Secret Hotels2 Ltd (Formerly Med Hotels Ltd) v The Commissioners for HM Revenue and Customs

JurisdictionEngland & Wales
CourtSupreme Court
JudgeLord Neuberger,Lord Sumption,Lord Reed,Lord Hughes,Lord Hodge
Judgment Date05 March 2014
Neutral Citation[2014] UKSC 16
Date05 March 2014

[2014] UKSC 16


Hilary Term

On appeal from: [2012] EWCA Civ 1571


Lord Neuberger, President

Lord Sumption

Lord Reed

Lord Hughes

Lord Hodge

The Commissioners for Her Majesty's Revenue and Customs
Secret Hotels2 Limited (formerly Med Hotels Limited)


David Milne QC

Nicola Shaw QC

(Instructed by Pinsent Masons LLP)


Sam Grodzinski QC

Eleni Mitrophanous Hanif Mussa

(Instructed by General Counsel for HM Revenue & Customs)

Heard on 29 and 30 January 2014

Lord Neuberger (with whom Lord Sumption, Lord Reed, Lord Hughes and Lord Hodge agree)


This appeal concerns the liability for Value Added Tax ("VAT") of a company which markets and arranges holiday accommodation through an on-line website. The outcome turns on the appropriate characterisation of the relationship between the company, the operators of the hotels, and the holiday-makers or their travel agents (which is an English law issue), and the impact of certain provisions of the relevant EU Directive on that relationship once it has been characterised (which is an EU law issue).

The basic facts

The appellant, Secret Hotels2 Ltd (formerly called Med Hotels Ltd, and known as "Med"), marketed holiday accommodation, consisting of around 2,500 resort hotels, villas, and apartments in the Mediterranean and the Caribbean, through a website, ("the website"). In these proceedings, everyone has focussed on hotel rooms, and has ignored villas and apartments, and I shall do the same. Around 94% of the sales of hotel rooms from the website were made to travel agents who no doubt sold them on to holiday-makers; the remainder of the sales were directly to holiday-makers.


An hotelier who wished his hotel to be marketed by Med had to enter into a written agreement with Med headed "global hotels — Terms and Conditions for allotment contracts", which I will call "the Accommodation Agreement". Once an hotelier had signed up to the Accommodation Agreement, his hotel would normally be included among those shown on the website.


When a potential customer (be it travel agent or holiday-maker) logged onto the website, she would see some "Terms of Use". If, after considering what was available, she identified a hotel at which she (or a client) wished to stay, she would book a holiday through a form on the website, which set out standard "Booking Conditions", which included, of course, terms as to payment. The customer had to pay the whole of the sum which she had agreed with Med to pay for the holiday (which I will call "the gross sum") before the holiday-maker arrived at the hotel. However, Med only paid the hotel a lower sum (which I will call "the net sum") in respect of the holiday concerned, pursuant to an invoice which was rendered by the hotelier when the holiday had ended.

The relevant VAT law

These proceedings concern Med's liability to VAT in respect of the supply of hotel accommodation through the medium of the website between the period between December 2004 and May 2007 ("the relevant period"). VAT is, of course, an EU tax, which is levied on the supply of goods or services. For the majority of the relevant period, the primary source of law on VAT was contained in Directive 77/388/EEC ("the Sixth Directive"), but on 1 January 2007 it was replaced by Directive 2006/112/EC ("the Principal VAT Directive"). As the two Directives contain effectively identical, although somewhat differently worded, provisions for present purposes, I will limit my references to the current one, and all references to articles are to articles of that Directive, unless stated otherwise.


By article 2.1(c), VAT is liable to be levied on "the supply of goods for consideration within the territory of a Member State by a taxable person acting as such". By virtue of article 135(2)(a), while leasing of property is exempt from VAT, "the provision of accommodation … in the hotel sector or in sectors with a similar function" is not. Article 45 states that "The place of the supply of services connected with immovable property … shall be the place where the property is located …".


The application of article 45 to travel agents could often result in their having to be registered in many member states, which could be inconvenient both for travel agents and for member states' taxing authorities. Accordingly, articles 306–310 contain a special scheme relating to travel agents. Article 306, which is the crucial provision for present purposes, is in these terms (albeit adding sub-paragraphs to para 1):

"Article 306

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.

[(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."

Article 79(c) excludes from liability to VAT the "amounts received by a taxable person from the customer, as repayment of expenditure … entered in his books in a suspense account."


Articles 307 and 308 are also of some relevance, and (with the paragraph numbering added to article 307) they provide as follows:

"Article 307

1. Transactions made, in accordance with the conditions laid down in Article 306, by the travel agent in respect of a journey shall be regarded as a single service supplied by the travel agent to the traveller.

2. The single service 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 carried out the supply of services.

Article 308

The taxable amount and the price exclusive of VAT, within the meaning of point (8) of Article 226, in respect of the single service provided by the travel agent shall be the travel agent's margin, that is to say, the difference between the total amount, exclusive of VAT, to be paid by the traveller and the actual cost to the travel agent of supplies of goods or services provided by other taxable persons, where those transactions are for the direct benefit of the traveller."


Provisions equivalent to articles 306–310 were contained in article 26 of the Sixth Directive (which was slightly different in both wording and layout, but identical in its central provisions and effect). They were given effect in the United Kingdom through the Tour Operators Margin Scheme (known as "TOMS"), which was promulgated in the Value Added Tax (Tour Operators) Order 1987 (SI 1987/1806). It is unnecessary to set out the provisions of TOMS as it has never been suggested that they have any different effect from articles 306–310.

The contentions of the parties in summary

HM Commissioners for Revenue and Customs ("the Commissioners") assessed Med for VAT in respect of the relevant period on the basis that TOMS applied. The Commissioners justified this on the ground that Med was a "travel agent" within the meaning of article 306, which "deal[t] with customers [namely travel agents and, less frequently, holiday-makers directly] in [its] own name and use[d] the services of other taxable persons [namely the hoteliers] in the provision of travel facilities". In effect, the Commissioners' analysis was that Med booked a room in a hotel for the net sum, which it paid to the hotelier when the holiday had ended, and Med supplied the room to its customer in return for the gross sum, which it received in advance of the holiday.


On that basis, it is agreed that Med would be a "travel agent" whose "operations" fell within article 306.1(a), and it would therefore be liable for VAT in accordance with article 307.1, namely on the gross sum paid by the customer to Med. Further, by virtue of article 307.2, the VAT would be levied in the UK, as that was Med's place of business. On the Commissioners' approach, therefore, where a customer had booked and paid for a holiday in Greece, by virtue of articles 306 and 307, as enacted through TOMS, Med would be liable to the Commissioners for VAT on the margin.


Med challenged this assessment on the ground that the nature of its business was such that it did not fall within article 306.1(a), but within article 306.1(b). This was on the basis that it was, during the relevant period, a "travel agent" which was "act[ing] solely as [an] intermediar[y]". (Although article 306.1(b) also contains a requirement that "point (c) of the first paragraph of article 79" must "appl[y] for the purposes of calculating the taxable amount", it is common ground that it would so apply if Med was "act[ing] solely as [an] intermediar[y]".) Med's analysis of the position was that, through Med's agency, the hotelier supplied a hotel room to a customer for the gross sum, and that Med was entitled to the difference between the gross sum and the net sum as a commission from the hotelier for acting as his agent.


On Med's approach, TOMS would not apply, and it is agreed that the difference between the gross sum and the net sum would be Med's commission for providing services to the hotelier, who was entitled to the gross sum from the customer. On that basis, the prima facie position would be as follows: (i) Med would have to register for VAT in Greece, (ii) it would have to pay VAT to the Greek taxation authorities on its commission, (iii) the hotelier would have to account for VAT on the gross sum, but (iv) the hotelier would be able to set off against its liability for that VAT, the input tax on the commission. However, by virtue of regulation 14(2) of the Value Added Tax...

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