Tax experts have called Medhotels’ victory in a £7 million VAT case a “game-changer” for the industry.
The Supreme Court found in favour of Secret Hotels, formerly known as Medhotels, and against HM Revenue and Customs (HMRC) in its judgment today.
The ruling will be welcomed by the dynamic packaging sector but may be less popular with traditional tour operators.
Travlaw partner Stephen Mason said: “Medhotels’ successful appeal to the Supreme Court will be warmly welcomed by those companies that want to offer innovative products to consumers without incurring TOMS VAT liability (or indeed liability for quality and safety issues at hotels).
“It will be less welcome to traditional tour operators, but even they may be able to structure their businesses to get some VAT benefit from the decision. This decision is undoubtedly a game-changer for the industry. What is clear is that the idea of agency is alive and well in the travel industry.”
Chris Photi, head of travel at White Hart Associates, said the decision was a landmark case for the industry.
He told Travel Weekly: “The Med Hotels decision is a landmark case for the much beleaguered travel industry who have been constantly pursued and badgered by an endless stream of government regulatory and taxation bodies and agencies over the last seven or eight years, despite this government agreeing to reduce the burden of over-zealous bureaucracy.
“This ruling reflects that these bodies and agencies are frequently wrong in their interpretation of the law, and is a clear indication that hard-working and diligent travel professionals have succeeded against the odds and hopefully will continue to do so.”
He added: “Let us hope HMRC repays the tens of millions of pounds paid by the industry currently subject to individual tribunal appeals without undue procrastination and prevarication.”
Daniel Barlow, an indirect tax partner at Deloitte, said the industry finally had definitive guidance on how to determine whether an intermediary is acting as an agent or a principal.
“Given the extent to which a travel business’ status impacts on the amount of VAT it charges, its regulatory position and its level of risk when legal claims are made, I’m sure that many travel businesses will use the judgement as a prompt to review whether they have the right business model,” he said.
Abta said it would be updating its guidance note on the matter and meeting HMRC to discuss the implications of the decision.
An Abta spokesman said: “Today’s judgement is undoubtedly an important victory for MedHotels. However all travel companies should recognise that that this is a judgement about MedHotels’ business model and on the specific terms of Medhotels’ contractual arrangements, which the court agreed established that it acted as an agent.
“What this judgement does is highlight again the fundamental importance of contractual arrangements, which must be effective, robust and accurately reflect the commercial realities between parties.
“The case does give some helpful guidance on agency matters and Abta will meet with HMRC to discuss the implications of the case in due course.”
A spokesman for lastminute.com, which is now owned by Sabre, said “We are delighted with this decision and the legal clarity it now brings to travel agents surrounding the whole question of agency and liability.”
The case hung on whether the bedbank was acting as an agent or principal during 2004 to 2007 when Medhotels was owned by lastminute.com.
As an principal it was liable to pay VAT on its margin under the Tour Operators Margin Scheme (Toms).
This was the third and final appeal by Medhotels since the original ruling in 2010.