After a very long wait and much speculation, the tax tribunal has agreed with HM Revenue & Customs (HMRC) that Med Hotels was liable to pay UK VAT through the Tour Operators’ Margin Scheme.
The issue may still have some way to go because Med Hotels can appeal. In fact, the right of both parties to appeal against decisions reached at various stages of the judicial process means it could be some time before the matter is resolved.
Although it will take a while for the full implications of the tribunal’s decision to become clear, we can take an educated guess about what HMRC will do next.
I would be very surprised if HMRC did not begin to issue assessments against any business that it believes falls into the same category as Med Hotels.
I also expect HMRC to extend its review into other businesses selling as agents, particularly where dynamic packaging is involved and net rate rooms are sourced through bed banks.
If these companies are able to distinguish their operations from those of Med Hotels, some may be able to defend themselves.
Some may also consider themselves protected by past rulings from HMRC confirming agency status. But, that could be a risky strategy as recent tribunal decisions have found reasons to dismiss these rulings.
This development comes on top of a raft of new EU rules. Agents are now required to issue VAT invoices and submit returns on commissions earned. Failure to declare this income can result in fines.
More problematical is the fact that additional tax may now be due on net rates in the countries where the hotels are. For a highly price-sensitive industry with low margins, this is going to put real pressure on business strategy.
These recent develop-ments mean it is now more important than ever for bed banks, online travel agencies and other agents to review their models.
They should incorporate VAT as a factor in their sales, or structure their affairs in a more VAT-efficient way. In some cases, the VAT cost can be avoided altogether.
The good news is that in the long term the outcome of the Med Hotels case could help to clarify the VAT legislation. The bad news is in the short term it is likely to increase the confusion and uncertainty for an industry fighting to survive.
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