The long awaited decision of the Court of Appeal in HMRC’s case against Secret Hotels 2 (formerly Med Hotels Limited) has been released showing strong support of HMRC’s position. The case concerns Med Hotels’ liability to pay VAT under the Tour Operator’s Margin Scheme (TOMS). TOMS liability is triggered by a supply of travel services where a company makes the supply as principal (or in its own name).
In coming to its decision, the Court of Appeal looked at whether the Upper Tribunal (Tax and Chancery Chamber) was entitled to restrict its consideration of the facts of the case to the wording of the various terms and conditions that governed the contracts between accommodation suppliers, Med Hotels and consumers, and concluded that the Upper Tribunal was not entitled to do so. The Court should also have looked at Med Hotels behaviour in exercising these agreements. In todays’ judgment, the Court of Appeal has listed the types of behaviour exhibited by Med Hotels, that suggested towards its finding of principal status:-
(1) 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.
(2) 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.
(3) Medhotels dealt with matters of complaint and compensation in its own name and without reference to the hotel operator.
(4) 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); they merely ‘marked up’ the operators’ prices, calling that mark up their commission.
(5) Medhotels treated deposits and other monies which it received from holidaymakers and their agents as its own monies. It did not account to the hotel operators for those monies.
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.
This decision will inevitably mean that lots of travel companies that think they are acting as agents probably aren’t; and should seek legal advice.
It won’t just be a liability to TOMS that this decision may trigger; but a whole host of other nasties:-
- Are you liable to consumers as principal so as to make you responsible for the quality of the arrangements you sell?
- Are you liable to consumers for any injury that they may suffer whilst away on holiday?
- Are you liable to financially protect your consumers’ forward payments?
- Can you still fall within the ‘agency’ category of ‘Flight Plus Arranger’?
Med Hotels have 14 days to request permission to appeal to the Supreme Court. They are expected to do so, but it’s possible that the Court of Appeal will not grant that permission, given the strong show of support for the 1st Tier Tribunal decision.
We think this decision will drive polarisation of the industry between traditional package tour operators on the one hand, and ‘pure’ agents selling other people’s products as a mere intermediary. There’s not much comfortable ground to stand on in between. This trend is bound to be exacerbated by the recent Titshall v Qwerty Travel decision, and the widening of the definition of ‘package’ expected next year from the EU. Does Flight-Plus have a future?
Of course, we’ll keep you posted!