Tax experts caution industry over VAT ruling

Tax experts have warned the industry that it shouldn"t be celebrating - just yet - following the successful appeal of Med Hotels over a VAT ruling.

The courts have overturned an earlier ruling by Her Majesty"s Revenue and Customs that would have forced bed bank Med Hotels to pay £7 million in VAT under the Tour Operators' Margin Scheme.

The HMRC had argued that Med Hotels, then owned by Lastminute, was acting as a principal between 2004 and 2007, the period under dispute.

Tax experts at KPMG said although the court"s latest decision gives some degree of certainty for the travel sector, it should not rule out an appeal by HMRC and nor should it assume that all other companies in the same situation will be treated the same.

Alan McLintock, indirect tax director at KPMG in the UK, said the HMRC might now decide to push much more aggressively for a review of the TOMS regime at EU level, an initiative that has been stalled for a number of years.

"Another outcome might be to pursue agency cases on wider anti-avoidance grounds that the agency structure's only purpose or one of its main purposes was to avoid VAT, as this was not argued by HMRC in Med Hotels," he explained.

"This approach however may or may not be any more successful in the courts than the agency challenge. "

Since its initial win, the HMRC has been challenging a number of other non-TOMS operators.

"While this recent decision is excellent news for these travel businesses, it does not necessarily mean that HMRC will automatically drop their cases, particularly if they decide to appeal Med Hotels further," said McLintock.

He also pointed out that the decision would anger many UK-based tour operators that do incur a TOMS cost, which have viewed agency structures as giving their competitors an unfair VAT advantage.

"These tour operators may now start to consider how they can become more VAT efficient," he said.

by Bev Fearis