Commenting on Med Hotels’ successful appeal at the Upper Tax Tribunal, announced on Friday 29 July, Alan McLintock, indirect tax director at KPMG in the UK, said:
“The decision is a strong win for the travel sector and absent a successful appeal, it is difficult to see what HMRC’s future strategy will be for the travel sector going forwards.”
“This is a key decision for the travel industry as a whole and provides some degree of certainty for travel businesses operating similar business models. However an appeal by HMRC cannot be ruled out which would in turn create further delay before the issue is finally resolved.”
“Not every travel company will greet the news with pleasure. Many UK based tour operators that incur a TOMS cost have viewed agency structures as giving their competitors an unfair VAT advantage. These tour operators may now start to consider how they can become more VAT efficient.”
“Travel companies need to remain vigilant in ensuring VAT is being actively managed with VAT effective contract wording”.
Details of the case
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Med Hotels has won its appeal to the Upper Tribunal that it acted as a disclosed agent in the supply of accommodation booked through its website. Therefore, it was not in the Tour Operators Margin Scheme (“TOMS”). HMRC had previously successfully argued at the First Tier Tribunal (“FTT”) that Med Hotels was an undisclosed agent buying in and selling on the hotel room and accordingly should account for TOMS VAT out of its margin.
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The decision by Mr Justice Morgan is a strong win for Med Hotels. Almost every point considered by the earlier First Tier Tribunal in finding for HMRC has been overturned or discarded as not being relevant.
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Med Hotel’s win poses a significant challenge to HMRC’s whole approach to the travel sector which has largely focused on attacking what it has perceived as being abusive agency structures. Absent a successful appeal, it is not entirely clear what direction HMRC’s future strategy will take.
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HMRC has been challenging a number of similar operators following their initial win at the FTT. While this recent decision is excellent news for these travel businesses, it does not necessarily mean that HMRC will automatically drop their cases, particularly if they decide to appeal Med Hotels further.
Lord Justice Morgan noted in his decision that:
“It seems to me that the FTT [First Tier Tribunal] was persuaded by the Commissioners to approach the question in an impermissible way. “
“The FTT appears to have lost sight of the point that it was common ground that the written agreements were not shams and their legal effect was to be arrived at by a process of construction of their express terms. “
“The FTT does not seem to have applied conventional principles as to the construction of written agreements.”
“Finally, it seems to have regarded anything which could be argued to be inconsistent with an agency relationship as far more weighty than the many matters which pointed unambiguously towards an agency relationship.”
In arriving at his decision the Lord Justice focused initially on the information and booking conditions seen by and entered into by the customer through the Med Hotels web site as this would indicate who the customer was entering into contract with. He then considered the legal agreement entered into between the Hotels and Med Hotels and in both sets of contracts found them to be one of agency where the customer was entering into a contract for the supply of rooms with the accommodation provider and not Med Hotels. In KPMG’s view it is critical that companies have effective VAT sensitised contracts and a common issue on KPMG VAT reviews for travel clients remains the use of imprecise or unhelpful contract language especially on older agreements.
What does the loss mean for HMRC?
According to KPMG in the UK, one outcome could be HMRC deciding to push much more aggressively for a review of the TOMS regime at EU level; an initiative that has been stalled for a number of years. Another might be to pursue agency cases on wider anti avoidance grounds that the agency structures only purpose or one of its main purposes was to avoid VAT, as this was not argued by HMRC in Med Hotels. This approach however may or may not be any more successful in the Courts than the agency challenge.
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For further information please contact:
Margot Cowhig, KPMG Corporate Communications
Tel: 0207 694 4246 Mobile: 07920 274856: margot.cowhig@kpmg.co.uk
KPMG Press Office: 0207 694 8773
Notes to editors.
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with nearly 11,000 partners and staff. The UK firm recorded a turnover of £1.6 billion in the year ended September 2010. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 150 countries and have more than 138,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG International provides no client services.
