Lowcost Holidays Ltd (t/a Lowcost Beds) and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 05 June 2017 |
| Neutral Citation | [2017] UKFTT 463 (TC) |
| Date | 05 June 2017 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge Philip Gillett, Sonia Gable
Nicola Shaw QC, instructed by Pinsent Masons, appeared for the appellant
Eleni Mitrophanous, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Application of Directive 2006/112, art. 306(1) and the Tour Operators' Margin Scheme – Whether holiday accommodation provided as principal or agent – Appeal allowed appellant operated as disclosed agent under English law – Decision subject to a later hearing as to meaning of term “act solely as an intermediary” and whether there will be a referral to the European Court of Justice (ECJ).
The First-tier Tribunal (FTT) allowed an appeal against an assessment by HMRC that supplies of holiday accommodation fell within the Tour Operators Margin Scheme (TOMS). The appellant acted as an agent and not principal and therefore was not subject to TOMS.
Under art. 45, the Principal VAT Directive (PVD) the place of supply of services connected with immovable property is where the property is situated. Articles 306–310 of the PVD allow member states to operate a special scheme for travel agents so that their supplies fall in their own tax jurisdiction, avoiding VAT registration in every member state where they provide holiday accommodation. Article 306(1) also excludes “travel agents where they act solely as intermediaries”. The UK enacted EU law through VATA 1994, s. 53 which introduced TOMS as in Value Added Tax (Tour Operators) Order 1987 (SI 1987/1806) (the “Tour Operators Order”) and Notice 709/5 much of which has force of law. TOMS allows for VAT to be accounted for on the margin between what the customer pays and the cost to the provider.
The FTT considered the leading Supreme Court (SC) case R & C Commrs v Secret Hotels2 Ltd (formerly Med Hotels Ltd) VAT[2014] BVC 9. Med Hotels had been assessed for VAT as falling under TOMS and had similar trading arrangements to Lowcost. In his judgement, Lord Neuberger laid down the guidance in considering whether in the circumstances Med Hotels was a principal or an agent or intermediary.
In Med Hotels, Lord Neuberger confirmed that the written agreements should be the starting point for analysing agency/principal arrangements and then the economic reality of the business. In overturning the FTT and Court of Appeal decisions, the SC concluded that Med Hotels was an intermediary and that the economic realty was that hoteliers owned accommodation that was supplied to holidaymakers.
Lowcost traded in various guises directly with holidaymakers through its website or via third-party travel agents or with hotel and accommodation owners direct. The FTT confirmed that the contract with holidaymakers through the Lowcost website was an agency arrangement, see para. 45 of the decision. Contracts with accommodation providers were less clear and some were unsigned. However, the FTT found that there was no requirement for them to be signed and as such in law they were valid and reflective of the contractual position, see para. 49. HMRC set out 17 points that it indicated showed a principal to principal relationship but the FTT decided that all of these with one exception had been dealt with by the SC in Med Hotels and none had affected the agency relationship, see para. 57. The one exception involved claims for refunds of VAT in other member states under the EU Eighth Directive which HMRC argued showed that Lowcost was acting as a principal. However, the FTT pointed out that this claim was mistakenly made following professional advice and had no bearing on the issue.
In finding for Lowcost, the FTT confirmed that under English law it was acting as an agent. However, HMRC intends to seek a referral to the ECJ on the subject of interpreting the term “act solely as an intermediary” and this will be subject to a later hearing involving a number of other travel businesses.
Following Secret Hotels 2, the FTT considered that both written contracts with trade organisations and website contracts with holidaymakers reflected the economic reality and were not merely shams. A growth of “bed-bank” provision in the travel industry allows for businesses to mitigate risk by acting as agent rather than principal and avoiding TOMS. HMRC are now looking towards the ECJ for further clarification.
[1] This is an appeal by Lowcostholidays Ltd (“LCH”) t/a Lowcostbeds.com and Lowcostbeds.com Ltd (“LCB”), collectively referred to below as Lowcost, against a decision by HMRC of 6 August 2010, upheld on review on 6 September 2010, and assessments of 27 October 2010, upheld on review on 4 January 2011. The assessments in question cover the period from 1 November 2005 to 31 January 2011.
[2] Lowcost was a travel agent offering holiday accommodation in other EU member states, and other countries, for the most part to customers based in the UK. The issue between the parties is whether Lowcost provided holiday accommodation to customers as a principal, dealing in its own name, under article 306 of Directive 2006/112, the Principal VAT Directive (“PVD”), and therefore came within the Tour Operators Margin Scheme, or whether it acted solely as an intermediary or agent.
[3] There are currently before the tribunal several other appeals of a very similar nature to this one (together with this appeal the “hotel appeals”). Shortly before the hearing of the hotel appeal made by Opodo Limited, which took place on 29 March 2016, the other appellants in the hotel appeals became aware that HMRC proposed to make an application at that hearing for the tribunal to make a referral to the Court of Justice of the European Union (“CJEU”) “regarding the proper interpretation of article 306 and in particular the term “act solely as intermediaries”” (the “CJEU referral”). As HMRC proposed to make the same application in all of the hotel appeals, the appellants made an application to the tribunal requesting, in outline, for the CJEU referrals to be dealt with all together separately at a later hearing, in which all the appellants would participate, or, for the other appellants to be permitted to make representations on that issue. This application was dealt with by Judge Morgan at a hearing on 29 March 2016.
[4] At that hearing Judge Morgan decided that, under rule 5(3)(b) of the Tribunal Procedure (First-Tier Tribunal (Tax Chamber) Rules 2009, the CJEU referral in relation to each of the relevant appeals, including this appeal, is to be treated as a separate issue to be dealt with in a separate hearing at which all of the CJEU referrals will be considered together.
[5] Accordingly the initial hearing before the tribunal in this appeal and each of the related appeals is confined to consideration of whether, under the principles set out in R & C Commrs v Secret Hotels2 Ltd (formerly Med Hotels Ltd) VAT[2014] BVC 9, the appellant was acting as a principal or as a disclosed or undisclosed agent under English law principles.
[6] LCH was previously known as Lowcosttravelgroup Ltd and changed its name to Lowcostholidays on 19 January 2009. It traded until 28 February 2009 when its business was transferred to LCB. Until 28 February 2009 LCH had a direct relationship with the accommodation providers and had a relationship with customers either directly, through its own website, or indirectly, via third party travel agents. After 1 March 2009 LCB maintained the direct relationship with the accommodation providers and dealt with customers either via third party travel agents or via LCH, which continued to hold the direct relationship with customers. LCB did not have a direct relationship with customers at any time.
[7] It is common ground that after 1 March 2009 LCH only acted as an agent.
[8] Article 45 of the PVD provides that “the place of supply of services connected with immoveable property … shall be the place where the property is located”. If therefore Lowcost was only providing services in this connection then, since the immoveable property in question was located in EU member states outside the UK, those services would fall outside the scope of UK VAT.
[9] 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.
[10] The special scheme is contained at articles 306–310 of the Directive. Article 306 provides that:
1[a] 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.
1[b] 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.
[11] 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 the TOMS provisions which were 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...
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