The latest court hearing into the MedHotels £7 million VAT case got underway on Tuesday prompting one tax expert to say the first day did not bode well for the bed bank.
The case was brought by Her Majesty's Revenue and Customs which alleges MedHotels was not acting as an agent during a period between 2004 and 2007 when it was owned by lastminute.com and therefore liable to pay VAT under the Tour Operators Margin Scheme (TOMS).
Having lost an original VAT tribunal case, that decision was overturned on appeal in a later judgement following an Upper Tier Tax Tribunal in the High Court, the judge deciding that the contracts drawn up between MedHotels and its suppliers were watertight.
However, Nick Garside, Grant Thornton senior manager, who attended the hearing on Tuesday said it was looking ominous for MedHotels.
He told the latest Grant Thornton travel industry seminar in London on Tuesday: "[Her Majesty's Customs and] Revenue are trying to move the argument away from the principles established in the Upper Court Tribunal.
"Those were the interpretation of the contracts and agreements between the parties. The documents said quite rightly that there intended to be an agency arrangement. What Customs want the court to do is look beyond that, to look at how their obligations stacked up in reality.
"The big thing they are focused on is that simply labelling contracts as agency agreements is not determinative, you need to do more than that."
Business practices that the hearing concentrated on, which were said to be indicative of more than an agency arrangement, included the fact that MedHotels had in-resort reps and that the hotels were never invoiced for commission so the margin was never disclosed to the supplier.
Other aspects of the working partnership included the fact that MedHotels was only invoiced after the customer had departed, that no Escrow accounts were set up and that MedHotels appeared to taking on a financial risk by agreeing a commitment to block bookings.
But Garside said he believed none of the points raised were material to whether MedHotels was acting as the principal or not.
"The challenge for the MedHotels barrister is to help the judges get beyond some of these technical VAT issues which they are not experts in and to really box them off because they do not necessarily inform the agency principal relationship."
Garside said the industry has evolved and HMRC is trying to apply an outdated model to it. "Customs has not really kept pace with the internet and dynamic packaging and what they have tried to do is overlay VAT on a situation which increasingly they do not understand.
"My sense overall was Customs had a pretty good day in terms of the submissions."
Despite this Grant Thornton still believes it would be extraordinary if a judge were to overlook the primacy of the contract which is still considered to be king.
Garside told the seminar he thought the decision to persue MedHotels was purely about revenue generation. "Customs have the taxation of the travel industry in terms of VAT in a real mess," he said.
There are fears that HMRC could use the MedHotels case to pursue other sectors of the holiday industry for VAT and that even if it loses this case it will take it all the way to the House of Lords where there is even less specialist knowledge of VAT rules.
MedHotels was sold to Thomas Cook in 2009.
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