The Court of Appeal has released its decision in the Secret Hotels 2 Ltd (formally the Medhotels) case – the Upper Tribunal decision has been overturned, with the Court of Appeal reaching the same conclusion as the First Tier Tax Tribunal.
The appeal, heard in July 2012, concerned whether the bed bank operated as an disclosed agent or principal, the latter making it liable for VAT under the Tour Operator Margins Scheme (‘TOMS’). In making its decision the Court of Appeal placed particular weight on the following facts and concluded that MedHotels was not simply supplying agency services but was itself buying in and re-supplying the services in its own name.
1) MedHotels dealt with holidaymakers in its own name in respect of the use of its website and in the services of its local handling agents;
2) MedHotels dealt with holidaymakers in its own name (and not as an intermediary) in those cases where the hotel operator was unable to provide accommodation offered;
3) MedHotels dealt with matters of complaint and compensation in its own name and without reference to the hotel operator;
4) MedHotels used the services of other taxable persons (the hotel operators) in the provision of the travel facilities marketed through its website;
5) MedHotels did not provide the hotel operators located in other EU countries invoices in respect of its commission making it impossible for hotel operators to comply with their obligations to account for local VAT on the full selling price of the product; and
6) MedHotels treated deposits and other monies which it received from holidaymakers and their agents as its own monies – it did not enter those monies into a client suspense account nor did it account to the hotel operator for those monies.
Travel businesses operating on a similar model to MedHotels are at risk of challenge by HMRC if their fact pattern is similar. For those business operating tight margins the application and additional VAT payable under TOMS could be enough to wipe out all profit obtained from the sale of EU holiday products.
Although the case specifically refers to the sale of hotel accommodation, the same principles are likely to apply to other travel products sold on the same basis (such as the sale of flights on an undisclosed agency basis). Businesses caught by this decision should therefore look at the wider picture and not just at the sale of hotel accommodation.
In light of this decision some travel business may have no option but to consider mitigating their VAT position. For those providing passenger transport, the UK Transport Company concession may be of benefit if not already implemented. Others may be forced to consider more radical options such as off-shoring the business to a non-EU location. For non-EU established business supplying TOMS products, there is a clear competitive advantage to those who are supplying the products from an EU establishment as the EU Commission continues to try and agree a way in which the current loophole (allowing such sales to be VAT free), can be plugged. Clearly any business migration has to be supported by robust implementation to ensure the requisite functions have exited the original country and moved overseas.
It may not be the end of the road for the case if MedHotels is given leave to appeal to the Supreme Court. However, the outcome of the Court of Appeal will give some no option other than to consider whether it is still viable to operate under their existing arrangements.
Please contact Martyne Pearson on 01962 737 961 or via email martyne.pearson@thevatconsultancy.com if you have any questions regarding the above.
