Yesterday’s Court of Appeal decision left Secret Hotels2 with a VAT bill in excess of £7 million and a significant section of the industry with a headache, says Damon Wright
The Court of Appeal decision in the Secret Hotels2 (Medhotels) case could have a fundamental impact on how the travel industry works.
HM Revenue and Customs (HMRC) had assessed Medhotels for £7 million in Tour Operators Margin Scheme (TOMS) VAT on sales of hotel accommodation, and the Court of Appeal has agreed with this.
At the time, Medhotels was part of the Lastminute.com group of companies. Its trade was that of a holiday-accommodation broker, contracting with owners to facilitate the sale of the owner’s holiday accommodation: 94% of the sales were concluded through third-party agents and 6% directly to consumers through Medhotels’ own website.
Medhotels considered itself to be the agent of the accommodation owner and, therefore, not liable to pay UK VAT on the sales.
However, HMRC determined that Medhotels was, in effect, selling to consumers and therefore assessed it for VAT under TOMS.
The First-Tier Tribunal which handled Medhotels’ appeal agreed with HMRC that, based upon its broad trading practices, the company was conducting the business in its own name and was, therefore, liable to UK VAT under TOMS.
The Upper Tribunal, to which HMRC then appealed, rejected this approach.
It preferred the view that, as only the owners could ultimately provide the consumer with the accommodation and Medhotels held agency-based contracts with those owners, the company was not acting in its own name and could not be liable to TOMS VAT.
The Court of Appeal has now overturned the Upper Tribunal decision, wholeheartedly backing the First-Tier Tribunal’s approach of looking beyond the contracts to the broader trading practices of Medhotels to determine it was acting in its own name.
In fact, the Court of Appeal may have taken this further in suggesting that, for the purposes of establishing whether the sale of a travel service to a consumer falls within the definition of UK and EU TOMS legislation, it may be sufficient for the seller to represent its own interests to the consumer rather than wholly those of another party.
If this is right it could be very difficult for anyone other than a traditional travel agent, selling packages clearly on behalf of a named tour operator, to sell travel services to consumers without being liable for TOMS VAT.
However, this may not be the end of the dispute. Medhotels has been given time to consider whether it will seek permission to appeal to the Supreme Court.
If the company does that and is granted permission, either by the Court of Appeal or by the Supreme Court itself, it may still be some time before we know the final outcome.
In the meantime, any business which is concerned that it may be affected by the decision should seek advice at the earliest opportunity.
Damon Wright is director of VAT services at MacIntyre Hudson