TLQ ONLINE. David Grant, Joseph Harbaugh, Stephen Mason and Jeff Wilks. Volume TLQ Online. Editors.

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1 TLQ ONLINE Editors David Grant, Joseph Harbaugh, Stephen Mason and Jeff Wilks Volume TLQ Online

2 Articles in TLQ Online are published throughout the year by Oakhurst Academic Press. The content complements material in the Travel Law Quarterly, its sister publication, and is available free of charge on the Travel Law Quarterly website at Editors: David Grant, Joseph Harbaugh, Stephen Mason and Jeff Wilks Managing Editor: Dr Helen Douglas. Material published in TLQ Online may not be reproduced, stored in a retrieval system, or transmitted in any form without the written permission of the editors. TLQ Online may be cited as [2014] TLQ Online ISSN X The editors welcome contributions from readers. A style guide is available at If you have a suggestion please contact: David Grant at Oakhurst Academic Press, Oakhurst House, Oakhurst Terrace, Newcastle upon Tyne NE12 9NY England. Tel: +44 (0) Fax: +44 (0) david.grant@tlq.travel or, Stephen Mason, Travlaw LLP, 2 Bachelor Lane, Horsforth, Leeds LS18 5NA. Tel: +44 (0) stephen@travlaw.co.uk or, Joseph Harbaugh at Shepard Broad Law Center, Nova Southeastern University, Fort Lauderdale, Florida. harbaughj@nsu.law.nova.edu or, Jeff Wilks. jwilks@tourismsafety.com Find us on the web at: Design and layout by MapSet Ltd, Gateshead, UK The views expressed by the contributors are personal. They do not necessarily represent the views of the publishers. The publishers gratefully acknowledge the assistance provided by Travlaw LLP in the publication of TLQ Online.

3 TLQ ONLINE Volume 2 TLQ Online Contents TOMS VAT and the Med Hotels Case 4 Martin Pooley

4 TOMS VAT AND THE MED HOTELS CASE Martin Pooley It is rare for travel cases to reach the higher courts and for one to reach the Supreme Court is almost unheard of, although in the past the ticket cases have reached the House of Lords. However the Med Hotels case was heard late in January this year by their Lordships and the outcome is eagerly anticipated. On the face of it this is a VAT case but it turns on an issue of fundamental importance to the travel industry when is a business acting as an agent and when are they a principal? It is to be hoped that the court is prepared to explore the wider issues in the case in order to give guidance on this vexed question but they may pass on that opportunity until the issue comes before them more directly. In the meantime Martin Pooley sets out the VAT issues the court will be considering. The author had the pleasure of attending the recent Supreme Court hearing in HMRC v Secret Hotels2 Ltd aka the Med Hotels case. And the earlier hearings in the First Tier Tribunal and the Upper Tribunal. So why would an accountant have nothing better to do? Because TOMS is interesting. What is TOMS VAT? Under the Tour Operators Margin Scheme for VAT, tour operators are liable for VAT on their margin on holidays in EU destinations. They are liable in the Member State in which they are established. TOMS is a mandatory EU wide scheme and if there were no such scheme tour operators would have to register for VAT in each EU destination. So it is a very valuable simplification measure even if it is unpopular. Instead of normal VAT rules, EU law (now Arts of the Principal VAT Directive or Art 26 of the Sixth VAT Directive at the times relevant to Med Hotels) says 4 things: It is a very valuable simplification measure (1) That the place of supply, which determines where the VAT liability arises and which would otherwise be in a destination for most supplies, is where the tour operator is established. (2) That the value of the supply, which would normally be the selling price, is the tour operators margin. Costs are allowed against the selling price in computing the margin only if they are for the direct benefit of the traveller. Indirect costs e.g. selling costs and overheads are dealt with under normal VAT rules and input tax is reclaimed as usual. (3) That the input tax on the direct costs is not deductible in any Member State, contrary to normal VAT principles. This makes arithmetic sense and is an obvious corollary of not registering in a destination but is equally true for holidays provided in the country in which the operator is established. (4) That there is no TOMS liability on non EU destinations. This is a particularly difficult area of the scheme and there is not

5 [2014] T L Q O NLINE 5 enough room in this article to explore the resulting problems in EU and UK law but suffice it to ask why holidays in non EU destinations should enjoy a tax advantage over holidays in EU destinations? So we burn up more aviation fuel, bring back nasty diseases from the other side of the world and export jobs out of the EU. Surely it should be the other way round? Under UK law there are basically four criteria for TOMS to apply to a particular supply: (1) That the supply includes a supply of accommodation, transport or car hire etc (see longer list). (2) That accommodation etc is bought in from a hotel etc (not from the operator s own resources). (3) That the customer is an individual or business consumer i.e. not a business which resells the supply to a traveller (which would make the operator a wholesaler). (4) That the operator is acting as a principal rather than as an agent (the issue in Med Hotels). TOMS has many problems e.g. non EU destinations as explained above, B2B transactions (try explaining to a conference organiser that his clients cannot reclaim VAT because of TOMS), inhouse supplies (what do you do about tour operators who run their own airlines or have their own hotels) and inconsistent implementation across the EU. The European Commission took infraction proceedings against eight member states in an attempt to resolve one particular area of inconsistency (whether wholesalers fall under TOMS) but the ECJ found against the Commission last year. Instead the ECJ told the Commission that the scheme was wrongly implemented in various Med Hotels argued that they were not liable to TOMS in the UK ways. So we need a new TOMS but it will take years to reach a consensus in Europe. Meanwhile Med Hotels shows that there is also a problem with the treatment of agents. Seen from the UK perspective, the travel agent earns a commission from the tour operator. The travel agent charges VAT on its commission which the tour operator reclaims and the tour operator pays TOMS on its margin, calculated before deducting the travel agent s commission. What did Med Hotels do? Med Hotels sold accommodation around the Mediterranean and may have looked rather like a traditional tour operator to a traveller at first glance. But Med Hotels had signed agency agreements with the hotels and told travellers that they acted as the agent of the hotels so that the travellers were contracting directly with the hotel. So Med Hotels argued that they were not liable to TOMS in the UK on their margin. Instead the place of supply was in the destination member state because the supply of arranging accommodation, itself a supply of property, was where the property was located. The amount of TOMS saved depends on the level of the margin but TOMS is typically 2% or 3% of EU sales which makes all the difference. In addition to saving TOMS, acting as an agent may allow the company to save on bonding costs and to avoid onerous contractual liabilities when problems arise. See for example Moore v Hotelplan Ltd [2010] EWHC 276 (QB). So agency is not just about TOMS. Agency is particularly common in the travel sector. Businesses may not describe themselves as operators but rather as travel agents, brokers, consolidators, intermediaries, wholesalers, retailers, organisers or destination management companies. There may be many stages between

6 6 [2014] T L Q O NLINE the original supplier and the final customer and it is often difficult to decide who is doing precisely what. And UK based tour operators may be competing with tour operators established outside the EU who do not register for VAT and pay no TOMS or with estate agents in a destination who may be exempt VAT. A number of bed banks are understood to be styled as agents and not to be accounting for TOMS so it is not surprising that Med Hotels wanted to avoid paying it. The court decisions so far HMRC won in the First Tier Tribunal in 2009, the Upper Tribunal favoured Med Hotels in 2001 and the Court of Appeal restored the FTT decision in 2012 so plenty of words have been written on the case but the three decisions can be summarised as follows: The FTT found that the parties behaviour was inconsistent with an agency relationship and that Med Hotels was not simply supplying agency services to the hotels, but was itself supplying the holiday. It does seem that Med Hotels did not implement the agency arrangements as carefully as it might have done. Likewise in International Leisure Ltd (French Life Holidays) (V & D Tribunal, Manchester Tribunal Centre, March 2006) the VAT Tribunal found for HMRC - the paperwork was not what it might have been - and the taxpayer did not appeal. Anyone interested in earlier cases should also read Hotels Abroad (LON/93/255/A). However a similar decision was reached in the VAT Tribunal in A1 Lofts Ltd v CRC [2009] EWHC 2694 (Ch) (where like Med Hotels, David Milne appeared for the taxpayer in front of Miss Gort). Miss Gort found that A1 Lofts were not agents and A1 Lofts appealed to the High Court on the basis that the Tribunal had not made any actual finding that the contractual documents were a Miss Gort was probably not surprised when she was overruled again sham or that the parties departed from the contractual arrangements. On that basis, the VAT position should follow the contractual documentation. The High Court held that the Tribunal had adopted an unstructured approach and that instead of starting by looking at case law, it should have used the facts established by the contracts to consider whether they were a sham or were superseded by a different contract. So Miss Gort was probably not surprised when she was overruled again and the Upper Tribunal found for Med Hotels. In due course the Court of Appeal found against Med Hotels. It set out six key findings as follows together with some added counter-arguments for Med Hotels: (1) Medhotels dealt with holidaymakers in its own name in respect of the use of its website and in the services of its local handling agents. The contrary argument would be that most travel agents have their own websites although admittedly a few also have reps in resort as Med Hotels did. (2) Medhotels dealt with holidaymakers in its own name (and not as intermediary) in those cases where the hotel operator was unable to provide accommodation as booked and the holidaymaker rejected the alternative accommodation offered. This behaviour does seem inconsistent with the UK concept of agency but how often were hotels unable to provide the accommodation and should the facts in a small proportion of transactions determine how the vast majority of transactions are treated for tax purposes? (3) Medhotels dealt with matters of complaint and compensation in its own

7 [2014] T L Q O NLINE 7 name and without reference to the hotel operator. See (2) above. Med Hotels passed the agreed amounts to the hotels. It was not relying on Art 11A(3)(c). It suggested that the Court of Appeal could usefully have answered two simple questions: (4) Medhotels used the services of other taxable persons (the hotel operators) in the provision of the travel facilities marketed through its website. Is this not what any travel agent would do? (5) In relation to value added tax, Medhotels dealt with hotel operators in other Member States in a manner inconsistent with the relationship of principal and agent. In particular, Medhotels did not provide the hotel operators with invoices in respect of its commission (nor even notify the hotel operators of the amount of that commission); so making it impossible for the hotel operators to comply with their obligations to account to the tax authorities of that member State in accordance with the Sixth Directive. In other words, if there is a tax gap, the Court should find way of filling it? (6) Medhotels treated deposits and other monies which it received from holidaymakers and their agents as its own monies. It did not account to the hotel operators for those monies. It did not enter those monies in a suspense account so as to take advantage of Article 11A(3)(c); and so cannot rely on the exclusion from the scope of Article 26 of the Sixth Directive which is contained in the second sentence of that Article. Med Hotels did not account to the hotel operators for those monies Was Med Hotels acting as an agent or as a principal when it sold hotel rooms? Does TOMS apply to supplies by agents? The Supreme Court has now to choose between the traditional approach adopted by the Upper Tribunal and the new behaviour based approach proposed by HMRC. The result may provide evidence of climate change in the world of tax following public concern about companies like Google and Amazon not paying their share. The European perspective Students of different legal systems will know that the UK s common law approach to agency is not shared by civil law regimes in Europe. Perhaps Med Hotels would look different through the prism of civil law. Indeed the European approach to TOMS is fundamentally different to the UK approach. Art 26 and Art 306 are both headed Special scheme for travel agents. Art 26(1) says Member states shall apply valued added tax to the operations of travel agents in accordance with the provisions of this article, where the travel agents deal with customers their own name...this article shall not apply to travel agents who are acting only as intermediaries and accounting for tax in accordance with article 11(A)(3)(c). In this article travel agents include tour operators. Section 47(3) VATA 1994 says Where services are supplied through an agent who acts in his own name the Commissioners may, if they think fit,

8 8 [2014] T L Q O NLINE treat the supply both as a supply to the agent and as a supply by the agent. If supplies arranged by agents were seen as supplies to and by the agent then Med Hotels could easily be decided in favour of HMRC. The new TOMS scheme which should result from the recent ECJ decision on wholesalers needs to address this question. But to allow Molesworth the last word, travel agents are not tour operators, as any fule kno. Martin Pooley is an independent accountant specialising in TOMS. He can be contacted at martin@pooley.co.uk

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