Travel agents and TOMS VAT March 2014


VAT Case of Secret Hotels2 Ltd in agent /principal issue

The Supreme Court has found in favour of Secret Hotels2 Ltd (Secret Hotels) in ruling that the bed bank was acting as an intermediary (disclosed agent) rather than as principal in its own name when supplying hotel accommodation through its website.

The case centred on whether the company was acting as agent for overseas providers of accommodation or as a principal in the supply of the accommodation when taking bookings. If acting as principal, as HMRC argued, it was an additional principal supplier within the chain that commenced with the owner of the overseas accommodation, passing through Secret Hotels and then onto the holidaymaker. Secret Hotels took the gross payment then passed this back to the accommodation owners less their commission.

HMRC’s view was that as a principal (buying in and selling on the accommodation) it was within the VAT Tour Operators Margin Scheme (TOMS) and so liable in the UK to account for UK on its margin.

Secret Hotels argued it was acting as a disclosed agent and so VAT would only be applicable in respect of its commission. In respect of hotels located outside of the UK then no VAT would be due.

The agreements between Secret Hotels and the accommodation owners who wished to offer their properties through the Secret Hotels website indicated that Secret Hotels was acting as the agent for accommodation providers. HMRC disputed this, arguing the commercial and economic reality was not consistent with an agency relationship, and that Secret Hotels was acting as principal in supplying on the accommodation to its customers.

The Court confirmed the contracts in place (and the reality of the arrangements) demonstrated Secret Hotels operated within the nature of a disclosed agency relationship meaning the supplies made by Secret Hotels were not subject to VAT as this was a business to business supply of services to overseas businesses.

It is of upmost importance to note that this case was decided on its own merits and that it was determined in this case the agreements in place between the parties reflected the actual economic reality of the relationship between Secret Hotels and the accommodation owners.

This case may allay the fears some travel agents had of having to leave the UK to avoid paying VAT on their margins under TOMS.

It is also possible that some disclosed agents may have been paying VAT under TOMS and if this is the case they should seek expert VAT advice to determine whether VAT has been overpaid and a claim could be submitted for this VAT paid when no VAT was due.

HMRC will likely continue to pursue undisclosed agents where they consider the commercial and economic reality is, in their view, that the ‘agent’ is acting as principal in supplying on the accommodation and therefore VAT is due on the margin achieved under TOMS.

What this case does is demonstrate the importance of clear, concise written contracts to define an agency agreement exists between an intermediary acting as a disclosed agent and not just in relation to accommodation provided via the internet but the overall industry of travel and accommodation, and packaged accommodation (including for example arrangers of conferences including hotel accommodation).

It is essential that disclosed agents also ensure that what they actually do is consistent with agreements set in place to minimise HMRC taking a view that there is such a variance to the contracts and the relationship between the parties that no disclosed agency relationship exists.

Should you wish to discuss how this VAT case may impact on your business model and existing contracts in place then please contact Barrie Dunning or your usual Beavis Morgan tax partner.

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