ABTA issues warning following Medhotels victory

ABTA has warned bed banks not to rely on Medhotel’s victory in its seven-year battle with the VAT man in their dealings with HM Revenue & Customs.

In a statement issued following the Supreme Court ruling today, it said: "Today’s judgement is undoubtedly an important victory for Medhotels.

"However all travel companies should recognise that that this is a judgement about MedHotels’ business model and on the specific terms of Medhotels’ contractual arrangements, which the court agreed established that it acted as an agent. "

In its ruling in favour of Medhotels, which is now trading as SecretHotels2, the court said the contractual documentation between the bed bank and hoteliers and between Medhotels and the customer made it clear the hotel room was provided by the hotelier to the customer through the agency of Medhotels.

HMRC had argued that successfully in an earlier appeal hearing that although the contracts described Medhotels as an agent it did not act as one in reality. However, the Supreme Court found that under English law it isn’t possible to take into account the subsequent behaviour or statements of the parties as an aid to interpreting their written agreement."

As a result, Medhotels escaped a £7.1 million bill for VAT which HMRC had been trying to get the company to pay since December 2007. If bed banks are acting as agents of the hotel, tax is paid in the country where the hotel is located; only if the bed bank is a principal is it paid in the UK.

"What this judgment does is highlight again the fundamental importance of contractual arrangements, which must be effective, robust and accurately reflect the commercial realities between parties," said ABTA.

"The case does give some helpful guidance on agency matters and ABTA will meet with HMRC to discuss the implications of the case in due course. Shortly, we will also be updating our guidance note on trading as agent or principal to take account of this decision."

Daniel Barlow, an indirect tax partner at Deloitte, said: The Supreme Court says one must look primarily at the contracts when determining whether a travel business is a principal or agent.

"The Supreme Court’s judgment is final, so the sector now has some definitive guidance from the courts on the factors that determine when an intermediary acts as an agent or a principal.  Given the extent to which a travel business’ status impacts on the amount of VAT it charges, its regulatory position and its level of risk when legal claims are made, I’m sure that many travel businesses will use the judgement as a prompt to review whether they have the right business model."