The taxman has started sending letters to bed banks threatening to review their VAT status following a tribunal victory over Medhotels earlier this year.
And a leading VAT expert has warned that other travel sectors, such as attraction tickets, car hire and seat-only, will also come under scrutiny from tax officials.
Damon Wright, VAT senior manager at tax specialist Grant Thornton, told a travel seminar in London on Monday that he expected Medhotels to lose an appeal against the original tribunal decision.
He said he expected the appeal to water down some of the findings in the original case, which he said appeared to make it virtually impossible for firms to act as agents for VAT accounting purposes.
But he said two fundamental weaknesses in Medhotels’ defence remained: the poor quality of its processes, and the fact that no one was paying VAT on the
mark-up on hoteliers’ nett rate.
The case dated back to before Medhotels was owned by Thomas Cook, which bought it from lastminute.com in 2008.
Wright said the decision could apply to other sectors of the travel industry that operate a nett-rate model and he expected Her Majesty’s Revenue & Customs officials to move on to these.
“Medhotels has lost, and ultimately it will lose the appeal because its procedures and its contracts and documentation were not as good as they needed to be,” he said.
“I think that applies to a lot of other travel companies that are holding themselves up as being agents. Contracts and documents must back you up completely. If they don’t you are at risk.”
Wright said letters being sent to bed banks cite the Medhotels case, in which the taxman claimed it should have paid about £7 million in tax between 2004 and 2006 under the Tour Operators’ Margin Scheme (Toms).
They also cite an earlier International Life Leisure case and are threatening to “raise assessments” of recipient firms’ VAT liability.
“We expected this to be done long before now,” said Wright.
“At the moment there is no indication as to whether they (HMRC) understand how far this goes.
“It raises the whole question of what is the difference between an agent and a principal in the travel industry and at what point can you say ‘I’m only an agent and not be liable under Toms’.”
Wright added: “The only way you can defend yourself against this is if your procedures are pristine.”
However, if the taxman in the UK is foiled in ensuring VAT is paid on nett rate mark-ups, counterparts on the continent are expected to pursue hoteliers, possibly pushing up prices.
A review of Toms in Europe is under way, having been started by the Spanish during its EU presidency last year.
More detail is expected later this month, but no changes are expected for up to three years.