ABTA warns agents to check tax status

ABTA has updated guidance for its members who put together dynamic packages following HM Revenue & Customs’ victory over Med Hotels which has left the bed bank facing a £7.5 million VAT bill.

ABTA pointed out that the Med Hotels was an important test case relating to the tax liabilities of UK travel businesses and its updated advice for members comes amid fears that HMRC will now go after more travel companies for unpaid VAT.

In a statement issued yesterday, HMRC said it would "continue to challenge arrangements in the travel and other sectors that lead to non-taxation of services".

The ruling will have the greatest implications for other bed banks and online travel agents, all of whom are likely to receive VAT assessments from HMRC following the ruling in its favour, but it will also have an impact on any travel agency that puts together dynamic packages.

In a statement, ABTA said the Court of Appeal ruling provided more clarity on the tax status of different business models, reinforcing the need for all travel companies to understand their status when buying and selling travel services. 

ABTA’s guidance document, Agent or Principal: How does your business trade? is now available in the Member area of its website and helps to clarify this status, it said. 

"The ruling means that the behaviour of a company, as well as contractual documents, will be taken into account when determining whether that company was acting in its own name for VAT purposes or as the agent of a principal," said ABTA.

"In effect, the Court has said that it is not enough to call yourself an agent, you must actually conduct your business as an agent as well."

Simon Bunce, ABTA head of legal and member services added: "This ruling confirms that travel businesses must ensure they understand how their business trades, and what tax they are liable for as a result. 

"ABTA’s guidance note will help our members to do this.  The Court stated that there were a number of features evident in the Med Hotels’ business model which led to a conclusion that it was not simply supplying agency services to the hotels it was selling but was itself supplying the holidays to the customers in its own name.

"Those features include Med Hotels taking responsibility for providing alternative accommodation where the original accommodation was no longer available and providing compensation itself to customers suffering problems at the hotel. 

"If travel agents want to avoid the tax liabilities of a principal then they must make absolutely sure they’re not just an agent on paper, they act like an agent in practice."

ABTA will now meet with HMRC following the ruling to ensure additional clarity on their interpretation of it.

Meanwhile, bed banks are preparing to fight individual battles with HMRC to prove that they are acting as agents, not wholesalers, and so are not liable for VAT on Tour Operator Margins (TOMS).

One source told TravelMole: "Med Hotels did a lot of stupid things that indicated they were a principle, such as not notifying hotels of the final selling price so they couldn’t pay VAT locally on the agent’s commission, having reps, paying compensation to clients without reference to the hotels and having guaranteed contracts."

It is understood that other online travel agents, such as On Holiday Group, Travel Republic and On The Beach have been forced to wait for the Med Hotels ruling before being able to clarify their position with HMRC. Lowcostbeds, however, is based in Switzerland where there is no VAT on TOMS.

"The bed bank sector would be mad not to include TOMS VAT in their charges while they fight their respective cases with HMRC," added our source, "but this would need to come from Hotels4U/Med Hotels as they’re the market leaders."

However, Thomas Cook, which owns Hotels4U and Med Hotels (which it acquired from lastminute.com) said it won’t charge VAT as it is confident it can prove it is operating as an agent, not a wholesaler.

By Linsey McNeill