Stuart Walsh of Pinsent Masons, one of the legal team that acted for bed bank Medhotels in the £7 million VAT case, gives his verdict on the long-awaited court battle
So finally the long-running and widely reported Secret Hotels2 (SH2) litigation draws to a close with a win for the taxpayer.
There are many notable things about the Supreme Court’s judgment, not least the fact that at each stage of proceedings the relevant appellate court – Upper Tribunal, Court of Appeal and, finally, the Supreme Court – categorically disagreed with the judgment of the immediate court below (in particular the three Court of Appeal judges unanimously found for HMRC; whereas the five Supreme Court judges unanimously found in favour of SH2).
Even the Courts that agreed with each other – namely the First-tier Tribunal (Tax) and Court of Appeal on the one hand; and the Upper Tribunal and Supreme Court on the other – ultimately did so for slightly different reasons.
This case demonstrates the inherent uncertainty of pursuing any litigation but also shows that, eventually, the right answer can be achieved.
But now that the litigation has concluded, are we in a better place than we were before?Well, the answer to that question depends upon who the we is referring to.
It goes without saying that it is a win for SH2 (although only of historic significance given that the “medhotels” business was sold by the lastminute.com group to Thomas Cook in 2009).
However, there are also obvious losers.
Last week it was widely reported that the On Holiday Group, a leading “bed bank” which on the face of it had a similar business model to SH2, had passed into administration.
Founder and chief executive of OHG, Steve Endacott, has claimed since the failure that the withholding (by HMRC) of £4.5m “effectively destroyed the OHG bed bank business”.
Sadly the long-awaited confirmation that a bed bank can be an agent came too late in the day to provide OHG with a much needed shot in the arm. This will be exceptionally frustrating to those involved and, more critically, is likely to result in significant job losses.
For those businesses that have managed to navigate their way through many stormy and uncertain years of trading accounting for UK VAT on sales of overseas accommodation as principal (through fear of HMRC imposing financial penalties if they did otherwise), notwithstanding a firmly held belief that they have at all times been the agent of the hotel, the Supreme Court judgment offers hope.
This is because although the Supreme Court had to determine the case before it on its own facts, it was also charged with the wider responsibility of giving guidance to an industry left confused by a Court of Appeal judgment which offered no real prospect of being consistently and fairly applied in practice.
To my mind, the Supreme Court has done an excellent job in resolving the numerous uncertainties created across the various judgments and has delivered clear guidance to the travel sector and beyond on the legal approach that must be followed for the purposes of determining whether a business is acting as an agent.
The Supreme Court has essentially concluded that the starting point is to characterise the nature of the relationships in light of the contracts, before considering whether that characterisation can be said to represent the economic relationship in light of the relevant facts.
By reference to the Supreme Court judgment some travel businesses will be extremely confident that their purported agency status is now beyond challenge; others may be less optimistic; more still may now be prepared to think about restructuring their hitherto ‘principal’ business as an agency to take advantage of the benefits that such a model may offer.
These benefits may include tax advantages and legally there is nothing wrong with this – it is after all clearly established law that a business does not have to arrange its affairs in a way which results in its paying the most amount of tax possible.
What of course should always be defeated are artificial arrangements that, for tax purposes, purport to be one thing but are in fact another. The judgment does not in any way restrict the ability of HMRC to do this.
So is the Supreme Court judgment the final word? In respect of SH2, the answer is yes. For other businesses the answer, at least for now, is no.
HMRC are understandably giving careful consideration to the terms of the judgment before providing a formal response – either generally through public notices or specifically to individual taxpayers directly affected by the judgment, many of whom have appeals before the Tax Tribunal stayed pending the SC judgment.
What is now needed is for HMRC to accept and apply the principles established in the Supreme Court judgment to affected businesses in a manner which is fair, reasonable and consistent.
Hopefully, free of distraction, affected businesses can concentrate on delivering a successful 2014 and beyond.