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Steve Allen of VAT Advisers Ltd highlights a selection of recent VAT cases.

Tribunal says Online Seller of Overseas Hotel Rooms was Acting As a Principal

The Appellant operates a website through which it markets hotel accommodation located in the Mediterranean and Caribbean. A traveller or travel agent would book accommodation through the website and pay the deposit and balance to the Appellant, who also kept the bank interest on this money. The relevant hotel would be paid a lesser amount by the Appellant, as agreed between the two, and would not know the price paid by the traveller. Equally, the holidaymaker would not know what the hotel received. The Appellant might pay the hotels in advance to secure the accommodation, and if cancellation charges became due from the customer under the booking conditions imposed by the Appellant, it would retain these. The Appellant also dealt with complaints, and would agree compensation without clearing the sum with the hotel. It said that where it had departed from the agency agreements and acted in a way more consistent with its being a principal, this was simply for commercial reasons.

It argued that for the period in dispute, it acted as disclosed agent for the hotels. It based this contention on its Terms and Conditions and agreements with the various parties involved.  As an agent, its income comprised purely commission rather than the full amount charged for accommodation supplied to travellers/travel agents. As such, the place of supply of its services would be where the accommodation was located rather than the UK, so no UK VAT was due. However, as it was not VAT-registered in any other country, VAT was not accounted for anywhere on the commission, meaning a proportion of the amounts paid by the travellers escaped VAT (i.e., a tax gap).

HMRC argued that when onelooked at the entirety of the commercial arrangements and the accounting procedures, the Appellant was acting as a principal. On that basis, the supplies of accommodation would be covered by the Tour Operators Margin Scheme, meaning that its supplies took place in the UK, and that UK VAT would be due on the profit derived on the EU accommodation. On the back of that contention, HMRC had previously issued a £7m assessment to the Appellant.

The Tribunal found for HMRC after concluding that the Appellant was acting as a principal. The three main reasons for this were that it did not disclose the selling price to the hotels, the holidaymakers contracted with Med Hotels with no terms imposed by the hotel, and no hotel could go to the holidaymaker and demand payment for the accommodation provided. Other supporting factors were that it took forex and financial risks when it paid hotels in advance, it kept no client trust account, and that if a hotel made a mistake and under-invoiced the Appellant, it would retain the excess. Also, for a period when Appellant agreed it was a principal, it acted in broadly the same way as it had done when it said it was an agent.

The decision shows that it is not enough to cite contractual terms and the contents of other agreements as support of your status; what actually happens in practice is crucial.  Additionally, the UK and EU courts seem increasingly to be giving decisions that plug any tax gaps where they are seen to exist. Clearly, any web-based operators that are using a similar business model to that of the Appellant should immediately review their position in light of this case.

Secret Hotels2 Ltd (formerly Med Hotels Ltd) (TC00431)

Tribunal says Injury Risk Management Services were Not Exempt Medical Supplies

The Appellant’s services consisted of two main elements. The first was to arrange swift treatment for client companies when one of their employees sustained a musculoskeletal injury. The second was to understand clients’ businesses, either on a site-by-site basis or by reference to the different activities performed by employees, so as to provide collated information about injuries sustained by all employees. This then enabled companies to locate risk areas in their businesses so that they could reduce the risks of injury, and thereby reduce the levels of sick absence.

HMRC argued that the Appellant was providing, via its health practitioner sub-contractors, exempt medical services, and that all the administrative services of compiling and delivering various reports to client companies were ancillary services. Alternatively, if the administrative services could not fairly be regarded as ancillary, HMRC argued that it was still appropriate to conclude that, from an economic point of view, the clients still receive one single composite service, and not several distinct services. As the medical aspect dominated the composite service, the whole service was exempt. The Appellant said that HMRC had misunderstood the unique nature of its business, which was to manage employee injury risk, identify risk areas, and develop suggestions to reduce the risk of injury.  As such, its supplies were standard-rated.

In reaching a decision for the Appellant, the Tribunal said HMRC had been wrongly influenced by the way in which the clients were charged for each visit to a practitioner. It examined what was meant by VATA 1994 Sch 9 Group 7 Items 1 and 2 Note 2, finding that the Note extends exemption to “supplies of services made by a person who is not registered …where the services are wholly performed or directly supervised by a person who is so registered or enrolled”.  HMRC argued that Note 2 need only apply to the dominant supply, but the Tribunal disagreed, finding that there is a single supply (i.e., Note 2 must be satisfied for all elements of the service). In this case, there was a single supply, with only one part being performed by registered practitioners. The other ancillary elements were not performed or overseen by a practitioner, so the service could not qualify as an exempt medical service. The single supply was taxable.

Health Response UK Ltd (TC00434)