Case Alert; Secret Hotels 2 Limited (2014) UKSC 16 “Med Hotel”: Taxpayers 1 – HMRC 0

Friday, March 7, 2014

by Nick Ryan

This case is reminiscent of those great rugby matches which ebbed and flowed, teetered and rumbled until, at the death, reason prevailed and the form side came through.

The travel industry, and other industries where intermediaries play such a high profile role, have been waiting for this decision for five years as this case has shifted between the tax payer and the tax collector. Finally the Supreme Court has decided in favour of the tax payer and logic has prevailed. Unlike a number of cases, this was not riddled with complexities, but rather simple in its debate, agent or principal?

In VAT, there are a number of criteria you consider in order to determine what is being supplied and by whom and, from this, who is accountable for VAT. Generally the three key criteria would be the contractual terms, the arrangements that support these i.e. what physically takes place in making the supply and, customer perception. In this case, HMRC had challenged the position that Med Hotels acted as an intermediary in the booking of hotel accommodation by customers, in HMRC’s view, Med Hotels was the principal and therefore was required to operate for VAT under the Tour Operators Margin Scheme. HMRC dis-credited the contracts in place between the hoteliers and Med Hotels taking the view that it is the entirety of the arrangements that clearly showed Med Hotels to be the principal in providing the hotel room to the customer. It is not an odd argument to have presented and one would consider it reasonably balanced but for the fact that HMRC dismissed the contract as a primary indicator of the basis of a supply when, in other situations, their stance would have been the opposite.

HMRC won at Tribunal then lost at the Upper Tribunal, won again at the Court of Appeal to lose at the final hurdle, the Supreme Court.

The Supreme Court based its decision on the application of the law and primacy of it. The question of whether Med Hotels is considered to be an intermediary under TOMS is a matter of EU law while the determination on whether Med Hotels is acting as either an agent or principal is a matter of UK law. The Supreme Court applied logic to its decision making process by directing its analysis of the arrangements to the contractual relationship between the parties concerned. From this it clearly identified that there were no legal issues with the basis and terms of the contract nor did the contract require to be corrected in any way from a legal basis. The Supreme Court concluded that the contracts were clear in that the roles of the parties concerned were confirmed with Med Hotels as the agent acting on behalf of the hotelier in sourcing bookings for the hotelier with the hotelier as principal in providing the hotel room to the end customer i.e. the person using the Med Hotels booking service. Therefore Med Hotels is an agent under UK law and, under EU law is an intermediary and therefore not required to account for VAT under TOMS.

If the decision had gone HMRC’s way the resultant tax yield would have been in excess of £5 million in this case alone; this tax yield would have increased significantly when associated cases and the domino effect of such a decision within the travel industry.

It does though emphasise the need for businesses to ensure that the contractual terms mirror the basis of operation as, otherwise, they can be open to challenge.

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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