The Court of Appeal judgment in favour of HM Revenue and Customs (HMRC) and against Secret Hotels (formerly Medhotels) on Monday has serious implications for other bed banks and potentially some agents. Ian Taylor summarises the court’s ruling


The Appeal Court found Medhotels.com liable for VAT under the Tour Operators Margin Scheme (TOMS) on the grounds that it operated as a principal, or accommodation supplier, and not an agent from the end of 2004 to June 2007.


In doing so the Court overturned an Upper Tribunal (High Court) decision in favour of Medhotels last year and upheld the ruling of a First-Tier Tribunal in favour of HMRC in 2010.


The decision leaves Secret Hotels, owned by Lastminute.com, owing VAT in excess of £7 million and with a substantial bill for costs.


More generally, the decision leaves other bed banks and agents at risk of similar VAT bills. A number have already had letters from HMRC giving notice of their potential liability under TOMS.


The case hinged on whether the company operated as an agent or principal during the period.


Medhotels/Secret Hotels argued it was an agent and had the contracts with hoteliers and travel agents to prove this.


HMRC argued the company’s behaviour contradicted its contractual arrangements and that Medhotels acted as a principal in the way it sold accommodation – which was mainly through travel agents.


The Court of Appeal decided the case came down to two issues: first, whether the First-Tier Tribunal was right to look not only at Medhotels’ contracts but also at its behaviour; and second, if it was right, whether the tribunal was correct in its ruling.


In his judgment, Sir John Chadwick followed the First-Tier Tribunal in noting the reference to travel agents and TOMS in the European Union’s VAT Directive.


This stipulates: “Member states shall apply VAT to the operation of travel agents . . . where the travel agents deal with customers in their own name and use the suppliers and services of other taxable persons in the provision of travel facilities. This Article shall not apply to travel agents acting only as intermediaries.”


Chadwick also referred, like the First-Tier Tribunal, to the VAT Acts of 1983 and 1994 which note that for the purposes of TOMS, the term “tour operator includes a travel agent acting as principal, and any other person providing … services commonly provided by tour operators or travel agents”.


In his judgment, Chadwick argued: “A travel agent who acts only as an intermediary will not be making a supply of a designated travel service . . . On the other hand, a travel agent who deals with customers in his own name and uses the supplies and services of other taxable persons in the provision of travel facilities is likely to be making a supply of a designated travel service … [suggesting] he will be a tour operator for the purposes [of VAT].”


Chadwick then argued the case must be examined on the facts – i.e. the business behaviour of Medhotels – and not just the contracts it had in place.


He ruled that the Upper Tribunal was wrong in its view that the First-Tier Tribunal had “erred in law” and decided: “The First-Tier Tribunal was plainly entitled to reach the conclusion it did.”


His judgment lists six reasons why the appeal court found Medhotels liable for VAT under TOMS:


1)    “Medhotels dealt with holidaymakers in its own name in respect of the use of its website and in the services of its local handling agents.


2)    “Medhotels dealt with holidaymakers in its own name (and not as an intermediary) in cases where the hotel operator was unable to provide accommodation as booked . . .


3)    “Medhotels dealt with matters of complaint and compensation in its own name and without reference to the hotel operator.


4)    “Medhotels used the services of other taxable persons (the hotel operators) in the provision of travel facilities.


5)    “Medhotels dealt with hotel operators in other [EU] member states in a manner inconsistent with the relationship of principal and agent. In particular, Medhotels did not provide hotel operators with invoices in respect of its commission (nor even notify hotel operators of the amount of that commission), making it impossible for hotel operators to comply with their obligations to account to the tax authorities . . .


6)    “Medhotels treated deposits and other monies it received from holidaymakers and their agents as its own. It did not account to the hotel operators for those monies.”


Chadwick concluded: “Medhotels was not simply supplying agency services to hotels, but was itself supplying the holiday.”


Lord Justices McFarlane and Lord Justice Ward in the Court of Appeal agreed with him.


Secret Hotels now has until December 17 to seek leave to appeal to the UK Supreme Court.