The Court of Appeal has allowed HMRC's appeal in the Secret Hotels2 case (formerly Med Hotels Ltd), which restores the decision of the First Tier Tribunal. That decision stated that Secret Hotels2 acted as a principal in the sale of hotel accommodation and was therefore required to apply the Tour Operators' Margin Scheme (TOMS). The reported liability for Secret Hotels is £7m in VAT due under TOMS.
Secret Hotels2 operated a website to market hotel accommodation in the Mediterranean and the Caribbean. HMRC issued VAT assessments on the basis that the taxpayer was liable to account for output tax under TOMS. The taxpayer appealed arguing that it was acting as agent for the hotel operators.
The FTT found that that it was a 'tour operator' within the meaning of s53 of the Value Added Tax Act 1994 since it was not simply supplying agency services to the hotels, but was itself supplying the holiday. Therefore it was required to account for VAT in respect of its supply of a 'designated travel service' within the meaning of art. 3(1) of the Value Added Tax (Tour Operators) Order 1987 and that it was correctly assessed on that basis.
The Upper Tribunal allowed the taxpayer's appeal, concluding that the contractual arrangements supported the taxpayer's case that it acted only as an agent.
However, on appeal, the Court of Appeal considered that it was necessary to look at the whole 'package' and not just the contractual terms in order to determine whether the taxpayer had acted as an agent or principal.
The following features, amongst those identified by the FTT, were of particular weight: the taxpayer dealt with holidaymakers in its own name in respect of the use of its website and in the services of its local handling agents; it 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 it dealt with matters of complaint and compensation in its own name and without reference to the hotel operator.
In relation to VAT, it dealt with hotel operators in other member states in a manner inconsistent with the relationship of principal and agent; in particular, it did not provide the hotel operators with invoices in respect of its commission; it treated deposits and other moneys which it received from holidaymakers and their agents as its own monies; it did not account to the hotel operators for those moneys.
On this basis, the Court of Appeal found that the FTT was correct to conclude that the taxpayer was not simply supplying agency services to the hotels, but was itself supplying the holiday.
