The legal agreements under which Med Hotels operated could not have been clearer in that they did not make the accommodation supplier a principal and liable to pay VAT on its margin, a tax tribunal appeal hearing heard yesterday.
A two-day hearing at the Royal Courts of Justice started yesterday morning. At stake is £7 million in what Her Majesty's Revenue & Customs claims is unpaid VAT during the period 2004-07, when Med Hotels was owned by lastminute.com.
Med Hotels lost a previous tribunal having been landed with the tax bill.
Representing Med Hotels under the lastminute subsidiary Secret Hotels 2, David Milne QC said: "It's difficult to see how a contract could be drafted any clearer. Med Hotels is acting as an agent and an intermediary between the holidaymaker and the hotel provider."
What is in dispute is how, if at all, the way Med Hotels actually operated meant that its agreements were changed by "course of dealing" and that this in law made it the principal and therefore liable to pay VAT under the Tour Operators' Margin Scheme (Toms).
Milne took Mr Justice Morgan through Med Hotels' legal agreements and terms and conditions with the hoteliers, with its customers and with its travel agent partners, through whom it distributed 94% of its business, paying around 14% commission.
The original tribunal took issue with elements of the arrangements Med Hotels had in place including the provision of in-resort reps and the promise to find alternative accommodation should the hotel principal fail to honour its part of the agreement.
It was also pointed out that Med Hotels itself drafted the agency agreements with hoteliers. However, Milne said this was usual practice in bulk selling agency arrangements; Med Hotels sold 25,000 individual properties.
He also said there was no doubt that Med Hotels did not enter agreements with its hotel partners that amounted to a commitment to sell an agreed volume of beds.
"We do not have inventory risk; if we did we would be a principal," Milne said. "We sometimes take a credit risk – but that does not go anywhere near undermining the basis of the contracts. We are simply acting as an agent."
In effect, the Med Hotels' terms and booking conditions committed it only to providing the customer with a process to find and book hotels, and to pass on the details of that booking to the hotelier. It was then an obligation of the hotelier to provide that service.
Med Hotels included references to the standards they expected to be delivered and said it would act as intermediary in the event of a dispute. But Milne asserted that nothing in the way it operated superseded the legal documents and agreements it worked by.
Milne did concede that the nett rate agreement that Med Hotels had with hotels made it difficult for hoteliers to automatically know the end price to the customer and therefore to properly account for VAT on the margin. The hearing was expected to last for two days.
The HMRC tax avoidance team has taken the original tribunal judgment as a green light to pursue about 20 other travel firms it considers to have been operating in a similar way to Med Hotels.
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