Opinion: Chris Photi on the Med Hotels defeat

Chris Photi, senior partner, White Hart AssociatesThe long-awaited VAT tribunal decision in relation to HM Revenue & Customs v re Med Hotels has reflected a decision in favour of HMRC.

What will this mean for the industry as a whole? How will it affect other bed banks, internet split contractors, travel agents and airline based contractors? And will it automatically mean assessments from HMRC on the back of in-depth tax investigations?

There is little doubt this decision will back up HMRC’s already robust enquiries into companies that receive variable commissions from overseas suppliers that are outside the scope of UK VAT (the VAT gap).

As always, the devil will be in the detail of the tribunal decision. My initial thought is that Med Hotels’ paperwork in certain areas was not as good as it could, and should, have been.

Many travel companies will be looking at their business models now to see if they are sustainable against this sort of decision. If they are not, they might look at changing the way they work.

However, my belief is that there are bigger political issues at play here than first meets the eye.

The Spanish tax authorities are not targeting hoteliers and suppliers in relation to the VAT gap, which is where the problem lies.

UK travel companies have bona fide agency agreements with overseas hoteliers and suppliers, and have structured themselves in line with relevant legislation and receive commission under the reverse charge rules.

Overseas hoteliers and suppliers are willing to enter into flexible commission agreements with UK travel companies to bring in business, but are not willing, it seems, to pay the correct amount of tax (IVA) in Spain.

Why aren’t the overseas tax authorities targeting these suppliers in relation to ‘the VAT gap’?

Take our example of Spain. They are in the midst of a recession, unemployment is increasing daily, and the tourism industry, due to the strengthening euro against sterling, is on its knees.

Why would the Spanish authorities target the tourist industry to collect higher, albeit correct, amounts of tax given that backdrop? They have ‘looked away’ given the current economic situation, something that has not been replicated by their UK counterparts.

This government makes all of the right noises with regards to helping businesses in recession but, in practice, does nothing of the sort. The UK used to be a nation of shopkeepers; now it is a nation of bureaucrats.

Why should the UK tax authorities be the vigilantes for Europe on this matter, while their Spanish counterparts ‘look the other way’, sip a glass of Rioja and look forward to beating us at the World Cup?

So much for the European‘Union’.

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