Could VAT ruling spell disaster for online travel agents?

Online travel agencies face multi-million pound tax demands after HM Revenue & Customs yesterday won a long-running legal battle with Secret Hotels, formerly Med Hotels, to force it to pay £7.5m in VAT (see earlier story).

A travel industry source said the tax office was now expected to go after other online travel agents, such as Travel Republic, On the Beach and the On Holiday Group for VAT.

It could also chase any travel agent that sells dynamic packages for unpaid VAT on their profit margins on the sale of hotel accommodation, unless they have clear proof they are acting as an intermediary and not as a wholesaler.

The source suggested the demands could sink some bed banks unless they have been putting the VAT aside in expectation of yesterday’s ruling in HMRC’s favour.

"This ruling threatens the very business model of online travel agents," he said. "I doubt they’ll be able to afford to pay the sort of bills they might get now."

The Court of Appeal yesterday ruled that Secret Hotels was liable to pay VAT under the Tour Operators Margin Scheme (TOMS) on the grounds that it operated as a principal and not as an agent from the end of 2004 to 2007, when it was owned by lastminute.com.

Med Hotels had argued that it was a retailer rather than an operator and therefore it was exempt from paying VAT on its profits from the sale of hotel accommodation. However, the Court of Appeal overturned an earlier High Court decision in Secret Hotels’ favour.

It said that regardless of the type of contract Secret Hotels and similar online travel agencies and bed banks have with hoteliers, if they are seen to be acting as principals rather than intermediaries they will have to pay VAT on the profit they make on the sale of accommodation.

"I imagine other online travel agencies and bed banks are urgently seeking legal advice to clarify their own position to avoid paying 20% VAT on their profit margins," said our source. "If they have an arrangement with  hotels where the hotel fixes the rate, I think they will be okay, but if they are in control of what the customer pays for accommodation I reckon they’ll be liable for VAT."

Lastminute.com has until December 17 to appeal against the decision to the Supreme Court. It said yesterday it was considering its options.

Med Hotels has since been sold to Thomas Cook, which also owns Hotels4U, which could face a similar tax demand. However a spokesman said Cook had been very careful when it set up Hotels4U to ensure that it was a retailer rather than a wholesaler.

By Linsey McNeill