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Secret Hotels 2 Limited (formerly MedHotels) wins £7m VAT case

5 March 2014

The UK’s Supreme Court has today issued a judgment in favour of Secret Hotels, reversing the decision of the Court of Appeal, released in late 2012.  The decision means that Secret Hotels 2 Limited (formerly MedHotels) does not have to pay the £7 million VAT bill given to it by HM Revenue and Customs (HMRC).  This judgment is significant for all intermediaries in the travel sector.

Secret Hotels 2 won its argument that, in determining whether it was acting as a principal or agent in the supply chain, the contracts between the parties are the principal determining factor.  HMRC had argued, successfully at the Court of Appeal, that although the contracts described Secret Hotels as an agent, they did not act as one in reality. However, the Supreme Court has found that under English law, ‘it is not permissible to take into account the subsequent behaviour or statements of the parties as an aid to interpreting their written agreement.’

Daniel Barlow, an indirect tax partner at Deloitte, comments: “This case was significant because UK-based travel businesses acting as principals are obliged to account for VAT under the Tour Operator’s Margin Scheme (TOMS), whereas agents have no such obligation.  The Supreme Court says one must look primarily at the contracts when determining whether a travel business is a principal or agent.

“The Supreme Court’s judgment is final, so the sector now has some definitive guidance from the courts on the factors that determine when an intermediary acts as an agent or a principal.  Given the extent to which a travel business’ status impacts on the amount of VAT it charges, its regulatory position and its level of risk when legal claims are made, I’m sure that many travel businesses will use the judgement as a prompt to review whether they have the right business model.”


Notes to Editors

Background to the case
A principal will typically buy in and supply the hotel room and in doing so will assume all of the legal obligations of supplying direct to a customer.  An agent will simply arrange a supply by the hotel directly to the customer and the legal obligations will rest with the hotel.  This case concerned the nature of Secret Hotels’ relationships with hotels and with consumers.  

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Deloitte LLP
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