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Supreme Court decision provides much-needed clarity on VAT status of online tour operators, says expert

A travel company which marketed and arranged the sale of holiday accommodation to holidaymakers through its website was acting as an 'agent' for the providers of that accommodation, and so did not have to account for VAT on those sales, the UK's highest court has ruled.

The Supreme Court's decision in the long-running case overturns earlier findings by the First-Tier Tribunal and Court of Appeal that the company, Secret Hotels2 Ltd, was itself supplying accommodation to customers or acting as 'principal'. Had this been the case, it would have needed to account for VAT on EU bookings under the Tour Operators Margin Scheme (TOMS). As it was acting as an agent, it was only liable to account for VAT on its commission, meaning that no VAT would be chargeable at all where the hotel was located outside of the UK.

Stuart Walsh a tax expert at Pinsent Masons, the law firm behind Out-Law.com, said that the judgment would provide "much-needed clarity" for the UK travel industry, where around 60% of bookings are now made online.

"The Supreme Court has essentially concluded that the starting point is to characterise the nature of the relationships in light of the contracts before considering whether that characterisation can be said to represent the economic relationship in light of the relevant facts," said Walsh, who was part of the legal team that represented Secret Hotels2 Ltd.

"In the case of Secret Hotels 2 Ltd, the Court rejected HMRC's contention – as upheld by the First-Tier Tribunal and Court of Appeal – that the various factors complained of, even when taken together, were inconsistent with the existence and nature of the agency relationship," he said.

Secret Hotels2 Ltd, owned by lastminute.com, marketed hotel rooms, villas and apartments to travel agents and holidaymakers through the Med Hotels branded website. According to the Supreme Court, around 94% of the hotel rooms advertised were sold through other third party travel agents. Customers booked and paid for the accommodation through the site at a "gross" listed price, while a lower "net" sum, essentially the gross price less any commission charged by Med and any other travel agent, was passed to the owner of the accommodation once the holiday had ended.

EU VAT law creates a special scheme under which travel agents acting in their own name can account for VAT solely in the member state in which it has established its business, to save them having to be VAT registered in many member states in which they make supplies. In the UK, this is fulfilled by the Tour Operators Margin Scheme or "TOMS". The effect of TOMS is that travel agents that "deal with customers in their own name and use supplies of goods or services provided by other taxable persons" must account for VAT in the UK while those who act "solely as intermediaries" do not.

Accommodation owners that wished to offer their property to third parties through the Med Hotels website entered into a contractual arrangement with Secret Hotels2 Ltd enabling them to do so. This contract stated that Secret Hotels2 Ltd was acting as an agent for the owners. However, HM Revenue and Customs (HMRC) disputed this, arguing that the "commercial and economic reality" of the arrangements was inconsistent with the agency relationship and that in fact Secret Hotels was dealing with customers in its own name.

In his leading judgment, Lord Neuberger rejected with this analysis and reinstated the Upper Tribunal's 2011 decision in favour of Secret Hotels.

"Where parties have entered into a written agreement which appears on its face to be intended to govern the relationship between them, then, in order to determine the legal and commercial nature of that relationship, it is necessary to interpret the agreement in order to identify the parties' respective rights and obligations, unless it is established that it constitutes a sham," he said.

"In the present proceedings, it has never been suggested that the written agreements between [Secret Hotels] and hoteliers, namely the Accommodation Agreements, were a sham or liable to rectification ... In these circumstances, it appears to me that (i) the right starting point is to characterise the nature of the relationship between [the website], the customer, and the hotel ... (ii) one must next consider whether that characterisation can be said to represent the economic reality of the relationship in the light of any relevant facts," he said.

In this case, the judge said that the points of contention all "stem from, and reflect, the fact that [Secret Hotels] had a substantial business based on the website". These provisions were not "inconsistent with a principal-and-agent relationship"; rather, all they did was "reflect the relative negotiating positions of the parties", he said. The position would be the same under EU law, where the concept of 'intermediary' was broadly similar to the English law concept of agent, he said.

"The judgment emphasises the importance of having clear and carefully drafted written agreements to record the intended relationship between the parties," said tax expert Piermario Porcheddu of Pinsent Masons, who was part of the legal team that represented Secret Hotels.

"However, care should be taken by online tour operators to ensure that their behaviour is at all times consistent with the agreements and it does not diverge to a degree such that it would amount to a variation of the contract and the underlying relationship between the parties," he said.

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