We must have clarity on the recent Medhotels judgment, says Abta chairman Noel Josephides
Business can only successfully function in an environment of certainty.
It was about 12 years ago, long before Medhotels ever became a part of Lastminute.com, that I visited Her Majesty’s Revenue & Customs on behalf of Aito and asked for clarification as to how a tour operator should behave to not have to pay VAT under the Tour Operators’ Margin Scheme.
HMRC would not say. Since then, in many meetings with the Department for Transport, Civil Aviation Authorty and the Department for Business, Innovation and Skills, I have asked that all these regulators get together with HMRC and give the industry clear guidelines on the subject. HMRC has always stood apart, even though I know that there have been joint meetings.
Now the courts have taken the decision on behalf of HMRC.
I am surprised that many have hailed the Supreme Court’s recent decision in the Medhotels case as a great liberating moment for the travel industry and the consumer, because there are still many uncertainties.
Abta has issued a cautionary initial response to the judgment, stating that all travel companies must recognise that this is just about MedHotels’ business model and on the specific terms of Medhotels’ contractual arrangements, which the court agreed acted as an agent.
Contracts are crucial
At the heart of all this is the importance of having contractual arrangements in place that accurately reflect the commercial realities between the parties.
What the ruling does not do, however, is clarify all of the terms of what constitutes acting as an agent for tax purposes, or equally important, what constitutes acting as principal for tax purposes.
As things stand, we could be faced with the situation where many tour operators will wonder what they need to do to restructure their business to avoid paying VAT under Toms.
They are probably wondering if, with the appropriate contracts in place, a traditional tour operator could act as an agent and avoid paying VAT, yet behave exactly the same as in the past. We need clarity on this.
We need clarity
Abta will be issuing updated guidance on trading as an agent or principal in the next few weeks.
It is also hosting a Travel Tax Briefing with Deloitte at the end of the month and a Travel Law seminar on May 7 when there will undoubtedly be further interrogation of last week’s case and what it means for different business models.
But the questions remain: will we get the certainty that we need as businesses to do the right thing? Will the DfT, CAA and BIS put pressure on HMRC to come out with a clarifying statement soon, before operators finalise commitments for 2015?
And will the government refund the huge amounts of tax to other businesses that had similar contractual arrangements to Medhotels in place?