Secret Hotels2 Ltd(formerly Med Hotels Ltd)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 March 2010 |
| Date | 15 March 2010 |
| Court | First-tier Tribunal (Tax Chamber) |
[2010] TC 00431.
[2010] UKFTT 120 (TC).
Miss J C Gort (chairman); Mr A McLoughlin (Member).
Mr David Milne QC and Miss Nicola Shaw of counsel, instructed by McGrigors LLP, for the Appellant
Mr. S. Grodzinski and Miss Eleni Mitrophanous of Counsel. instructed by the Solicitors Office, for the Respondents
The following cases were referred to in the decision:
A1 Lofts Ltd v R & C Commrs VAT [2009] BVC 924
C & E Commrs v Music and Video Exchange LtdVAT [1992] BVC 30
C & E Commrs v Reed Personnel Services Ltd VAT [1995] BVC 222
Hill (t/a JK Hill & Co) v C & E Commrs VAT (1988) 3 BVC 297
International Life Leisure LtdVAT No. 19,649; [2006] BVC 2,803
Mercantile International Group v Chuan Soon Huat Industrial Group Ltd UNK [2002] All ER (Comm) 786
Potter (No. 2)VAT (1985) 2 BVC 205,376
Spearmint Rhino Ventures (UK) Ltd v R & C CommrsVAT [2007] BVC 437
Tour operators' margin scheme - Whether supplies of hotel and other holiday accommodation made by appellant as agent for accommodation suppliers or as principal - If as principal, whether supplies made to travel agents were wholesale supplies on "business-to-business" basis - eu-directive 77/388 subsec-or-para 4 article 6 subsec-or-para A article 11 article 13Bthe sixth VAT directive (Directive 77/388), art. 6(4), 11(A), 13(B) and eu-directive 77/388 article 2626; Value Added Tax Act 1994 section 53Value Added Tax Act 1994, s. 53; Value Added Tax (Tour Operators) Order 1987 (SI 1987/1806).
The primary issue was whether the appellant acted as principal or agent in making supplies of hotel accommodation. In the former case, the appellant would be liable to account for VAT in the UK under the tour operators' margin scheme (TOMS). In the latter case, the supplies would be treated as made where the hotel was situated. Should the appellant be acting as principal, the tribunal would be required to decide if its supplies were wholesale supplies, which would fall outside the scope of the TOMS.
The appellant was part of a group of travel-related businesses. At all material times it operated a website through which it marketed hotel accommodation. The website featured approximately 2,500 resort hotels, villas and apartments in a variety of destinations throughout the Mediterranean and the Caribbean. Approximately 94 per cent of all hotel sales were made to travel agents for onward supply to holidaymakers and the remainder were supplied direct to the public. The appellant contended that for the majority of the period in question, its contractual arrangements established an agency business model for which it relied on the accommodation agreements, terms and conditions, agreements with travel agents and booking conditions. For a period of more than a year to July 2008, the appellant conceded that it operated as a principal, but from that date it claimed to have reverted to an agency role.
The commissioners pointed to eight indicia that the appellant was not acting as an agent. These were that: the hotels looked to it rather than to the customer for payment; it had the ability to determine its own undisclosed level of profit; there was no requirement on it to account for its profit or commission to the hotels; it retained any under-invoicing; its payment of foreign hotels in advance of a booking laid it open to significant currency exchange risks; it had no requirement for a separate account as maintained by travel agents; it was owed money by hotels; and it set the terms and conditions with the customer.
The commissioners contended that there was no material difference between the period when the appellant claimed to be acting as an agent and when it accepted that it was acting as principal. Furthermore, the appellant set the selling price to the holidaymaker, which was inconsistent with an agency arrangement. The commissioners submitted that if the appellant were truly an agent, it would be important for the hotel to know the amount of commission it was receiving in order for it to correctly account for VAT. The commissioners made further submissions in support of their contention that there was no agency, including: that the appellant was contractually entitled make cancellation charges to the holidaymaker and was under no obligation to pass those charges on to the hotels; that the appellant retained the interest from deposits received from holidaymakers and administration fees for changes to bookings; that the appellant made compensation payment to holidaymakers; and that there was no evidence of the appellant maintaining a suspense account of the expenditure it incurred in making compensation payments, allegedly on behalf of the hotels, as it would have been required to do under the sixth VAT directive (Directive77/388), eu-directive 77/388 subsec-or-para A article 11art. 11(A)(3)(c).
The commissioners submitted that there was a number of key issues for the tribunal in deciding this appeal: it should look at the entirety of the commercial arrangements, generally to be found in the contractual documents, in order to ascertain the nature of the relationship between the parties; it should look at the substance of what was agreed and the substantive rights and obligations in order to decide whether the correct classification of the relationship was agency; it should ensure that the appellant acted to bring into effect a direct contract for the supply of goods and services and did not undertake direct contractual obligations for that supply itself; and it should consider whether the ability of one party to decide the its profit without having an obligation to disclose it to the other party was indicative of that party's status.
With regard to the appellant's alternative case, namely in the event that it was found to have been acting as a principal, then the third party travel agents were dealing with it as principal and it was making wholesale supplies which fell outside the TOMS, the commissioners made a number of submissions. These included: that this argument could not apply to sales made direct to holidaymakers; that the arrangements between the appellant and the hotels did not mirror those of travel agents; that travel agents did not take commercial risks, make advance bookings, or retain cancellation charges; and that if the appellant were making wholesale supplies to other principals, it was at the very least odd that it was providing holiday representatives in the relevant resorts. It was also submitted that if the appellant had been wholesaling, it would be liable to register for VAT in the member state where the accommodation was situated, which it had failed to do. In the view of the commissioners, if the tribunal were to accept either the appellant's main or alternative case, the result would be that VAT on its margin would be wholly unaccounted for anywhere in the EU, contrary to the sixth directive.
The appellant's principal submission was that it was acting as disclosed agent on behalf of the hotel which was the plain effect of the contractual arrangements entered into with the hotels, the travel agents and the holidaymakers. None of the terms of those contractual arrangements or the way in which the parties acted was inconsistent with that position. The relevant question for the tribunal was whether the hotel supplied accommodation to the holidaymaker or whether the hotel supplied accommodation to the appellant as a principal and the appellant then supplied the accommodation on to the holidaymaker. The appellant relied on the terms and conditions agreed between it and the hotel which, it argued, appointed it as agent and by which it was authorised to effect legal relations on behalf of the hotel. The first two paragraphs of the booking conditions on its website were, the appellant submitted, conclusive of an agency relationship. The appellant put forward a number of arguments in an attempt to counter the commissioners' submissions that its terms and conditions pointed away from agency status. With regard to the retention of any interest on deposits from customers, the appellant submitted that the reward of interest was counterbalanced with the risk of bank charges and it was not necessary for an agent to keep a trust account or to separate out the principal's money. In respect of the advances made to the hotels, the appellant never took an inventory risk; it was never at risk that a room would not be let. The commissioners' assertion that the customer did not undertake any obligation to the hotel was not accepted. The booking conditions made it clear that the holidaymaker's contract was with the hotel and one of the consequences was that the holidaymaker was liable to the hotel for the price. The fact that the appellant had handling agents in the resorts was irrelevant.
Should the tribunal find that appellant had acted as principal, then, the appellant submitted, it made its supplies to travel agents wholesale. It was suggested that the contractual arrangements between the appellant and the travel agent mirrored those between the appellant and the hotels and, accordingly, if the appellant were to be regarded as a principal, then so too must travel agents. The appellant maintained there was no evidential basis for the commissioners to assert that in any onward supply of hotel accommodation the travel agent acted as agent for the appellant. According to the appellant, the arrangement was outside the TOMS because the supply was business to business.
The tribunal considered the evidence, looking not only at the contractual documents but also at the manner in which the appellant carried on its business. The appellant provided accommodation direct to holidaymakers booking through its website and subject to its own booking conditions, and to other travel agents on the basis of the agreement with those travel agents. Holidaymakers who booked accommodation through other...
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Secret Hotels2 Ltd (Formerly Med Hotels Ltd) v The Commissioners for HM Revenue and Customs
...1987 (SI 1987/1806). This was an appeal by the taxpayer against a decision of the First-tier Tribunal (FTT) ([2010] UKFTT 120 (TC); [2010] TC 00431) dismissing its appeal against assessments to VAT under the Tour Operators' Margin Scheme. The taxpayer was part of a group of travel-related b......
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Secret Hotels2 Ltd (Formerly Med Hotels Ltd) v The Commissioners for HM Revenue and Customs
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