01 Aug, 2011

Success for Med Hotels in VAT Tribunal

The Upper Tier Tribunal has issued its judgment in the much awaited VAT case concerning Secret Hotels 2 Ltd (formerly Med Hotels). Below is a commentary on the ruling from leading business and finance advisor Grant Thornton UK LLP.

Med Hotels had previously appealed to the First Tier Tribunal on the grounds that the company acted purely as the agent of foreign hoteliers when supplying accommodation to holidaymakers. The Tribunal disagreed and ruled that the company was required to account for UK VAT on the supplies.

The recent appeal at the Upper Tier Tribunal reversed that ruling and confirmed that Med Hotels was indeed acting as the agent for the overseas hotels.

Damon Wright, Indirect Tax Director at Grant Thornton said:  “This is good news for both Med Hotels and other ‘bed-bank’ agents who found themselves with a VAT liability under the Tour Operator’s Margin Scheme (TOMS) following the first judgment last year. The latest decision confirms that the supply of the hotel accommodation is by the hotel owner. VAT will therefore be due from the hotelier in the country where the hotel is situated and not from the ‘bed bank’ agent.

“However, the decision does present a conundrum for the EU tax authorities. The Upper Tribunal decision is the UK’s interpretation of the rules and it places an obligation on the overseas tax authorities to collect the VAT that is due. That view is not shared by the tax authorities in other countries, who expect the tax to be collected in the UK. It is therefore likely that no VAT will have been collected in relation to these holidays.  

“That is clearly contrary to how the EU VAT system is supposed to work and it is likely that the VAT rules will need to be reviewed by the member States” continued Wright.

“In the meantime, given the amount of tax at stake, this may not be the end of the matter and HM Revenue and Customs might seek to have the matter heard by the Court of Appeal. If an appeal is confirmed, businesses will need to review their current structure and factor in any potential VAT costs to ensure they have a sustainable business model going forward. Margins in the sector are already very low and any imposition of UK VAT will have a serious impact on the travel trade.”


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