Firms that have been paying VAT or have already paid Medhotels-style assessments could be in line for refunds from the tax man, says BDO’s Damon Wright
In what can only be described as one of the greatest comebacks in VAT history, Medhotels (Secret Hotels2 Ltd) has finally won a resounding victory against Her Majesty’s Revenue and Customs.
The case concerns the question of whether Medhotels was an agent of the hoteliers (and earning a commission) when arranging the booking of hotel accommodation or, as claimed by HMRC, was acting in its own name.
If Medhotels was right, it had no UK VAT liability on any commission earned from overseas hoteliers.
If HMRC was right, the commission was in fact a margin on which Medhotels was liable to pay TOMS VAT (HMRC had assessed for £7 million on all EU accommodation bookings over several years).
Over several years, the case has bounced around the UK court system: HMRC winning at the first tier tribunal, Medhotels winning at the upper tribunal, HMRC winning at the Court of Appeal and now, finally, Medhotels winning hands down in the Supreme Court.
In summary, the Supreme Court considered that both its contracts with hoteliers and its customer terms and conditions clearly set out and supported Medhotel’s status as a disclosed agent for the hoteliers, which meant it qualified as an intermediary for the purposes of applying the EU TOMS legislation (and was not liable to pay TOMS VAT).
Very notably, the court also stated that there were no grounds to support any other conclusion.
Instead, it systematically dismantled all of HMRC’s arguments for looking outside of the contracts, such as Medhotels drafting the contracts and setting the terms, setting its own commission levels (through receiving net rates then grossing up), settling compensation, handling customer complaints, setting cancellation terms, entering into the advanced reservation and payment of rooms or the hoteliers only invoicing Medhotels for net rates.
It did agree that not reporting the selling price and not raising commission invoices to the hoteliers (thereby allowing the hoteliers to account for VAT on the gross selling price) as well as not holding monies received in suspense/trust accounts, were failings by Medhotels which were contrary to its requirements as an agent.
However, it noted that, in considering the VAT implications, these failings were insignificant and did not override Medhotels’ agency status.
Therefore, the court emphatically denounced all of the arguments HMRC has been using over the last few years to challenge the industry and issue assessments.
So, what does this mean for those travel businesses that have been assessed by HMRC, and any other businesses that may have questions around whether they qualify as an agent (and outside of TOMS)?
Firstly, it should be noted that, due to changes to the EU VAT legislation effective from January 1 2010, agents earning a commission from EU hoteliers and other accommodation suppliers, must now issue formal VAT invoices for the commission and report the amounts earned through EC sales lists.
Otherwise, unless HMRC is able to demonstrate that the facts are substantially different, any businesses that have paid Medhotels-based assessments should eventually get a full refund plus interest.
Others may now want to consider whether an agency model may in fact be an appropriate way of keeping outside of TOMS.
However, this should not be done without fully considering the other regulatory and commercial requirements (such as Flight-Plus and consumer liability).
There may even be some other travel businesses that have been paying VAT under the mistaken view that they were acting in their own name, who can now ask for a refund of overpaid TOMS VAT going back up to four years.