Revenue and Customs v Secret Hotels2 Ltd [2014] UKSC 16

Med Hotels marketed hotel accommodation online. HMRC assessed it for VAT as a principal under TOMS. The Supreme Court held Med acted as an agent (intermediary) for hoteliers under the contractual documentation, so TOMS did not apply and the appeal was allowed.

Facts

Secret Hotels2 Ltd (formerly Med Hotels Ltd, ‘Med’) marketed holiday accommodation at around 2,500 hotels, villas, and apartments in the Mediterranean and Caribbean through its website www.medhotels.com. Approximately 94% of sales were to travel agents, with the balance to holiday-makers directly. Hoteliers signed an ‘Accommodation Agreement’ with Med, and customers booked via the website subject to ‘Terms of Use’ and ‘Booking Conditions’. Customers paid Med the full (‘gross’) price in advance, whilst Med paid the hotelier a lower (‘net’) sum after the holiday, retaining the difference.

HMRC assessed Med for VAT of £7,119,702 for December 2004 to May 2007 on the basis that Med fell within the Tour Operators Margin Scheme (‘TOMS’), enacted domestically to give effect to articles 306-310 of the Principal VAT Directive (2006/112/EC) and its predecessor Sixth Directive. The First-Tier Tribunal upheld the assessment; the Upper Tribunal (Morgan J) reversed; the Court of Appeal restored the FTT’s decision. Med appealed to the Supreme Court.

Issues

The central issue was whether Med’s activities fell within article 306.1(a) (travel agents dealing with customers ‘in their own name’ and using services of other taxable persons) or article 306.1(b) (travel agents acting ‘solely as intermediaries’). This turned on:

• The English law characterisation of the contractual relationships between Med, the hoteliers, and the customers – specifically whether Med acted as principal or as agent for a disclosed principal.
• The EU law application of article 306 to that characterisation.

Arguments

HMRC

HMRC contended Med booked rooms from hoteliers for the net sum and supplied them on to customers for the gross sum, acting as principal. It relied on financial arrangements (Med fixing its own commission, retention of cancellation charges and ‘no-show’ forfeits, one-sided obligations), Med’s dealings with customers in its own name via the website and local handling agents, its handling of complaints and compensation without reference to hoteliers, its failure to provide invoices for commission to hoteliers, its treatment of deposits as its own money, invoicing by hoteliers for net sums only, and Med’s reservation of rooms in its own name.

Med

Med argued that the contractual documentation expressly appointed it as ‘selling agent’ for the hoteliers, that customers contracted directly with hoteliers through Med’s agency, and that the difference between gross and net sums was commission for acting as agent. TOMS therefore did not apply.

Judgment

Lord Neuberger (with whom Lords Sumption, Reed, Hughes, and Hodge agreed) allowed Med’s appeal.

Approach to characterisation

The Court set out the correct approach: where parties have entered into a written agreement intended to govern their relationship, the court interprets the agreement to identify their respective rights and obligations, unless it is a sham. Labels are not conclusive but the analysis begins with the contractual documentation. Subsequent conduct is not admissible as an aid to interpretation (citing FL Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235), though it may be relevant to establish sham, rectification, variation, or that the written agreement was only part of the totality.

Under EU law, per Revenue and Customs Commissioners v Newey (Case C-653/11), contractual terms normally reflect economic and commercial reality and are a factor to be taken into account, unless they constitute ‘a purely artificial arrangement which does not correspond with the economic and commercial reality of the transactions’. The Court noted the similarity between the EU concept of ‘intermediary’ and the English law concept of agency, and between dealing ‘in his own name’ and acting as principal.

Effect of the contractual documentation

The Accommodation Agreement identified the hotelier as ‘the Principal’ and Med as ‘the Agent’, appointed Med as ‘selling agent’, and required Med to ‘relay all monies which it receives from the Principal’s Clients … which are due to the Principal’. The website Terms of Use stated Med ‘acts as agent only for each of the hotels’, and the Booking Conditions confirmed Med acted ‘as booking agents on behalf of all the hotels’ with contracts made directly with accommodation providers.

The Court rejected HMRC’s reliance on particular features: an agent may fix its own commission (Mercantile International Group plc v Chuan Soon Huat Industrial Group Ltd [2002] 1 All ER (Comm) 788); financial provisions and one-sided obligations reflected Med’s superior bargaining position and its interest in protecting goodwill.

Conduct-based factors

Considering the eight factors relied on by HMRC and the Court of Appeal, Lord Neuberger held that none, individually or collectively, was inconsistent with Med being an agent. Med’s dealings in its own name before hotel selection, use of local handling agents, complaint handling (with reimbursement from hoteliers), failure to provide VAT-compliant invoices, treatment of deposits, hoteliers invoicing for net sums, and reservation of rooms in its own name were all explicable by reference to Med’s commercial position and goodwill considerations and did not vary or displace the agency arrangement.

Application of article 306

Applying the EU test, the contractual documentation supported the conclusion that Med was an intermediary, and ‘economic reality’ did not support a contrary view – the hotelier owned the accommodation and the customer received it. The arrangement was not artificial; taxable persons are free to structure their affairs to limit tax burdens (Revenue and Customs Commissioners v RBS Deutschland Holdings GmbH (Case C-277/09)), subject to the abuse principle in Halifax plc v Customs and Excise Commissioners (Case C-255/02).

Med therefore fell within article 306.1(b), TOMS did not apply, and the supplies were treated as made where the hotel was situated – outside UK VAT. Morgan J’s order was restored.

Implications

The decision confirms the primacy of the written contractual documentation, properly construed, in determining the character of relationships for VAT purposes, subject to any finding that the arrangement is a sham, rectifiable, subsequently varied, or an artificial construct not reflecting economic reality. Labels used by the parties are not conclusive but the exercise begins with interpretation of the agreement.

The judgment aligns the English law analysis of agency with the EU law concept of ‘intermediary’ under article 306, and confirms that dealing ‘in one’s own name’ is analogous to acting as principal. It endorses commercial freedom for taxpayers to structure transactions to minimise tax, subject to the abuse of law doctrine.

The decision is particularly significant for online travel intermediaries and similar ‘platform’ businesses whose commercial documentation designates them as agents: provided the contractual arrangements genuinely reflect an agency relationship and are not artificial, they will fall outside TOMS, with VAT arising in the jurisdiction of the underlying supplier. It also underlines that a party’s commercial dominance and protective conduct in relation to goodwill do not, without more, convert an agent into a principal.

The decision leaves open the precise interaction between article 306.1(a) and 306.1(b) – Lord Neuberger noted Lord Sumption’s suggestion during argument that a travel agent may only fall within article 306 if within (a), but be excluded if also within (b) – but found it unnecessary to decide the point. It also proceeded on the parties’ agreed assumption that agency status under English law entails intermediary status under EU law, an assumption the Court cautioned may not hold in every case.

Verdict: Appeal allowed. The Supreme Court discharged the order of the Court of Appeal and restored the order of Morgan J in the Upper Tribunal. Med acted as an agent (intermediary) for the hoteliers, falling within article 306.1(b) of the Principal VAT Directive, so TOMS did not apply and Med was not liable for the assessed UK VAT.

Source: Revenue and Customs v Secret Hotels2 Ltd [2014] UKSC 16