Opinion: Med Hotels verdict is a great result, but not the last word

Grant Thornton VAT specialist Damon WrightHaving read the decision in the Med Hotels VAT tribunal appeal case it does appear to give Her Majesty’s Revenue and Customs (HMRC) the proverbial bloody nose.

The Judge has largely brought the argument back to contract and agency law and thrown out all of HMRC’s peripheral arguments around net rates and price setting, cancellation terms, compensation and money handling.

It has even dismissed the question of the way we interpret the relationship in the UK being different to that in the accommodation supplier’s country. In other words it doesn’t matter if we see it as an agency but the supplier’s law doesn’t. The key is whether under English law a contract for agency exists.

All in all, as I read this, it leaves HMRC very little room indeed to continue to challenge the bed bank agency structure where there are clear contracts between the hotel owner and bed bank and bed bank and traveller which state that the hotel owner is the supplier and the bed bank is its agent.

Does this mean that this is the end of it? Probably far from it. I would fully expect HMRC to appeal and to continue to maintain its position against the bed banks while that appeal is in progress.

It also doesn’t deal with the question of whether someone should be paying VAT on agents’ commission, the answer to which I think is yes. If not in the UK, then it should at least be paid in the EU member states where hotel accommodation is sold.

Whether it is then the hotel owner or the bed bank (or another party) that has to pay it remains to be seen, but someone should be paying. In fact, my understanding is that some overseas tax authorities are already beginning to ask questions about this.

The only real way under the current EU law where no VAT will be payable on the commission/mark-up is if the supplier is a tour operator established outside of the EU.

In the meantime, it’s a great result for the industry. HMRC will find it difficult to argue against but I have no doubt they will try. Expect the saga to continue for a while yet.

Damon Wright is a VAT specialist at Grant Thornton

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