The industry is looking to this month’s Medhotels appeal to clarify how agents must operate to be non-principals, says Stephen Mason, senior partner at Travlaw
Forget all this talk about the new Package Travel Directive or Atol reform, the big topic for many people in the travel industry is this: at the end of this month the Supreme Court will hear the appeal in the Medhotels case (Secret Hotels2 v HMRC) – the third appeal from the original hearing. It has more instalments than The Hobbit movies.
But why does this matter so much? Well, so many of our clients desire to be an agent, to avoid VAT, liability etc. But just what do you have to do in 2014 to be “only an agent”?
The difficulty for those wanting to operate business models with confidence and certainty is that the courts look at
the facts of each case to see whether,
in fact, the company is truly behaving
like an agent.
So where did the previous court think that Medhotels had gone wrong? In what way was its behaviour said to be inconsistent with being an agent?
This is what the court said:
- 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.
- Medhotels dealt with holidaymakers in its own name (and not as intermediary) in those cases where the hotel operator was unable to provide accommodation as booked and the holidaymaker rejected the alternative accommodation offered.
- Medhotels dealt with matters of complaint and compensation in its own name and without reference to the hotel operator.
- Medhotels did not provide the hotel operators with invoices in respect of its commission (nor even notify the hotel operators of the amount of that commission); it merely ‘marked up’ the operators’ prices, calling that mark-up its commission.
- Medhotels treated deposits and other monies that it received from holidaymakers and their agents as its own. It did not account to the hotel operators for those monies, or enter the money in a suspense account.
These features of a business relationship (as well as other ones listed in the findings of the 1st Tier Tribunal decision) will tend very strongly towards a travel company acting as a principal in the sale of travel services, and will make it very difficult for companies to deal as an agent if they are going beyond the role of a pure intermediary by acting in their own name.
The trouble is, it is not clear on precisely which side of the line any company will fall. For example, if a company just does number 2 from the above list, or, say, 2 and 3, is that enough on its own to cause it to lose agency status?
And anyway, the criteria above are not clear in themselves – for example, what does number 5 mean? Does every agent have to put every penny received into a trust account?
As a reminder, it’s not just liability to Toms that this decision may trigger – you could be at risk from a host of other nasties if you try, but fail, to operate effectively as an agent. Issues include:
- Are you liable to consumers for the quality of the arrangements you sell?
- Are you liable to consumers for any injury that they suffer while away on holiday?
- Are you liable to financially protect your consumers’ forward payments?
- Can you still successfully claim to fall within the ‘agency’ category of ‘Flight-Plus Arranger’?
The appeal this month is in the hands of previous Medhotels owner lastminute. com. While traditional package operators and OTAs/bed banks may prefer different results to this appeal, we can all join together in wishing lastminute.com good luck in obtaining much greater clarity from the Supreme Court, for the benefit of the whole industry.
Travlaw will be holding its annual Big Tent Event in London on January 22. Entry is by invitation only. Contact stephen@travlaw.co.uk