Spanish tax inspectors follow 'MedHotels' VAT trail

Spanish tax inspectors follow 'MedHotels' VAT trail

Tax authorities in Spain are understood to have begun investigating whether hoteliers in the country are paying the right level of VAT following the MedHotels case in the UK.

The UK tax office failed to convince a High Court judge this summer that bed bank MedHotels was liable to pay £7 million in VAT on its margin for the period 2004-07. However, the case exposed a tax gap in the sector.

Travel Weekly understands Her Majesty's Revenue and Customs (HMRC) officials in the UK have been "agitating" their Spanish counterparts to ensure that, if the tax cannot be collected here, it is at least paid locally.

A well-placed source said he was aware of a number of hotels which had been approached. "If this is not the bed banks' problem then it's got to be someone else's - whether that is fair or not is not for me to comment on," he said.

It had been assumed the Spanish tax authorities would not pursue hotels in the country for the tax, for fear of undermining so an important sector of the economy expecially in the current climate.

But the source said: "Spain has had not had a bad year for tourism and the country is broke, so this is one way for the government to raise some revenue."

The MedHotels case prompted HMRC to write to at least 10 other firms operating in a similar way, suggesting they too were liable for VAT under the Tour Operators Margin Scheme.

HMRC has not dropped these cases, although its pursuit of the VAT was dealt a severe blow on appeal at an Upper Tier tax tribunal which ruled MedHotels' paperwork and agreements with hoteliers meant it had been acting as an agent and was therefore not liable.

For the bed bank sector it is preferable tax on hotel beds is paid at the lower rate in Spain, where EVA - the Spanish equivalent of VAT - can be as low as 6% in some regions, compared with the 20% rate levied in the UK.

On Holiday Group chief executive Steve Endacott said: "This is another example of the British government not knowing how the market works. We are plagued by a bureaucratic and slow response from HMRC on all tax issues.

"I would expect most hotels are paying VAT because we are notifying them what is due."

HMRC has sought leave to appeal against the MedHotels ruling. The bed bank, formerly owned by lastminute.com, was sold to Thomas Cook in 2009.

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