Secret Hotels2 Limited VAT case win - the implications

A significant win at the Supreme Court could mean that travel companies may escape burdensome VAT costs.

The dispute between Secret Hotels2 Limited (SH2L) and HMRC concerns whether SH2L was acting as an intermediary (agent) or in its own name (principal) when arranging hotel accommodation for its customers. If acting as principal, SH2L would be required to account for VAT under the Tour Operators Margin Scheme (TOMS).

The case was originally heard in 2010, after HMRC’s decision that the company acted as a principal and so was liable to pay VAT on its margin under TOMS. SH2L’s challenge was dismissed by the First-Tier Tribunal. The company won its subsequent appeal at the Upper Tribunal, but that decision was reversed by the Court of Appeal in 2012.

On 5 March 2014, the Supreme Court issued its ruling and found in favour of SH2L,which means that the company is not required to pay the £7.1m assessment issued by HMRC.

The Supreme Court considered that the contracts between the hotel and the taxpayer, and the taxpayer and the end customer clearly identified that the room would be provided by the hotel to the end customer, with SH2L acting as an agent. The difference between the price charged to the customer and the amount paid by the taxpayer to the hotel was SH2L’s commission for arranging the booking.

Whilst SH2L and other travel intermediaries will clearly welcome the decision, hotels should ensure that they have correctly accounted for VAT on the full price of the room charged to a customer, rather than the amount actually received from an agent acting in the same way as SH2L.

For advice on this matter, please contact a member of the VAT team.

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