The 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 martyne.pearson@thevatconsultancy.com.
