25 March 2010

Med Hotels VAT ruling creates Ã¢â¬Åâœlevel playing fieldÃ¢â¬~

A "murky" area over whether travel companies act as agents or principals has been clarified in a court ruling.

Med Hotels, formerly part of lastminute.com, lost an appeal against a demand by the tax authorities that it was liable for a £7 million VAT bill under the Tour Operators Margin Scheme.

The ruling found that the company, now owned by Thomas Cook, was acting as a principal rather than supplying agency services and was therefore liable to pay VAT under the scheme.

Med Hotels rival Youtravel.com managing director Graham Nichols said he welcomed the "emerging clarity over this area which has been murky for a long time".

He said his company was established three years ago as a principal and has remained so ever since.

"This was partly because we felt it was the model that travel agency partners would value most and also because it seemed to be most reflective of the arrangements that would actually be put in place, said Nichols.

"As principal on accommodation-only sales we have been within the TOMS scheme throughout our existence and to date we have paid many millions of pounds in VAT.

"However, we have been concerned for a long time that we were not competing on a level playing field, as many of our competitors were operating under the agency model and were therefore not paying VAT through TOMS.

"As a result, we investigated the agency model very carefully to identify the exact detail of how it could be implemented and the many barriers to a successful practical outcome. We even approached HMRC for approval but they were very non-committal - no doubt because they were investigating others at the time.

"Although we have not seen the transcript of the verdict as yet, it does appear that bed-banks can no longer just call themselves agents and avoid VAT without adhering strictly to the required business arrangements and practices, backed-up of course by the correct paperwork.

"I have also seen it said that bed banks can only make money because they do not pay VAT.

"In our case this is clearly not true as we are in TOMS and moved into profit last year with the expectation of much higher profits this year."

by Phil Davies