on the commission earned. The decision contradicts the AG opinion which in itself is not unusual, but the AG seemed to be more travel agent focussed and suggested that the adjustment was valid.

The outcome of the Ibero Tours case supports the decision given by the First Tier Tax Tribunal in Tui & Others case which was referred to the Upper Tribunal last year. The case was stayed pending the outcome of Ibero Tours. It will be interesting to see what happens next from a UK perspective and whether the case will continue to be heard at the Upper Tribunal (much will depend upon whether the Taxpayer can distinguish itself from the facts in the Ibero Tours case). This is clearly important to the UK travel industry given the sum at dispute.

If you have any questions regarding the above or would like to discuss the implications of the case in more detail please do not hesitate to contact Martyne Pearson on 01962 737 951 or via email at

Belly Dancing and the Education Exemption

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The FTT recently considered the VAT exemption in VATA 1994 Sch 9 group 6 item 12 in the case of Audrey Cheruvier (TC03148). Exemption applies to ‘the supply of private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer’.

The appellant offered private tuition in belly dancing, with a programme allowing dancers to progress through various levels. She argued that the tests for exemption were met but the FTT disagreed. The judgement and rationale is well set out and logical.

There are several strands to the question of whether belly dancing is a subject ordinarily taught in a school or university:

Firstly, are there any educational institutions in the UK offering study programmes in dance? Evidence was provided that there are several offerings. Therefore at face value the test is met. HOWEVER it is necessary to dig deeper and establish whether they are on all fours with the appellant’s programme. It was found that the dance study programmes offered by schools and universities had a much broader curriculum, not solely focused on the physical performance of the dance style but also including elements such as theory on the impact of dancing on muscle groups and the history of particular types of dance. The appellant’s offering focused on the physical performance. Therefore it did not mirror a course offered at a school or university. The purpose of this exemption is to allow private tuition to compete on a level playing field with the same study offered in a formal educational establishment.

Secondly, does belly dancing as a style of dancing qualify? The school and university programmes focused on mainstream dance styles such as street and ballet. The FTT did not dwell on this issue but, had it been the core argument, it is reasonable to assume that it would have qualified as it would offend the concept of fiscal neutrality to say a particular style of dance is excluded if all other tests are met.

Ultimately the FTT determined that the dance school was offering a recreational activity and as such exemption did not apply. HMRC’s manuals state that sporting and recreational activities can be exempt provided the other conditions are met in terms of analogous content.

This is another perfect example of the ‘devil lying in the detail’ – there should be no element of doubt whatsoever for a business operating in a B2C environment, as the risk of the treatment being successfully challenged can be catastrophic for the business.

To find out more contact Julie Park at The VAT Consultancy on 01962 735350 or via e-mail at