Select Hotels 2 Limited: It’s not just the contractual terms that should be considered when determining the nature of a supply

Wednesday, February 6, 2013

by Nick Ryan

This may not be the final decision in this matter but, in this instance, the Court of Appeal made an unanimous judgement in HMRC’s favour that Select Hotels acted as principal in the making of the travel arrangements and therefore were required to account for VAT under the Tour Operator’s Margin scheme (TOMS). This decision confirms the decision reached by the First Tier Tribunal that, based on the entirety of the arrangements and practices in place, Select Hotels was clearly the principal in the arrangements made, a position aggressively contested by the company. Their argument, which was upheld at the Upper Tribunal which confirmed that the correct legal approach was to consider only the various legal contractual documents in order to determine the nature of the supply.

Some would be surprised to see two so opposite views by similar bodies yet it is not uncommon and shows how much of a grey area the interpretation of the law can be.

Although the Court of Appeal confirmed that the Upper Tribunal acted within the law in reaching its decision it also agreed with the First Tier Tribunal was correct to look at the “whole package” including the contractual obligations in order to determine the nature of a supply for VAT purposes; this follows the approach and reasoning in the Reed Personal Services decision.

This decision highlights the key criteria to be used in determining the basis of the supply for VAT purposes. It is essential to not only look at what a contract states the various parties will undertake but also consider what actually happens. In many instances there have been clear discrepancies identified in a business between the working practices it completes to fulfill supplies to its customers and the contractual agreements in place that govern these from a legal perspective. This may have no impact where if you relied on either the contract or the working practices the same VAT treatment applies but where the difference can result in a different VAT treatment then this opens the door for a challenge by the tax authority and possibly, if that challenge is successful, a costly VAT bill and/or associated legal costs if the challenge is contested.

Therefore the lesson to be learnt from costly cases such as this is that businesses should always consider whether the contract matches the working practices and vice versa. Where differences arise then consideration as to what element is right and what needs to be changed has to be acted on.

If your business has concerns over their basis for arrangements or whether the correct treatment for VAT purposes is being applied then please contact Nick Ryan of the VAT Practice on 0238838181 or

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