Secret Hotels2 Ltd (Formerly Med Hotels Ltd) v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Sir John Chadwick,Lord Justice Mcfarlane,Lord Justice Ward |
| Judgment Date | 03 December 2012 |
| Neutral Citation | [2012] EWCA Civ 1571 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2011/2750 |
| Date | 03 December 2012 |
[2012] EWCA Civ 1571
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
MR JUSTICE MORGAN
Case No UT/FTC/56/2010
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Ward
Lord Justice Mcfarlane
and
Sir John Chadwick
Case No: A3/2011/2750
Mr Sam Grodzinski QC and Ms Eleni Mitrophanous, instructed by the Solicitor's Office, HMRC, for the Appellant
Mr David Milne QC and Miss Nicola Shaw QC, instructed by McGrigors LLP, for the Respondent
Hearing dates: 3 and 4 July 2012
At all material times the respondent, formerly known as Med Hotels Ltd and to which, for convenience, I will refer in this judgment as "Medhotels", operated a website ( www.medhotels.com) through which it marketed hotel, villa and apartment accommodation in resorts throughout the Mediterranean and the Caribbean. In December 2007, following discussions as to the correct analysis of the nature of that business for the purposes of value added tax, the appellant, the Commissioners for Her Majesty's Revenue and Customs, issued a Notice of Assessment to Value Added Tax in respect of the accounting period 12/04. A further Notice of Assessment was issued in respect of the periods 12/05, 3/07 and 6/07. The total amount of VAT assessed under those Notices (after an adjustment) was in excess of £7 million. The assessments were made in respect of output tax for which, as the Commissioners contended, Medhotels was liable to account under the Tour Operators Margin Scheme.
The Tour Operators Margin Scheme was introduced, pursuant to Article 26 of the Sixth Council Directive on the harmonisation of the laws of Member States relating to turnover taxes (77/388/EEC) by section 37A(1)-(2) of the Value Added Tax Act 1983, and the Value Added Tax (Tour Operators) Order 1987. It will be necessary to refer to the legislation, and to the terms of the Scheme, in some detail later in this judgment. It is sufficient, at this stage, to note that it has been common ground that the effect of the Scheme, read with the legislation, is that where a travel agent or tour operator is supplying accommodation services as agent for a principal (the hotel operator) value added tax is payable in the Member State where the accommodation is situated; but where the travel agent is supplying accommodation services as principal (or in his own name) and not as intermediary the tax is payable on his margin in the Member State in which he is established. The issue which has given rise to this appeal is whether, as the Commissioners contend, Medhotels was (during the periods to which the assessments relate) supplying accommodation services as principal (or in its own name) — in which case it was required to account for VAT in the United Kingdom under the Scheme — or, as Medhotels contends, was acting as agent for a disclosed principal (the hotel operator) — in which case the supplies of accommodation services fell to be treated as made in the jurisdiction in which the hotel was situated and so do not give rise to any liability to VAT in the United Kingdom.
Medhotels appealed to the First-Tier Tribunal (Tax Chamber) against the assessments to output tax which had been made by the Commissioners. That appeal came before the Tribunal (Miss J C Gort and Mr A McLoughlin) in November 2009. The decision of the First-Tier Tribunal, [2010] UKFTT 120 (TC), dismissing the appeal, was released on 15 March 2010. Medhotels appealed to the Upper Tribunal. That appeal came before Mr Justice Morgan in June 2011. For the reasons set out in his decision [2011] UKUT 308 (TCC), released on 29 July 2011, he allowed the appeal. It is from that decision that the Commissioners appeal to this Court.
The legislative framework
In respect of the earlier accounting periods the relevant Community legislation was set out in the Sixth Directive. From 1 January 2007 the Sixth Directive was replaced by Council Directive 2006/112/EC on the common system of value added tax ("the VAT Directive"). In relation to the issues raised in this appeal, the terms of the relevant Community, or European Union, legislation did not alter in any substantial respect.
Article 9(1) of the Sixth Directive ("Supply of Services") set out the general rule:
"The place where a service is supplied shall be deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied or, in the absence of such a place of business or fixed establishment, the place where he has his permanent address or usually resides."
Article 9(2) of the Sixth Directive (Article 45 of the VAT Directive) qualifies that general rule in relation to the supply of services connected with immovable property:
"… the place of the supply of services connected with immovable property, …, shall be the place where the property is situated."
In that context, it is necessary to have in mind that, although (generally) Article 13B(b) of the Sixth Directive requires that Member States shall exempt the leasing or letting of immovable property from value added tax, excluded from that requirement (and from exemption) is "the provision of hotel accommodation … in the hotel sector or in sectors with a similar function …": Article 13B(b)(1).
As the First-Tier Tribunal pointed out, at paragraphs 15 and 16 of its decision, application of Article 9(2) of the Sixth Directive would require the supply of hotel accommodation to be treated as made in the place where the hotel was situated; so that a United Kingdom travel agent or tour operator providing hotel accommodation in another Member State would be liable for value added tax in that other Member State and might, under the domestic provisions in that State, need to be registered with the tax authorities there. This would give rise to obvious practical difficulties for travel agents and tour operators selling accommodation in a number of Member States: in that they might have to account for value added tax to the tax authorities in each of those Member States. It was to alleviate those difficulties, and the burden to which they gave rise, that Article 26 of the Sixth Directive (Articles 306 to 310 of the VAT Directive) provided a special scheme for travel agents. The Article is in these terms (so far as material):
"1. Member States shall apply value added tax on to the operation of travel agents in accordance with the provisions of this Article, where the travel agents deal with customers in their own name and use the supplies and services of other taxable persons in the provision of travel facilities. This Article shall not apply to travel agents who are acting only as intermediaries and accounting for tax in accordance with Article 11A(3)(c). In this Article travel agents include tour operators.
2. All transactions performed by the travel agent in respect of a journey shall be treated as a single service supplied by the travel agent to the traveller. It shall be taxable in the Member State in which the travel agent has established his business or has a fixed establishment from which the travel agent has provided the services. The taxable amount and the price exclusive of tax, within the meaning of Article 22(3)(b), in respect of this service shall be the travel agent's margin, that is to say the difference between the total amount to be paid by the traveller, exclusive of value added tax, and the actual cost to the travel agent of supplies and services provided by other taxable persons where those transactions are for the direct benefit of the traveller.
…
4 Tax charged to the travel agent by the other taxable persons on the transactions described in paragraph 2 which are for the direct benefit of the traveller, shall not be eligible for deduction or refund in any Member State."
Article 11A(3)(c) of the Sixth Directive, to which reference is made in paragraph 1 of Article 26, provides that:
"The taxable amount shall not include:
…
(c) the amounts received by a taxable person from his purchaser or customer as repayment for expenses paid out in the name and for the account of the latter and which are entered in his books in a suspense account. The taxable person must furnish proof of the actual amount of this expenditure and may not deduct any tax which may have been charged on these transactions."
Those provisions were given effect under United Kingdom domestic law by section 37A(1)-(2) of the Value Added Tax Act 1983 (subsequently re-enacted as section 53 of the Value Added Tax Act 1994) and the Value Added Tax (Tour Operators) Order 1987 (SI 1987/1806). Section 53 of the 1994 Act is in these terms (so far as material):
"Tour Operators
(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.
(2) Without prejudice to the generality of subsection (1) above, an order under this section may make provision –
(a) for two or more supplies of goods or services by a tour operator to be treated as a single supply of services;
(b) for the value of that supply to be ascertained, in such manner as may be determined by or under the order, by reference to the difference between sums paid or payable to and sums paid or payable by the tour operator;
…
(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...
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