Agents who are dynamically packaging could be in for a tax bombshell after Med Hotels lost a £7 million VAT tribunal case this week.
A judge ruled on Tuesday that the bed bank had been acting as a principal despite its claims to be an agent of hoteliers during a period when it was owned by lastminute.com.
Andrew Burnham, principal at accountancy firm MacIntyre Hudson, said this was a “significant victory” for Her Majesty’s Revenue & Customs that would prompt it to move on to investigate DIY agents.
Experts agree accommodation-only suppliers have been well advised and are likely to be within VAT rules, but agents that have jumped on the DIY bandwagon might be caught in the clampdown.
Burnham said: “You should get your house in order before you have your collar felt.”
On Holiday Group chief executive Steve Endacott warned: “This is big boys’ stuff and if you have not understood what you needed to do you could be in big trouble.”
Endacott said the ruling helped to clarify how suppliers should set themselves up to be an agent of the hotelier and fall outside of the Tour Operators’ Margin Scheme (Toms).
“Med Hotels made an awful lot of mistakes in terms of how they implemented being an agent of the hotelier,” he said.
“The tribunal has not said the agency model is wrong.”
Burnham said the ruling meant some bed banks would not now be able to avoid Toms, adding that those already working on tight margins would have to push up their prices and may struggle to compete.
“This will squeeze out the dynamic packaging market,” he said. “It will be a lot tougher for those trying to make it work, as their commercial advantage has been taken away. This was a battle, not a war. More is still to come.”
Somewhere2stay managing director Stuart Jackson said he believed most bed banks were acting within the law now, but could be caught out by previous practices.
“For those who are not owned by a vertically integrated company or a wealthy backer, this could cause major issues,” he said.
Traditional operators welcomed the ruling, saying it would help create a level playing field.
Noel Josephides, managing director of Sunvil Holidays, said: “Bed banks will have to pay VAT because they were avoiding it before. The model is flawed and shouldn’t have happened in the first place.”
Mike Monk, Abta’s head of financial services, said: “The decision highlights the need for our members to review their terms of trading and the way in which they account
for VAT.”