Alpha International Accommodation Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 27 October 2017 |
| Neutral Citation | [2017] UKFTT 0778 (TC) |
| Date | 27 October 2017 |
| Court | First-tier Tribunal (Tax Chamber) |
[2017] UKFTT 0778 (TC)
Judge Harriet Morgan, Member Elizabeth Bridge
Ms Nicola Shaw QC, counsel, instructed by Pinsent Mason, appeared for the appellant
Ms Claire Darwin, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents (“HMRC”)
Value added tax – Application of VAT Directive (2006/112), art. 306(1) and the Tour Operators' Margin Scheme (TOMS) – Whether supplies fell within TOMS – Held – No – Appellant acted as disclosed agent not as principal – Whether English law or foreign law should apply to some contracts – Held – HMRC had failed to plead that foreign law applied.
The First-tier Tribunal (FTT) allowed an appeal by Alpha International Accommodation Ltd, (the appellant) that it acted as a disclosed agent and was outside the scope of TOMS. The FTT also found that HMRC had failed to plead its case that certain contracts fell outside of English law.
The appellant sold accommodation to travellers through a website www.alpharooms.com, initially as a principal, accounting for VAT through TOMS and later as a disclosed agent outside of TOMS. Commercial reasons including reducing risk with accordingly lower insurance premiums and reduced fees to regulatory bodies were behind the change. Additionally competitors had moved to this model resulting in VAT savings for supplies of EU accommodation. HMRC were informed in 2006 but in 2010 HMRC wrote to say that it considered the appellant to have been acting as a principal and issued assessments for underdeclared VAT.
The FTT outlined the relevant EU law, Directive 2006/112 (the Principal VAT Directive), art. 306, from which the UK enacted VATA 1994, s. 53 implementing the Value Added Tax (Tour Operators) Order 1987 (SI 1987/1806) plus Notice 709/5, included statutory meaning. The leading Supreme Court (SC) case R & C Commrs v Secret Hotels2 Ltd (formerly Med Hotels Ltd) [2014] BVC 9 was cited. The SC found that Secret Hotels2 was an intermediary and not an agent acting in its own name and therefore fell outside of TOMS. Lord Neuberger in outlining the approach to be taken started with all the relevant contracts, analysing the wording and then considering the economic reality of those agreements, including whether they could be a sham.
The FTT following Lord Neuberger's guidance analysed a sample of agreements reflecting the appellant's business. These were mainly with hoteliers and were referred to as standard provider terms, of which there were three versions in place during the periods in question. The agreements on the website were referred to as website terms. With the exception of a few instances the appellant maintained that it acted as a disclosed agent for all EU supplies either with hotels or travellers and that these contracts, which were binding, confirmed this. The appellant collected gross payment from customers through its website including local VAT as charged by the hotel provider. It then paid the hotel provider a net sum reflecting its commission fee which was not subject to UK VAT.
HMRC challenged this on the basis that on the balance of probabilities the appellant had failed to show it was an agent as a number of agreements were unsigned and others had no terms and conditions attached. Furthermore some of the contracts were unclear as to whether they fell within English or foreign law.
Following Reveille Independent LLC v Anotech International (UK) Ltd [2016] EWCA Civ 443, the FTT found that, on the balance of probabilities, unsigned agreements were contracts, see para. 225 of the decision. The FTT also found that all the relevant parties followed the contract as set out by the appellant, see para. 227 and that on the balance of probabilities the terms referred to in contracts were those set out in the standard provider terms, see para. 228. Finally the FTT concluded that on the balance of probabilities the appellant acted as a disclosed agent under English law, see para. 230.
The FTT accepted that the onus was on HMRC to plead its case that certain contracts should be considered as falling outside English law and it had failed to do so, see para. 266.
The case will now be subject to the result of a later hearing involving hotels at which HMRC will seek to clarify the meaning of the term “act solely as intermediaries” in the context of art. 306 by way of a referral to the European Court of Justice (ECJ).
This case is a continuation of the slow fall out involving the travel industry following the SC decision in Secret Hotels2. The appellant's contractual arrangements reflected the economic circumstances and the understanding of the various parties, despite discrepancies such as unsigned copies of contracts and missing terms and conditions.
[1] The appellant is a travel agent based in the UK specialising in the marketing and supply of holiday accommodation to UK travellers at over 239,000 hotels and apartments in more than 29,000 destinations, including in other member states of the European Union. The vast majority of its business is conducted through its website www.alpharooms.com.
[2] In outline, HMRC has assessed the appellant to under-declared VAT in respect of accounting periods from 01/06 to 12/10 inclusive on the basis that the appellant was acting as a “travel agent” within the meaning of article 306 of Council Directive 2006/112/EC (the “Directive”) so that it should have accounted for VAT under the special scheme for travel agents provided for under articles 306 to 310 of the Directive as implemented by s 53 of the Value Added Taxes Act 1994 (“VATA”) in the Tour Operators Margin Scheme (“TOMS”) (see 3 to 7 below for further details). HMRC's stance was that the appellant fell within these rules as regards supplies made to travellers, who booked hotel accommodation in member states through its website, as it was acting either as a principal or as an agent acting in its own name and not solely as an intermediary. The appellant argued that these special VAT rules did not apply in relation to the relevant period as the appellant was acting as a disclosed agent or intermediary only.
[3] Chapter 3 of Title XII of the Directive establishes a special scheme for travel agents in order that they can account for VAT in the country where they are established. In the absence of such a scheme, a person who provides hotel or holiday accommodation in other member states would have to register for VAT in all of those member states.
[4] The special scheme is contained at articles 306–310 of the Directive. Article 306 provides that:
1. Member States shall apply a special VAT scheme, in accordance with this Chapter, to transactions carried out by travel agents who deal with customers in their own name and use supplies of goods or services provided by other taxable persons, in the provision of travel facilities.
This special scheme shall not apply to travel agents where they act solely as intermediaries and to whom point (c) of the first paragraph of article 79 applies for the purposes of calculating the taxable amount.
2. For the purposes of this Chapter, tour operators shall be regarded as travel agents.
[5] Provisions equivalent to articles 306 to 310 were contained in article 26 of the previous Directive 77/388/EEC (which was slightly different in both wording and layout, but identical in its central provisions and effect). Those provisions were given effect in the UK in TOMS which was established pursuant to s 53 VATA which provides as follows:
(1) The Treasury may by order modify the application of this Act in relation to supplies of goods or services by tour operators or in relation to such of those supplies as may be determined by or under the order.
…
(3) In this section “tour operator” includes a travel agent acting as principal and any other person providing for the benefit of travellers services of any kind commonly provided by tour operators or travel agents.
[6] Details of TOMS can be found in the Value Added Tax (Tour Operators) Order 1987 (SI 1987/1806) and in VAT Notice 709/5. Both s 53 VATA and the 1987 Order were intended to implement the relevant provisions in the Directive set out above. As there was no dispute between the parties as to the VAT position under TOMS if those provisions were held to apply, we have not set out further details of those rules.
[7] We note that article 306(1) of the Directive does not contain a sub-paragraph [a] and [b]. However the Supreme Court used this numbering in R & C Commrs v Secret Hotels2 Ltd (formerly Med Hotels Ltd) [2014] BVC 9 and we have used it also for ease of reference. The decision in that case is relevant here and we have, therefore, set out a summary of that decision below. In summary the Supreme Court held that an online travel agent, who operated a website through which hotel accommodation was reserved, was not an agent acting in its own name under article 306(1)[a] but rather acted only as an intermediary under article 306(1)[b] so that it was not within the special rules for travel agents.
[8] Lord Neuberger, who set out the judgment of the Supreme Court in Secret Hotels2, described the facts as follows (at [2] to [4]). Secret Hotels2 Ltd ((formerly called Med Hotels Ltd, and known as “Med”), marketed holiday accommodation, including hotels in the Mediterranean and the Caribbean, through a website. The vast majority of the sales of hotel rooms from the website were made to travel agents; the remainder were made direct to holiday-makers. An hotelier who wished his hotel to be marketed by Med had to enter into a written accommodation agreement with Med in which case his hotel would normally be included among those shown on the website. When a potential customer logged onto the website, the customer would see some “Terms of Use”. If, after considering what was available, the customer wished to book a...
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