Secret Hotels2 Ltd v HM Revenue and Customs

For VAT purposes, a travel business’s status as principal or intermediary is not settled solely by contractual labels or construction. The tribunal must apply the statutory scheme to the whole facts. Where a transaction includes designated travel services, it must assess the whole package as a single supply rather than isolate hotel accommodation. Relevant indicators include dealing with travellers in its own name, using other taxable persons’ services, handling complaints and compensation, treating receipts as its own, and failing to account for commission or use a suspense account. The linked questions whether the business is a tour operator and supplies a designated travel service are essentially factual. On the facts, the business was supplying the holiday and fell within the margin scheme under Value Added Tax (Tour Operators) Order 1987.

HMRC assessed output VAT against Medhotels, formerly Secret Hotels2 Ltd, under the Tour Operators Margin Scheme for several accounting periods. The First-Tier Tribunal dismissed the appeal: [2010] UKFTT 120 (TC). The Upper Tribunal allowed Medhotels’ appeal, holding that the relevant supplier should be identified by construing the written contracts with holidaymakers and that the First-Tier Tribunal had erred by considering Medhotels’ behaviour: [2011] UKUT 308 (TCC).

HMRC appealed to the Court of Appeal. The central questions were whether the First-Tier Tribunal had erred in law by considering the whole facts, including conduct, and, if not, whether it was entitled to conclude that Medhotels supplied hotel accommodation as principal rather than merely acting as intermediary.

The appeal was allowed unanimously. The decision of the First-Tier Tribunal was restored.

1. Nature of the questions. The Tribunal had to decide whether Medhotels was a tour operator and whether its supplies were designated travel services under section 53 of the Value Added Tax Act 1994, Article 26(1) of the Sixth Directive and Article 3(1) of the Value Added Tax (Tour Operators) Order 1987. Those questions were closely linked and essentially questions of fact.
2. Whole-facts approach. The Court applied the distinction explained in Customs and Excise Commissioners v Reed Personnel Services [1995] STC 588: the nature of a VAT supply is not necessarily identical to a contractual obligation, and contractual construction may not resolve the VAT question. The First-Tier Tribunal was therefore entitled to consider the whole facts, including how the arrangements operated.
3. Whole package. Article 3(2) of the Value Added Tax (Tour Operators) Order 1987 required one or more designated travel services supplied as part of a single transaction to be treated as a single supply. The Tribunal was entitled to assess the whole package rather than focus exclusively on the supply of accommodation.
4. Relevant indicators. Material factors included dealings with holidaymakers in Medhotels’ own name, use of hotel operators’ services, handling complaints and compensation without reference to the hotels, VAT arrangements that prevented the hotels from accounting on the full customer price, and treatment of deposits and other receipts as Medhotels’ own money without use of a suspense account under Article 11A(3)(c) of the Sixth Directive.
5. Application and result. On those facts, the First-Tier Tribunal was plainly entitled to conclude that Medhotels was not simply supplying agency services but was itself supplying the holiday. The Upper Tribunal had therefore erred in law. It was unnecessary to consider whether the Upper Tribunal would have been entitled to reach the same result on its contractual approach. The First-Tier Tribunal’s decision and the VAT assessments were restored.

1. Court of Appeal (Civil Division) allowed HMRC’s appeal and restored the decision of the First-Tier Tribunal.
2. Upper Tribunal (Tax and Chancery Chamber) allowed Medhotels’ appeal from the First-Tier Tribunal: [2011] UKUT 308 (TCC).
3. First-Tier Tribunal (Tax Chamber) dismissed Medhotels’ appeal against the VAT assessments: [2010] UKFTT 120 (TC).