Medhotels was acting as a principal in its contract with customers – despite calling itself an agent in its terms and conditions, a tribunal heard this week.
The Thomas Cook-owned bed bank began its legal battle over an £11 million VAT claim payable under the Tour Operators’ Margin Scheme (TOMS) on Monday. The claim covers the period from 2004-2007, when Medhotels was still owned by lastminute.com.
Speaking on Tuesday, legal counsel for Her Majesty’s Revenue and Customers Sam Grodzinski said it was not enough for the bed bank to label itself an ‘agent’ in its terms and conditions.
To establish if Medhotels was acting as an agent, he said it was necessary to look at the substance of the commercial arrangements between the bed bank, its customers and the hotels it worked with. “The use of the word ‘agent’ is wholly uninformative. Just because it describes itself as an agent of the hotel, that does not dictate the legal relationship.
“When you look at the substance of the contracts Medhotels entered into with hotels and customers – whatever labels may have been used – Medhotels was acting as a principal,” he said.
Grodzinski asked Sabre senior tax director Alan McLintock about the bed bank’s claim that VAT on commission is due in the country where the hotel is located. He said: “It is your case that it was up to the hotel to pay tax on your commission – but you never told the hotel what your commission was. You never issued the hotels with a VAT invoice.”
McLintock said: “Medhotels didn’t understand that it was required. Invoicing is very badly done in the travel industry. Only 27 of the agents we work with issue VAT invoices out of hundreds.”
Medhotels would offer customers who complained about their holiday a discount on their next booking or a small amount of compensation – despite claiming not to be liable, alleged Grodzinski.
“These are incredibly small amounts. If someone broke their neck, our legal team would reject any suggestion of liability,” said McLintock.
Grodzinski asked McLintock about the bed bank’s practice of giving advance payments to hotels. He said the advance payments exposed the bed bank to “considerable commercial risk in the event of an insolvency. It’s impossible to reconcile this with Medhotels acting as an agent,” he added.
“Our business leaders felt advance payments were being used inappropriately,” said McLintock. “If they had been more prudent, it would not have made them.”
The prosecutor said there was little difference between Medhotels’ booking conditions when it acted as an agent, and when it became a principal in 2008.
“The artificiality of the agency label could not be clearer than when looking at the contract. It is exactly the same; all that’s changed is the label,” said Grodzinski.
McLintock said the company’s legal team had revised the contract, but admitted “the time and resources spent were disproportionate to the changes made”.