[2010] UKFTT 120 (TC)

														TC00431

Appeal number LON/2008/0151

Value Added Tax – Whether supplies of hotel and other holiday accommodation made by Appellant as agent for accommodation suppliers or as principal

Value Added Tax – If Appellant is principal whether supplies made by it to travel agents  wholesale supplies on business to business basis

FIRST-TIER TRIBUNAL
TAX CHAMBER

SECRET HOTELS2 LTD
	(formerly MED HOTELS LTD)	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (VAT)	Respondents

				TRIBUNAL: 	 MISS J C GORT (Judge)
						 MR A McLOUGHLIN

Sitting in public in London on 23-26 November 2009 

Mr David Milne QC and Miss Nicola Shaw of counsel, instructed by McGrigors LLP, for the Appellant 

Mr S Grodzinski and Ms Eleni Mitrophanous of counsel, instructed by the Solicitors Office, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	The Appellant appealed against two assessments by the Commissioners in the amounts of £1,484,966 for the period 12/04 and the sum of £5,643,736 in respect of the periods 12/05, 3/07 and 6/07.  The reasons for the decision are contained in a letter dated 28 August 2008.  In that letter the original sum was stated to be £5,711,083 in respect of the latter periods, but this figure was later reduced to £5,643,736. 

2.	The assessments relate to output tax calculated under the Tour Operators Margin Scheme (“TOMS”) in respect of supplies of hotel accommodation.  

Background 

3.	At all material times, the Appellant was part of a group of travel related businesses which includes lastminute.com and Holiday Autos.  The group was owned by lastminute.com Ltd (a wholly owned subsidiary of Sabre Holdings Corporation).  On 2 February 2009, the trade and assets of the Appellant were sold to Hotels4 U.com Ltd as part of a transfer of a going concern of the last minute.com group.  The exact sequence of events is unclear, given that in the Appellant’s skeleton argument it is stated that on 2 February 2009 that transfer took place, whereas in a letter dated 20 November 2009 from McGrigors on behalf of the Appellant it is stated that on 9 February 2009 the trade and assets of the Appellant were sold to Hotels4U.com Ltd.  That letter further states that on 25 February 2009 the Appellant changed its name from Med Hotels Ltd to Secret Hotels2 Ltd.  The grounds of appeal state that for VAT purposes the Appellant remains part of the lastminute.com group.  It is irrelevant to the decision we have to make precisely what the group structure is.

4.	At all material times the Appellant operated a website (www.medhotels.com) through which it marketed hotel accommodation. The website featured approximately 2,500 resort hotels, villas and apartments in a variety of destinations throughout the Mediterranean and the Caribbean.  

5.	Approximately 94% of all hotel sales were made to travel agents who supply the hotels on to holidaymakers.  The remaining 6% of sales were made to holidaymakers.

6.	The appeal is concerned with the nature of the supplies made by the Appellant between 12/04 and 06/07.  It is the Appellant’s case that for the majority of the period in question (from 12/04 to 31 May 2007), the Appellant’s contractual arrangements established an agency business model, for which they rely on the Accommodation Agreements, the Terms and Conditions, Agreements with travel agents and the Booking Conditions.  The Commissioners’ case is that those documents should be looked at as well as all other contractual documents and the entirety of the Appellant’s commercial arrangements.

7.	It is not in dispute that for the remainder of the period of the assessment (1-30 June 2007) the Appellant operated as principal.  Between 1 June 2007 and 21 July 2008 the Appellant changed its business model and accepted that in that period it was acting as principal.  The reason given by the Appellant for this change was that there was commercial pressure upon it from travel agents following the deaths of children on holiday from the United Kingdom in Corfu from carbon monoxide poisoning.  The travel agents wanted to ensure that the Appellant was acting as principal in relation to the supplies of hotel accommodation and was therefore in a position to indemnify them against claims from any holidaymaker or his family for any such incidents which might occur in the future.  Some adjustments were made to the contractual arrangements covering this period, but on 21 July 2008 the Appellant reverted to what it claimed to be an agency model. The contracts applicable to this period are, it was submitted by Mr Milne, irrelevant to the determination of the issues in the case because they related to the period after the period of assessment.   We have not looked at them and therefore we do not take them into account for the purposes of this decision. 

The issues

8.	The two issues which must be resolved by the Tribunal are:

(i)	Does the Appellant act as a principal, as the Commissioners allege, or as an agent, as the Appellant contends, when making the supplies of hotel accommodation?  It is common ground that if the Commissioners are correct then the Appellant is in principle required to account for output tax under the TOMS and if the Appellant is correct then the supplies are treated as taking place in the jurisdiction in which the hotel belongs (and are, therefore, outside the scope of UK VAT); and

(ii)	If the Appellant is found to act as principal, are the supplies which it makes to the travel agent ‘wholesale’ supplies on a business to business basis (within section 3 of Notice 709/5)?  It is common ground that ‘wholesale’ supplies are outside the TOMS.

9.	The Commissioners assessed the Appellant on the basis that all its provision of accommodation in the relevant periods were made by it as principal or undisclosed agent and were therefore liable for VAT in the UK.

10.	The Appellant’s main contention is that it acted as the hotel’s disclosed agent and was therefore not liable to pay VAT in the UK at all.  

11.	During the material time the Appellant did not pay VAT either in the UK or in the Member States where the relevant accommodation was situated.

The legislation

12.	The Sixth Directive

For most of the period that is covered by the decisions and assessments, the Sixth Directive was in force.  From 1 January 2007, this was replaced by the VAT Directive.  The Sixth Directive will be referred to here, with references provided to the corresponding articles in the VAT Directive.

13.	Pursuant to Article 13B(b)(1) of the Sixth Directive (Article 135(2)(a) VAT Directive), the leasing or letting of immovable property is generally to be exempted from VAT, but this excludes: “the provision of accommodation, as defined in the laws of the member States, in the hotel sector or in sectors with a similar function …”.  This is reflected in item 1(e) of Group 1, Schedule 9 of the Value Added Tax Act 1994 (“VATA”) which excludes from exemption “the grant of any interest in, right over or licence to occupy holiday accommodation”.  Thus the supply of hotel accommodation is standard rated.

14.	Under Article 9(2)(a) of the Sixth Directive (Art 45 of VAT Directive): “the place of the supply of services connected with immovable property … shall be the place where the property is situated …”.  This is implemented by Article 5 of the VAT (Place of Supply of Services) Order 1992.

15.	Thus, the supply of hotel accommodation is treated as being made where the hotel in question is located.  Under the normal rule therefore, a UK company providing holiday accommodation in another Member State would be liable to pay VAT in that other Member State and would therefore need to be registered there for VAT.

16.	Obvious practical difficulties would arise for travel agents selling accommodation in a number of member States if they had to account for VAT to the relevant tax authorities in each of those Member States.  The normal rule is therefore in some circumstances displaced by the application of a special scheme for travel agents which requires travel agents of a certain kind to account for VAT on their margin within their own state of establishment (the TOMS – see below).

17.	Article 26 of the Sixth Directive (Articles 306-310 of the VAT Directive) provides:

“(1)	Member States shall apply value added tax to the operations of travel agents in accordance with the provisions of this Article where the travel agents deal with customers in their own name and use the supplies and services of other taxable persons in the provision of travel facilities.  This article shall not apply to travel agents who are acting only as intermediaries and accounting for tax in accordance with Article 11(A)(3)(c).  In this Article travel agents include tour operators.

(2)	All transactions performed by the travel agent in respect of a journey shall be treated as a single service supplied by the travel agent to the traveller.  It shall be taxable in the Member State in which the travel agent has established his business or has a fixed establishment from which the travel agent has supplied the services.  The taxable amount and the price exclusive of tax, within the meaning of Article 22(3)(b), in respect of this service shall be the travel agent’s margin, that is to say, the difference between the total amount to be paid by the traveller, exclusive of value added tax, and the actual cost to the travel agent of supplies and services provided by other taxable persons where those transactions are for the direct benefit of the traveller.

…

(4)	Tax charged to the travel agent by the other taxable persons on the transactions described in paragraph 2 which are for the direct benefit of the traveller, shall not be eligible for deduction or refund in any Member State.”

18.	Article 11(A)(3)(c) of the Sixth Directive (referred to in Article 26(1) provides:

“The taxable amount shall not include:

(c)	the amounts received by a taxable person from his purchaser or customer as repayment for expenses paid out in the name and for the account of the latter which are entered in his books in a suspense account.  The taxable person must furnish proof of the actual amount of this expenditure and may not deduct any tax which may have been charged on these transactions.”

19.	Article 6(4) of the Sixth Directive (Article 28 of the VAT Directive) provides as follows:

“Where a taxable person acting in his own name but on behalf of another takes part in a supply of services, he shall be considered to have received and supplied those services himself.”

Domestic Legislation

20.	These EU legislative provisions are reflected in domestic law as follows:

	Section 53 of VATA (Value Added Tax Act 1994) provides:

“(1)	The Treasury may by order modify the application of this Act in relation to supplies of goods or services by tour operators …

(2)	Without prejudice to the generality of subsection (1) above, an order under this section may make provision –

(a)	for two or more supplies of goods or services to be treated as a single supply of services;

(b)	for the value of that supply to be ascertained, in such manner as may be determined by or under the order, by reference to the difference between sums paid or payable to and sums paid or payable  by the tour operator;

(c)	…

(3)	In this section “tour operator” includes a travel agent acting as principal and any other person providing for the benefit of travellers services of any kind commonly provided by tour operators or travel agents.”

21.	The Value Added Tax (Tour Operators) Order 1987 provides for the Tour Operators Margin Scheme (“TOMS”):

“Supplies to which this Order applies

2.	This Order shall apply to any supply of goods or services by a tour operator where the supply is for the benefit of travellers.

Meaning of “designated travel service”

3(1)	Subject to paragraphs (2), (3) and (4) of this article, a “designated travel service” is a supply of goods or services –

(a)	acquired for the purposes of his business; and

(b)	supplied for the benefit of a traveller without material alteration or further processing;

by a tour operator in a member State of the European Community in which he has established his business or has a fixed establishment.

(2)	The supply of one or more designated travel services, as part of a single transaction, shall be treated as a single supply of services.

(3)	The Commissioners of Customs and Excise may on being given notice by a tour operator that he is a person who to the order of a taxable person – 

(a)	acquires goods or services from another taxable person; and

(b)	supplies those goods or services, without material alteration or further processing, to the taxable person who ordered the supply for use in the United Kingdom by that person for the purpose of that person’s business other than by way of  re-supply – 

treat supplies within sub-paragraph (b) as not being designated travel services.

(4)	The supply of goods and services of such description as the Commissioners of Customs and Excise may specify shall be deemed not to be a designated travel service.

…

Place of Supply

…

5(2)	A designated travel service shall be treated as supplied in the member State in which the tour operator has established his business or, if the supply was made from a fixed establishment, in the member State in which the fixed establishment is situated.
…
7.	Subject to articles 8 and 9 of this Order, the value of a designated travel service shall be determined by reference to the difference between sums paid or payable to and sums paid or payable by the tour operator in respect of that service, calculated in such manner as the Commissioners of Customs and Excise shall specify.

…
12.	Input tax on goods or services acquired by a tour operator for re-supply as a designated travel service shall be excluded from credit under sections 14 and 15 of the Value Added Tax Act 1983 [now sections 24-26 Value Added Tax Act 1994].”

22.	Paragraph 26 of HMRC Notice 709/5 explains that a supplier of services who comes within TOMS cannot reclaim any UK or EU VAT charged on the travel services and goods he buys in and re-supplies, but only accounts for VAT on his margin (i.e. difference between the amount received from his customer and that paid to his suppliers).

23.	Under paragraph 3.1 of Notice 709/5, supplies to business customers which are for subsequent resale (wholesale supplies) do not fall within the TOMS.  This follows from section 53(3) VATA, which only includes within the definition of “tour operator” a person who provides services for the benefit of “travellers” (as opposed to for the benefit of other businesses).

Summary of the overall effect of the legal provisions

24.	Where a travel agent is supplying accommodation services as an agent for his principal, the hotel, the normal rule applies and VAT is payable in the Member State where the accommodation is situated.

25.	By contrast, where a travel agent is supplying accommodation services as principal, or on behalf of another person but in his own name (i.e. as undisclosed agent), he will pay VAT on his commission in the Member State where he is established.

26.	Whichever role the “travel agent” takes, it is clear that there will be a liability to pay VAT.  The particular role the travel agent adopts is relevant only to the question whether VAT should be paid in his place of establishment or in the place where the accommodation in question is situated.

Cases referred to
International Life Leisure Ltd (19649)
Spearmint Rhino Ventures (UK) Ltd [2007] STC 1252
A1 Lofts Ltd [2009] All ER (D) 93 (Nov)
Mercantile International Group v Chuan Soon Huat Industrial Group Ltd [2002] All ER (Comm) 786
J K Hill & Co [1988] STC 424
Potter [1985] STC 45
Music and Video Exchange [1992] STC 220
Reeds Personnel Services Ltd [1995] STC 588

The evidence

27.	Agreed bundles of documents were provided and Mr Alan McLintock, a Senior Tax Director with Sabre Europe Management  Services Ltd, a wholly owned subsidiary of Sabre Holdings Corporation, gave evidence to the Tribunal.  In the following contractual documents the Appellant is variously referred to as: ‘the Agent’, ‘Med Hotels’ or ‘the Company’.

The contractual arrangements 

(A)	The Accommodation Agreements

These were drawn up by Global Hotels, an internal department of lastminute.com Ltd which was responsible for negotiating hotel room rate and reviewing them twice a year.  The Agreements show the pricing and availability of rooms, excluding inventory risk, and the allocation of units to the Appellant for specific periods at specific rates.  

(B)	The Terms and Conditions

These govern the relationship between the Appellant and the hotel, and were managed by Global Hotels.  They cover all the supplies of hotel accommodation made by the Appellant over the period in question.  Although the contracting party was Last Minute Network Ltd, this was not an issue in the case.  The preamble states:

“The terms and conditions of this Agreement will govern any reservation made by the Agent with the supplier of accommodation overleaf herein referred to as ‘the principal’.”

It contains where relevant as follows:-

1.	Principal’s Obligations

1.1	The Principal shall apply to the Agent, its subsidiaries and any authorised third party all advertising material including website address, CDs, slides, brochures and marketing video tapes (“Media”).  The Principal shall ensure the Agent and its subsidiaries and any authorised third parties have unlimited rights to use the media at all times during the Agreement and that the content of the Media shall be accurate and shall not be misleading in any way.

1.2	The Principal shall provide all accommodation property, resort or surroundings (“Property”) and services, amenities and/or facilities (“Services”) to the Client strictly pursuant to the Media.

…

1.5	The Principal shall honour all Client accommodation requests, options and reservations taken by the Agent.  However, if any request, option or reservation cannot be honoured, the Principal will (a) notify the Agent immediately by fax/email; (b) comply with the Agent’s requests and instructions concerning alternative arrangements, and (c) unless otherwise advised by the Agent, locate replacement accommodation for each Client at accommodation of least (sic) equal standard with similar Services and location ensuring all additional costs, including transportation expenses are borne by the Principal.

1.6	The Principal shall ensure the replacement accommodation complies with the provisions of this Agreement.  The Principal shall remain bound by this Agreement if no replacement accommodation is provided to the Client.

1.7	If the replacement accommodation is not deemed acceptable by the Client and the Client wishes to cancel his/her booking, the Principal shall pay to the Agent compensation for loss of profit, all costs including without limitation committed airline seats, administration fees, Client compensation and the Agent’s commission where applicable.

1.8	The Principal shall not, at any time, do anything which is intended deliberately to harm the reputation of the Agent or cause a derogation of the Agent’s trading brands.

1.9	The Principal shall fully comply with all applicable national and local laws, rules, legislation and trade regulations relating to accommodation and the operation of the property or resort and shall ensure the Principal shall ensure all staff are properly trained for the evacuation of Clients in the event of an emergency.

2.	Liability and Indemnity

2.1	The Principal on behalf or (sic) itself, its employees, agents and sub-contractors accepts liability and agrees fully to indemnify the Agent in respect of all losses, damages, liabilities, expenses and demands of whatever nature (including without limitation any professional fees incurred by the Agent and any compensation payments, refunds or credits to any Client subject only to condition 1.5(c) above) which the Agent may suffer or incur directly or indirectly as a result of (a) any breach by the Principal of any term or condition of this Agreement; and/or (b) the death, injury or illness (including fatality) of any person for whom the Agent may be responsible or for which the Agent may have any liability and which is caused by or arises out of any wrongful or negligent act or omission of, or any breach of this Agreement by, the Principal, its employees, agents or sub-contractors; provided that the Principal shall not be liable in respect of anything arising directly as a result of the sole fault of the Agent.

2.2	In the event of a claim or complaint being made by the Client to the Agent or the Agent’s representatives in relation to the inadequacy or non-provision of the accommodation or any other Service provided or agreed to be provided by the Principal, the Agent shall notify the Principal of any such claim or complaint, and the Principal shall resolve the claim or complaint directly with the Client.

2.3	If the Principal receives a claim or complaint from a Client it shall (a) immediately take all responsible steps to resolve such claim or complaint; and (b) if it is serious, or if it involves a personal injury, immediately notify the Agent in writing by fax/email and provide details of the Principal’s response to the claim or complaint; and (c) if requested to do so by the Agent, keep the Agent informed of developments concerning the claim or complaint as they arise.

2.4	If the Agent receives a claim or complaint concerning the Client’s accommodation booking, the Principal will, at the Agent’s request, promptly and at the Principal’s own expense, give all assistance requested by the Agent including but not limited to, providing documents, providing detailed written statements from relevant employees and/or agents and ensuring such employees and/or agents remain available to give evidence.

2.5	The Agent is entitled to receive a commission from the Principal.  Such commission may be calculated as any sum charged to a Client by the Agent which is over and above the prices set out in the rate sheet attached to this Agreement.

4.	Insurance

The Principal shall maintain insurance cover with a reputable company or institution in respect of (a) the property (including the accommodation) against fire and such other risks as are usually covered by a hotel owner’s or leaseholders comprehensive policy.  Such cover being to the full reinstatement value of the property to include professional fees, site clearance and debris removal; and (b) all third party risks including (but not limited to) any liability for damages for the death, injury or illness of the Clients, employees, agents, sub-contractors of the Principal or any liability under clause 2.1(b) hereof. The Principal shall on demand provide a copy of insurance policies to the Agent or the Agent’s representatives together with a copy of the receipt for the payment of the current insurance policy premium.

5.	Health and Safety

5.1	The Principal hereby certifies that the Property, Services and accommodation comply and will at all times during the validity of this Agreement comply fully with EEC, national and trade laws, regulations and codes of practice, relating to hygiene, fire, general safety and security of those on the property or in any way affecting the operation of the Property.

…

(C)	The Agency Agreement

This governs the relationship between the Appellant and the travel agent.  The agreements were broadly of two types: “gross rate” contracts, where the travel agents’ commission was set in the agreement with the Appellant and, from around the start of 2007, “net rate” contracts in which the travel agent could decide its own commission above the price agreed with the Appellant.  The Commission Terms are set out as follows:

“14% commission plus value added tax of invoice on all commissionable items arranged through or by the Agent.  A VAT invoice in respect of commission earned will be required before commission is credited.”

(It is the Appellant who requires the VAT invoice.)
Credit Terms are defined as:

“Payment for bookings made with MHL throughout this document will be due and payable as follows:

Where date of travel is more than 35 days after date of booking, a 25% deposit is payable on booking.  Balance payable 35 days before date of travel.

Where date of travel is less than 35 days after date of booking, full payment on booking date.”

28.	Under Clause 1, the definition section, it is stated: “‘Accommodation Arrangements’ means accommodation supplied by MHL.”  The Agreement continues:  

	“Appointment

2.1	By this Agreement MHL appoints the Agent as a non-exclusive Agent in the Republic of Ireland for the retail sale of the Accommodation Arrangements on the terms and subject to the conditions in this Agreement.

…

4.	Commission

In consideration of the support and marketing agreement within the provisions of Clause 5 below, MHL shall share with the Agent the commission it receives from the hotel.  MHL shall pay the Agent an agreed share of the commission as set out in the specific terms of this Agreement on all commissionable items arranged through or by the Agent.

5.	Duties of the Agent

The Agent agrees, at all times during the continuance of this Agreement to act in the best interest of MHL, and not allow its interests to conflict with the duties that it owes to MHL and to act towards MHL dutifully and in good faith to:

5.1	Sales promotion

promote and use its best endeavours to increase sales of the Accommodation Arrangements to existing and potential customers through all means, including but not limited to teletex, the internet and direct marketing activity;

5.2	Monies Held

(i)	hold all monies paid to the Agent by clients for bookings made with MHL, on trust as agents for MHL at all times;

(ii)	hold all monies paid to the Agent by clients for bookings not including air transportation on behalf of those clients until MHL issues a confirmation invoice; thereafter to hold the monies on behalf of MHL;

5.3	Booking Procedures

ensure that a deposit is taken in accordance with the applicable current Booking Conditions and in the case of late booking within the balance due date, ensure that the full cost of the Accommodation Arrangements in cleared funds is taken, before confirming the booking with MHL.

5.4	Booking Conditions

ensure that the lead-named client is referred to the Booking Conditions in respect of the clients’ booking and any other applicable information before any booking is confirmed by the Agent;

5.5	Insurance 

(i)	ensure that the lead-named client is specifically advised that the insurance available … which the client shall be required to purchase at or before the time of entering into a contract with MHL.

(ii)	indemnify MHL if the Agent fails to comply with the provision of Clause 5.6(i) and MHL incurs costs on behalf of the client such as medical and repatriation expenses.

…

5.9	Cancellation and amendment charges	

Cancellation and amendment charges will be charged by MHL to the Agent on the basis shown in Appendix A to this Agreement.

5.10	Cancellation and amendment procedure

(i)	inform the lead-named client of any obligations to pay cancellation amendment charges where a client requests the cancellation or amendment of  a booking and pass on MHL’s cancellation invoice or amendment invoice, as appropriate, to the client on receipt; 

…
5.11	Collection and refund of moneys due

(i) 	collect from clients all deposits, balances, cancellation charges, amendment fees and all other moneys payable by clients in accordance with the Booking Conditions and to remit those moneys as shown on MHL’s confirmation invoice, cancellation invoice or amendment invoice, as appropriate to MHL in accordance with the Credit Terms expressed in the Principal Terms and Conditions of this Agreement no later than the day after receipt by the Agent of such moneys.
…

(A table of cancellation and amendment charges is included but is not set out here.)

29.	There were two ways in which travel agents could access the hotels marketed by the Appellant and make a booking.  The first was through the Appellant’s website, and the second was through an “eX Tensible Markup Language” or “XML” feed.  A travel agent wishing to make bookings through the website will be provided with an individual identity code to access a dedicated ‘travel agents only’ section.  Neither the holidaymakers nor the hotels themselves had access to this part of the website.  The XML feed was introduced in about 2005, it enabled the Appellant to transfer the hotel details and prices directly into the travel agent’s own system, allowing the travel agent to market and sell the hotel rooms from its own system.

30.	The XML licence which we saw was entered into on 23 January 2007 and provided at paragraph 3.1 as follows:

Customer shall at all times keep the individual Net Rate prices for the Med hotels Content and the Customer Content hidden and confidential from any and all Visitors and all third parties, but will Package the Med hotels Content for the Customer Content to create holiday a packages for sale to Visitors at an inclusive  price.

(D)	Booking Conditions

The Booking Conditions, i.e. the terms on which a holidaymaker contracts with the Appellant, appear on the Appellant’s website.  On the first page under the heading Booking Conditions it says as follows:

“medhotels.com act as Booking Agents on behalf of all hotels, apartments and villas featured on this website and your contract will be made with these accommodation providers.  Please read the booking Terms and Conditions carefully.  They apply to all bookings made with medhotels.com and to all members of your party.”

31.	In the next paragraph it states that at the time an e-mail confirmation of the booking is sent a binding contract comes into existence.  It continues that the contract is subject to the Booking Conditions which include cancellation charges.  It provides:

“Once the contract is made, the accommodation provider is responsible to you to provide you with what you have booked and you are responsible to pay for it, in each case subject to these booking conditions, and any other terms and conditions specific to the relevant accommodation.”

32.	There then follows a reference to holiday insurance and one to payments, in particular that a deposit of 25% has to be paid if the booking is made more than five weeks before the arrival date, and the balance will be payable five weeks before departure.  It then provides:

“Please note: Your booking may be cancelled, if you fail to make payment on time and you would then be liable to pay the accommodation provider the cancellation changes set out below.  Payment for incidental extras … has to be made directly to the accommodation provider, when you check out.”

A heading ‘Special Requests’ provides that such requests are to be made at the time of booking and will be passed on to the relevant accommodation provider.  Any changes which a holidaymaker may wish to make will be subject to an administration charge of £15 payable to the Appellant.  The provisions for cancellation include a table setting out variable charges for cancellation.  The table also sets out a scale of charges for amendments. The concluding paragraph in relation to cancellations and amendments provide:

“If in the unlikely event that we are informed by the accommodation owner that they are unable to provide the accommodation which you have booked, we will try to provide you with similar accommodation of equal standard.  If we are unable to do this or you prefer not to accept our alternative, you may cancel free of charge.”

33.	Under a heading ‘our responsibility to you’ for your Booking it is stated:

“Because we are acting only as a booking agent we have no liability for any of the accommodation arrangements and in particular no liability for any illness, personal injury, death or loss of any kind, unless caused by our negligence.  Any claim for damages or injury, illness or death arising from your stay in the accommodation, must be brought against the owner of the accommodation and will be under the jurisdiction of the law of the country in which the accommodation is based.”

There then follows a paragraph on Complaints Procedure which provides inter alia that the holidaymaker must inform the accommodation management immediately of any complaint.  If the issue is not resolved to the holidaymaker’s satisfaction, he should contact the Appellant’s representative in the resort.  It then provides:

“We will act as an intermediary to try and rectify the problem.  In the event that we are unable to do so, and you wish to take matters further, you must do so directly with the accommodation provider concerned.”

34.	Under the Agreement itself which is also set out on the website the holidaymaker is informed that the Appellant acts as agent on behalf of each of the hotels for which it offers accommodation.  

35.	Clause 4 “The services of med hotels.com” provides:

“Medhotels.com provides information concerning the price and availability of hotels, together with a range of other information to assist in making a hotel reservation. Prices, restrictions and availability of goods and services may change without notice and reservations are subject to applicable taxes and fees.  By completing the information boxes and clicking ‘confirm’ on the reservation page you are entering into a contract with med hotels.com for the provision of all the services of the Site, including the publication of pricing, availability and other information concerning available hotel rooms (the “Services”), on the terms set out herein.  Unless otherwise agreed or specified, medhotels.com does not charge Users any fee for the provision of its Services.  You may withdraw from your contract with med hotels.com for the Services at any time without any cost to you by notifying us that Info at medhotels.com.”

36.	Under Clause 6 of the Agreement which is headed ‘Contract to purchase hotel services’ it provides:

“Any reservations you make on this site will be directly with the company whose hotels services you are booking.  At the time of making any such reservation you are entering into a contract with that company and not with medhotels.com.”

Handling Agency Agreement

37.	In addition to the above Agreements we were also shown a template of a Handling Agency Agreement.  This Agreement was between the Appellant and the relevant handling agent in a particular resort.  Under the description of the parties to the Agreement it states inter alia that:

“This Contract defines the services, which must be delivered by the Agent to support Medhotels in the provision of holidays and excursions to its Customers.”  

Under the interpretation section the customer is defined as a customer of Medhotels.  Under clause 2 ‘appointment’ it provides:

“The company hereby appoint AGENT as its agent to look after the needs of its customers and to provide the Services in the Territory in accordance with and subject to the terms of its Agreement and the Agent hereby accepts such appointment on the terms set out in this Agreement.”

Under clause 4.1(h) it provides that one of the services to be supplied by the Agent is to “assist the Company with any disputes between its Customers and Hoteliers.”  Under clause 5.3 the representative’s duty is to “avoid a conflict of interest” the Agent will ensure the representative’s first priority is to provide Customer Service assistance to the customers.   Paragraph 6.6 provides that “the Agent shall ensure that all staff remains courteous and helpful in all dealings and communications with the Company’s Customers.  Clause 6.1.2 provides that “all coach transfers will be branded with the Medhotels logo.”

Mr McLintock’s evidence

38.	In his witness statement Mr McLintock set out that whenever he referred to “the customer” he was referring to the hotel’s customer.  However, when a holidaymaker (a term which we will use to avoid the ambiguity of the word ‘customer’) makes a booking using the Appellant’s website, he/she assuming a booking is made, makes a payment to the Appellant.  A deposit of 25% is made at the time of the booking unless it is less than five weeks prior to the travel date, in which case the full price is paid.  Payment is made by credit card and the Appellant takes the balance of the payment five weeks before the travel date.  This payment is made into the Appellant’s bank account, not the hotel’s account.  Interest on direct sales is therefore earned by the Appellant.  It was Mr McLintock’s opinion that the person using the website would see that the Appellant was acting as an agent for the hotel through the terms and conditions, and other communication.  The use of the word ‘customer’ on the website was for marketing purposes and was not indicative of legal relations.

39.	It was accepted by Mr McLintock that the holidaymaker would not know the rate which the hotel charged to the Appellant and neither did the hotel know what rate the holidaymaker was paying.  It was not disputed that the bill from one hotel to a particular holidaymaker, Mrs Cotter, sent to the Appellant showed an IVA (VAT) rate of 5%.  It was accepted that the Appellant ought on all occasions to have issued a VAT invoice for its commission (an amount unknown to the hotels in question) but this had not been done, Mr McLintock told the Tribunal, because at the relevant time the Appellant had not understood that it should be done.  The Agency Agreement itself stipulated in its Agreement with the travel agent that a VAT invoice in respect of commission earned would be required before commission would be credited.  Mr McLintock described this as being a protective clause to enable the Appellant to recover the VAT it paid, but in practice only twenty-seven travel agents out of many hundreds in fact issued a VAT invoice.  It was accepted by Mr McLintock that where a hotel would make an error in the Appellant’s favour, then the Appellant would not account to the hotel for the difference, but where a hotel made an error in its own favour, then the Appellant would look to the hotel to correct it.  Mr McLintock’s explanation was that if all errors were investigated it would necessitate a loss of time and the Appellant would therefore need to charge an administrative fee or increase its rates. The Appellant retained the 25% deposit it had received prior to the holidaymakers’ arrival on such occasions when the holidaymaker did not in fact go on holiday in question, i.e. the holidaymaker forfeited that amount to the Appellant, not to the hotel. There was no contractual obligation to pay the sum to the hotel.  However in circumstances where a travel agent was involved, the money would be passed back to the travel agent, although in practice the travel agent almost never charged for cancellations.  Equally hotels would not generally charge for cancellations other than when a large party was involved.  On such an occasion the hotel would contact the Appellant.  In situations where the hotel did not charge, the Appellant would not do so.  It was accepted that a holidaymaker would have contracted to pay cancellation charges and the Appellant therefore had a discretion to impose such a charge.  The evidence shows that even where a hotel did not charge, the Appellant would retain the customer’s deposit.  90% of the Appellant’s business was through agents, not directly with the holidaymaker.

40.	Various letters of complaint written to the Appellant were produced which showed that it had corresponded with the complainants and offered payment without first clearing the matter with the hotel in question, although that hotel would then be charged by the Appellant for any monies paid to the complainant.  Mr McLintock said that there would be some communication with the hotel to validate the claim prior to any payment being made, and that payment was only made where the claim was not substantial.  It was accepted that at a meeting on 25 January 2006 between HMRC and representatives of the Appellant it was said that the Appellant could agree compensation without prior approval from the hotel in question.  It could also recover the compensation by way of deducting it from the payment it made to the hotel.  In some cases the Appellant would issue a voucher but that voucher would be in respect of a future holiday with the Appellant and not with the hotel in question.  It was therefore the Appellant and not the travel agent or the hotel that was offering the compensation, which Mr McLintock explained was part of the commercial reality of the situation, i.e. where the expense was low it made sense to keep the travel agent happy and not to charge it.  The fact that some customers complained to the Appellant and not to the hotel was explained by it being easier for the holidaymaker to contact the Appellant as it was in the United Kingdom.  In another case there was evidence of a complaint which was rejected by a hotel but nonetheless the Appellant paid the complainant and then charged the hotel in question.  This was explained by Mr McLintock as being only a nominal amount which was paid and was done to maintain good relations with the holidaymaker.  He did not dispute that the Appellant had charged the hotel without the hotel’s agreement. 

41.	The website Booking Conditions seen by the holidaymaker (see above) state inter alia as follows:

“If in the unlikely event that we are informed by the accommodation owner that they are unable to provide the accommodation which you have booked, we will try to provide you with similar accommodation of equal standard.  If we are unable to do this or you prefer not to accept our alternative, you may cancel free of charge.”

Mr McLintock did not accept that this imposed an obligation on the Appellant but, in the event of a hotel having gone into insolvency, as a matter of goodwill the Appellant would attempt to accommodate the holidaymaker elsewhere.  Insofar as any moneys held by the Appellant on behalf of the hotel, the Appellant would have to pay that to the insolvency.  The commercial reality of the Appellant’s position was that if the travel agent asked the Appellant to do something, then it would do it.

42.	‘Customer relations’ and ‘commercial reality’ were frequently cited by Mr McLintock as the reason for the Appellant’s actions where they appeared inconsistent with the agreements.  The former was particularly relied on in relation to the Appellant’s provision of its own representative in the various holiday destinations.

43.	The Appellant had made pre-payments to certain hotels which, at the meeting referred to above with HMRC, were referred to as ‘loans’ which were made in order to get the hotel to sign up with the Appellant.  They were considered by the Appellant to act as an incentive to the hotel in question and to aid its cashflow,  the purpose of the advance payment was not to purchase guaranteed beds. Mr McLintock accepted that there was a risk that the hotel in question might go insolvent, but it was deemed at the time to be an acceptable risk.  The payments in question were made in return for higher commission rates.  

44.	Mr McLintock was unable to say whether any travel agents ever signed the XML licence.

45.	Between 1 June 2007 and July 2008 the Appellant accepted that it was dealing with the hotels as a principal and not as agent.  The only difference in the Terms and Conditions in that period was that there was a new clause 3 and a new clause 9.6.  The new clause 3 was as follows:

“Taxes   Company agrees to identify to MH and include in its standard accommodation charges all Taxes imposed on the Net Rate for the accommodations booked hereunder.  Company agrees to remit any and all such Taxes paid to Company by MH or any Client to the appropriate taxing authorities as required by law.  Company and MH will reasonably and in good faith cooperate with each other in the determination and administration of each party’s tax collection and remit its responsibilities.  “Taxes” means VAT, sales, use, excise, lodging, hotel, transient, rental or other similar types of taxes, governmental fees or charges.”  

Clause 9 provides:

9.	General

9.1	MH shall be licensed to use the Company’s logos, trademarks and property names/details during this Agreement.  

9.2	MH reserves the right at any time to transfer or sub-contract any of its rights and/or obligations under this Agreement to any subsidiary or other associated company as MH or to any authorised third party.

9.3	This Agreement shall be construed in accordance with and governed by English law, and the parties hereby submit to the exclusive jurisdiction of the competent courts of England.

9.4	This Agreement shall not operate so as to create a partnership or joint venture of any kind between the parties.

9.5	This Agreement supersedes all previous agreements, arrangements and understandings between the parties with respect to the subject of this Agreement, which shall cease to have any further force or effect.

9.6	In no event shall MH be liable hereunder under any legal or equitable theory for any indirect, incidental, exemplary or consequential damages, and in no event will MHL’s cumulative liability hereunder exceed £50,000.

This agreement also substituted the words “the Agent” which were used in the earlier agreement, with “MH” and the hotel was called “the Company” not “the Principal” as in the previous agreement. These changes were made on the instructions of the Appellant’s lawyers.  In the event, notwithstanding this claimed change of legal status, the Appellant did not succeed in cutting out any of its competitors (the claimed reason for the changes) and therefore it reverted back to its claimed status as an agent.  

The Respondents’ case

46.	Mr Grodzinski pointed to 8 indicia that the Appellant was not acting as an agent.  These were:

1.	The hotels looked to it for payment, not to the customer.  The invoices were paid by it unless it decided to withhold payment in circumstances where a customer complained. If the Appellant became insolvent, the hotel could not look to the customer for payment.  

2.	It had the ability to determine its own undisclosed level of profit.  

3.	The absence of any requirement upon it to account for its profit or commissions to the hotels.

4.	The fact that it retained any under-invoicing.  This was said by Mr McLintock to be consistent with the contract, but it was not consistent with a fiduciary relationship between it and the hotel.  

5.	The paying of the hotel in advance before a customer booked laid it open to a significant foreign exchange risk.

6.	The absence of any requirement for a separate account which was to be compared with the Travel Agent contract in which the travel agent was bound to provide a separate account.  

7.	The fact that the hotels owed money to it was inconsistent with it being the hotel’s agent.

8.	The fact that it set the terms and conditions with the customer was not what was to be expected in an agency situation where the principal is expected to tell the agent what its terms were with its customer which it was for the agent to procure.  In the present case, for the most part the hotels did not produce terms and conditions.

47.	In addition Mr Grodzinski pointed to there being no material difference between the period when the Appellant contended it was acting as an agent and when it accepted that it was acting as principal.  Furthermore the Appellant set the selling price to the holidaymaker, this was clear from clause 2.5 of the Agreement with the hotel.  In the case of International Life Leisure Ltd where the tribunal, thought it crucial that the travel agent had the: 

“… contractual ability to set the price for accommodation and retain the difference between it and the price it has agreed for the accommodation with the provider ‘without referring or accounting’ to the provider thereof the clause in question negates agency” (paragraph 95) 

That case was also relied on for the submission that, just because a company described the relationship as one of agency, that was not determinative of the situation.  

48.	We were referred to the case of Spearmint Rhino Ventures (UK) Ltd in which case a dancer set her own fee, only some of which she was obliged to pay to the club in which she danced, a fact which was said to be of “crucial significance”  (paragraph 37).  The High Court observed at paragraph 37:

“,,,  [t] here could no doubt be an arrangement involving an agency in which that factor existed, but that important fact tends to demonstrate the genuineness of the situation in which the dancer engages and performs in her own right.”

It was further submitted that, if the Appellant were truly an agent, it would be important for the hotel to know the amount of commission it was receiving because it is only if the hotel knows the price its agent is charging that it can properly account for VAT.   In the present circumstances the Appellant must assume that the hotel will not be accounting for VAT based on the full price paid for by the traveller, as it invoiced the Appellant for the net amount payable to it by the Appellant, and only accounted for local VAT on that amount.  It therefore followed that the VAT due on the amount retained by the Appellant i.e. its margin (a sum unknown to the hotel), should have been payable by the Appellant in the UK.  There was no evidence of any VAT paid on the Appellant’s supplies by anyone anywhere.  

49.	Other matters relied on by Mr Grodzinski were that the Appellant was contractually entitled to charge the holidaymaker cancellation charges up to 100% of the price paid/payable.  There was no contractual obligation to pass those charges on to the hotels.  Additionally the Appellant retained the interest from the deposits made to it by the holidaymakers.  It did not pass on the interest to the hotels and it also retained administration fees for changes to bookings.  These actions were not consistent with agency, nor was the fact that from time to time it made compensation payment to the holidaymakers.  Although these were charged on to the hotels, the basis on which it did so was not clear from its agreement with the hotel.  That Agreement makes complaints a matter for the hotel and does not authorise the Appellant to investigate and determine those complaints and to make compensation payment itself on the hotel’s behalf.  On occasion compensation paid by the Appellant was in the form of discount/vouchers for future bookings with it and there was no requirement that they be used for another holiday with the particular hotel about which complaints had been made this again points away from agency.  Additionally there is no evidence of the Appellant maintaining a suspense account of the expenditure it incurred in making compensation payments, allegedly on behalf of the hotels, as it would have been required to do under Article 11(A)(3)(c) of the Sixth Directive. 

50.	Mr Grodzinski pointed to the absence of any terms and conditions from the hotels to the customers, despite the fact that the Appellant states that the contract was with the hotel and referred in its contract with the customers to the hotel’s terms and conditions, it in fact never provided the customer with any such terms and conditions.  There is no documentation to show that the hotel has an obligation to provide accommodation to the holidaymaker, rather than to the Appellant.  In the event of the hotel not providing accommodation, the booking conditions state that the Appellant will try to provide similar accommodation of equal standard and, if it cannot, or the holidaymaker does not want the alternative, it will allow him to cancel free of charge.  The same position existed in the period during which the Appellant accepts that it was acting as a principal.  The agreement between the hotel and the Appellant states at clause 1.7 that the hotel will pay any client compensation if it cancels a booking, but there is no provision in the booking conditions for any such compensation.

51.	The provision by the Appellant of handling agents to provide support to the customers independently of the hotel was another factor relied on by HMRC.  The Appellant’s contract with the handling agents refers to the holidaymakers as its customers and the Appellant’s website refers to them as providing this support to its guests.  The contract also makes clear that the handling agents primary loyalty was to the Appellant’s customers, that is, not to the hotel.

52.	We were referred to Bowstead on Agency.  At paragraph 1-032 it is stated:

Agent and seller: Agent and buyer

The above discussion raises the distinction between agency and sale.  These relationships, unlike the others dealt with above, are mutually exclusive: in respect of a particular transaction a person cannot be acting as agent if he is a buyer or seller to his principal and vice versa.  The sale is a commercially adverse relationship; agency involves a fiduciary relationship of trust of confidence. The solution to commercial disputes may frequently turn on whether the parties are to be regarded as parties to one or the other relationship.

…
“The distinction between agent and buyer for resale normally turns on whether the person concerned acts for himself to make such profit as he can, or is remunerated by pre-arranged commissions.  A supplier who himself fixes the resale price is likely to be a buyer for resale: but the fact that the resale price is fixed by the manufacturer does not necessarily make the supplier an agent, for resale prices are frequently fixed by manufacturers.  Exceptionally a buyer for resale may also be paid commission, or an agent remunerated by being allowed to keep the excess over and above a stipulated price.  But the making of such a profit by an agent would normally be improper.  

…

“Each transaction must be examined on its facts, considering the extent to which an agent’s duties are appropriate.  Much turns on the extent to which the principal can call for an account, for the duty to account is a typical feature of the agent’s position.  The ways in which the parties described themselves are not conclusive.  “There is no magic in the word ‘agency’.  It is often used in commercial matters where the real relationship is that of vendor and purchaser.” [Citation from Exp. White, re Neville (1871)LR 6 Ch. App 397.] There may indeed be reasons for principal and agent adopting the relationship of vendor and purchaser, for example, to avoid tax, exchange control rules or trade embargos. It is also the case that the trading functions of intermediaries may imperceptibly alter over a period.”

53.	Mr Grodzinski put forward the following key questions to be answered by the Tribunal:

1.	In order to ascertain the nature of the relationship between the parties the Tribunal must look at the entirety of the commercial arrangements, which were generally to be found in the contractual documents.

2.	The fact that the parties used the label ‘agency’ to describe the relationship could not be determinative of the issue.  It was necessary to look at the substance of what was agreed, and the substantive rights and obligations agreed to in order to decide whether the correct classification of the relationship was agency.

3.	The fundamental feature of an agency relationship was that the agent acts to bring into effect a direct contract for the supply of goods/services and does not undertake direct contractual obligations for that supply himself.

4.	The ability of one party to decide the profit it makes without having an obligation to disclose it to the other party is indicative of that party’s status, but not determinative.  

54.	With regard to the Appellant’s alternative case, namely in the event that it was found to have been acting as a principal, then the third party travel agents were dealing with it as principal, i.e. it was making wholesale supplies which fall outside TOMS, it was submitted as follows:

(a)	This argument cannot apply to the sales made direct to holidaymakers by it;
(b)	The arrangements for a travel agent under the gross-rate contracts do not mirror those between the Appellant and the hotel, in particular as the travel agent is not free to set its own price in such a contract;
(c)	The arrangements with all travel agents do not mirror those between the Appellant and the hotel as the holidaymaker in such cases is still booking subject to the Appellant’s booking conditions and therefore subject to its amendment and cancellation charges;
(d)	Unlike the Appellant, the travel agents do not take commercial risks, make advance bookings, or retain cancellation charges;
(e)	If the Appellant were making wholesale supplies to other principals, it is at the very least odd that it is providing holiday representatives in the relevant resorts itself.

It was also submitted that if the Appellant had been wholesaling, it would be liable to register for VAT in the Member State where the accommodation is situated, which it has not done.  If the Tribunal were to accept either the Appellant’s main or its alternative case, the result would be that VAT on its margin would be wholly unaccounted for anywhere in the EU, contrary to the Directive.

The Appellant’s case

55.	Mr Milne’s principal submissions on the facts were that up until 1 June 2007 the Appellant was acting as disclosed agent on behalf of the hotel which was the plain effect of the contractual arrangements entered into with the hotels, the travel agents and the holidaymakers.  None of the terms of those contractual arrangements or the way in which the parties acted was inconsistent with that position.  He referred the Tribunal to the case of A1 Lofts Ltd, in particular the following passage from the judgment of Lewison J where he said at paragraph 53:

“Absent a finding of sham or departure from the written arrangements, the construction of the contracts is likely to be the finishing point as well as the starting point.”

The relevant question for the Tribunal was whether the hotel supplied accommodation to the holidaymaker or whether the hotel supplied accommodation to the Appellant as a principal and the Appellant then supplied the accommodation on to the holidaymaker.

56.	Mr Milne relied on the Preamble to the Terms and Conditions agreed between the Appellant and the hotel which, in clear terms, appoints the Appellant as agent and by which the Appellant is authorised to effect legal relations on behalf of the hotel.  The following clauses in that agreement were said to be supportive of agency:  Clauses 1.1, 1.2, 1.5, 1.6, 1.9, 2.1-2.4, 4 and 5.  (See above.) The first two paragraphs of the Booking Conditions on the website were, it was submitted, in the absence of sham, conclusive of an agency relationship.  Also said to be supportive in varying degrees of an agency relationship were paragraphs 5-6, and 8-10.  Mr Milne referred to ‘clauses’ of the Booking Conditions, but we have referred to ‘paragraphs’ as it was clear from the page references he gave that he was referring to the part of the website conditions which precedes the part where specifically numbered clauses appear, which, in our bundle, is from p.83 onwards.  In respect of the Agency Agreement it was submitted that clause 5.4 was supportive of/consistent with an agency relationship.  By that clause the travel agent must refer its clients to MHL’s Booking Conditions, which themselves clearly state that MHL acts as agent.

57.	In respect of HMRC’s contention that clause 1.1 of the Terms and Conditions does not stipulate how the hotel is marketed, it was the Appellant’s case that such a stipulation is unnecessary when the hotel provides the Appellant with all marketing materials as here.  The plain expectation of the clause is that it would use its material to prepare descriptions on their website.  In respect of clause 1.8, it was suggested that this clause recognises that the Appellant has its own business to run and reputation to protect and that if the hotel damaged the Appellant’s reputation, the Appellant would rightly be aggrieved.  This clause did not undermine the Appellant’s case.  With regard to clause 2.2, and Mr McLintock’s evidence that the Appellant in fact handled complaints and offered compensation to holidaymakers which would be recharged to the hotel, it was not explained by HMRC why this was abnormal behaviour for an agent and similar compensation arrangements were a feature in the case Mercantile International.  HMRC’s contention that clause 2.5 was a pointer away from agency was not accepted, the fact that in either clause the Appellant receives a commission over and above the rate payable under the Accommodation Agreement was not unusual.  It was also a feature in the agency relationships in the case of J K Hill, Potter and Mercantile International.  Mercantile International and J K Hill were also relied on for the fact that in those cases the agent made advances to its principal, and it was also a feature of the Music and Video Exchange. With regard to the Appellant’s retention of any interest on deposits from customers, it was submitted that the reward of interest was counterbalanced with the risk of bank charges and it was not necessary for an agent to keep a trust account or to separate out the principal’s money.  We were referred to Bowstead on agency at Article 43 where it is said:

“Agent holding money for principal

It is convenient first to consider situations where the agent simply holds for his principal without any issue of breach of fiduciary obligations.  The analogy with trust might be taken to suggest first, that when an agent holds the title to money or other property for his principal, he always does so (in situations where the principal does not himself own it) as trustee.  This would often be impractical and has never been the rule.  It is perfectly possible for property so held, especially money, to be the agent’s own, and mixed with his own assets subject only to a duty to transfer or account for it to his principal.  Equally however he may certainly hold as trustee.”

The fact that the Appellant did not keep a trust account did not determine the question of whether it was acting as an agent, and at its highest it might indicate a breach of fiduciary duty.  Similarly in respect of the advances made to the hotels, the Appellant never took an inventory risk, it was never at risk that a room would not be let.  It was not inconsistent for an agent to assume financial risk, as in Mercantile International.  HMRC’s assertion that the customer did not undertake any obligation to the hotel was not accepted.  It was submitted that the Booking Conditions made it clear that the holidaymaker’s contract is with the hotel and one of the consequences of that is that the holidaymaker is liable to the hotel to account for the price. The fact that the Appellant has handling agents in the resorts was said to be irrelevant.

58.	If the tribunal were to find that the Appellant acted as principal, then it was submitted that the Appellant makes its supplies to travel agents wholesale.  It was suggested that the contractual arrangements between the Appellant and the travel agent mirrored those between the Appellant and the hotels and accordingly, if the Appellant were to be regarded as a principal, then so too must the travel agents.  There was no evidential basis for HMRC to assert that in any onward supply of hotel accommodation the travel agent acted as agent for the Appellant.  The arrangement was outside the TOMS scheme because the supply was one of business to business.  

Reasons for decision

59.	The concept of ‘supply’ for VAT purposes is not identical with a contractual obligation, as was held by Laws LJ in the case of Reed Personnel Services Ltd, cited by Lewison J in the case of A1 Lofts Ltd at paragraph 36,  Laws LJ at page 591 had said:
“I certainly accept that where any issue turns wholly upon the construction of a document having legal consequences, the exercise of construction is one of law for the judge.  But for the proper resolution of a case of this kind, there are I think two qualifications.  The first is that the concept of making a supply for the purposes of VAT is not identical with the performance of an obligation for the purposes of the law of contract, even where the obligation consists in the provision of goods or services.  The second is that, in consequence, the true construction of a contractual document may not always answer the question – what was the nature of the VAT supply in the case?  Insofar as the answer to that question is not concluded by the legal process of construing the document, there remains a question of fact …”

After citing the above passage, Lewison J went on to say at paragraph 40:

“What I understand Laws J to be saying is that the identification of the parties’ obligations is a matter of contract.  But once their obligations have been identified, the nature or classification of those obligations, and in particular whether they answer a particular statutory description, is not necessarily concluded by the contract.  It may well be, even in a tripartite situation, that they do; but it is not inevitable.  Read in this way, it seems to me that Reed exemplifies a common method of reasoning.  The court is often called upon to decide whether a written contract falls within a particular legal description.  In so doing the court will identify the rights and obligations of the parties as a matter of construction of the written agreement; but it will then go on to consider whether those obligations fall within the relevant legal prescription.”

60.	In Reed, having observed that the commissioners’ argument proceeded on the premise that the contract must conclude the issue as to Reed’s supplies, Laws J at page 595 continued:

“But in my judgment the premise is false.  First, as I have already said, the concept of ‘supply’ for the purposes of VAT is not identical with that of contractual obligation.  Secondly, in consequence, it is perfectly possible that although the parties in any given situation may conclude their contractual arrangement in writing so as to define all their mutual rights and obligations arising in private law, their agreement may nevertheless leave open the question, what is the nature of the supplies made by A to B for the purposes of A’s assessment of VAT.  …  Where and to what extent the tax falls to be exacted depends, as with every tax, on the application of the taxing statute to the particular facts.  Within those facts, the terms of contract entered into by the taxpayer may or may not determine the right tax result.  They do not necessarily do so.  They will not do so where the contract, though it tells all the parties everything that they must or must not do, does not categorise any individual parties’ obligations in a way which inevitably leads to the conclusion that he makes certain defined supplies to another.  In principle, the nature of a VAT supply is to be ascertained from the whole facts of the case.  It may be a consequence, but it is not a function, of the contracts entered into by the relevant parties.”

We therefore will look not only at all the various contractual documents but also at the behaviour of the Appellant.

61.	The principal document is that setting out the Terms and Conditions between the Appellant and the hotel.  There are aspects of this document which it is unusual to find in an agency contract.  Whilst the document refers to the Appellant as ‘the agent’ and to the hotel as ‘the principal’, this fact is not itself determinative of the roles of the parties even in the present situation where there is no allegation that the documents are a sham.  The majority of this contract imposes obligations upon the hotel in question, the only obligation, which appears in the preamble, undertaken by the Appellant is that it undertakes “to deal accurately with the request for accommodation bookings and relay all monies, which it receives from the principal’s client(s) … which are due to the principal, but shall have no further commitment to the principal under this agreement.”  There is no other document imposing obligations on the Appellant as far as the hotel is concerned and indeed all the documents are drafted by the Appellant and we have seen no documents drafted by any of the hotels which impose any conditions upon the Appellant.  The main obligations upon the hotel are that it should:

(i)	Provide accommodation as described in its advertising material (clause 1.2);
(ii)	Honour accommodation bookings or where it cannot do so, provide alternative accommodation (clause 1.5);
(iii)	If replacement accommodation is not deemed acceptable and the holidaymaker cancels his booking, the hotel will be liable to pay the Appellant compensation for loss of profit, commission and client compensation (clause 1.7);
(iv)	The hotel will fully indemnify the Appellant in respect of losses, damages, liabilities and demands and compensation payments to clients resulting from a breach of the agreement by the hotel and/or death, injury or illness for which the Appellant may have liability which is caused by a wrongful or negligent or omission by the hotel (clause 2.1);
(v)	Any complaint by a holidaymaker will be notified by the Appellant to the hotel who will resolve it with the holidaymaker and will keep the Appellant informed and provide all assistance requested by the Appellant (clauses 2.2-2.4); and
(vi)	The Appellant is to receive the difference between the sum charged to the client and the charge made to it by the hotel (clause 2.5); 
(vii)	The hotel is obliged to maintain insurance cover (clause 4) and also to allow the Appellant’s representatives to inspect the property at any reasonable time on request (clause 6).
(We have substituted ‘the Appellant’ for ‘the Agent’ and ‘the hotel’ for ‘the Principal’ in the above précis of the Terms and Conditions.)

In this document the hotel did not set terms as to how the Appellant was to market the accommodation.  The Appellant provided the accommodation direct to holidaymakers booking through its website and subject to its own booking conditions and to other travel agents on the basis of agreement with those travel agents.  Those holidaymakers who booked accommodation through other travel agents were still subject to the Appellant’s booking conditions.  We therefore do not consider it appropriate to look at the above document in isolation from the Appellant’s own Booking Conditions, and we will turn to those below.

62.	The Booking Conditions attempt to make clear both in the preamble (cited above) and in the body of the document that the holidaymaker has a contract with the hotel or other accommodation provider.  After the preamble, in the first paragraph on the first page, it is stated: “Once the contract is made, the accommodation provider is responsible to you to provide you with what you have booked and you are responsible to pay for it, in each case subject to these Booking Conditions, and any other terms and conditions specific to the relevant accommodation.”  However, this does not specifically state that the holidaymaker is responsible for paying the accommodation provider. The Booking Conditions subsequently state: “Please note: your booking may be cancelled, if you fail to make payment on time (i.e. to the Appellant) and you would then be liable to pay the accommodation provider the cancellation charges set out below.”  This may be contrasted with the next statement: “Payment for incidental extras (e.g. mini bars, telephone charges, etc) has to be made directly to the accommodation provider, when you check out”, which make a distinction between those payments which must be made direct to the accommodation provider and those which must be made to the Appellant.  It appears to us that in the circumstances there is no contract between the hotel and the holidaymaker, and there is no possibility that the hotel could have gone to the holidaymaker and demanded the price of a room.  Whilst there was no obligation upon the Appellant to accommodate the changes to bookings, any such changes as were made would incur an administration charge of £15 payable to the Appellant itself, not to the hotel, in addition to potential charges by the hotel in question subject to the hotel’s own terms and conditions.  We have seen no such terms and conditions and there was no evidence of the Appellant being bound by any particular hotel’s own terms and conditions.  The agreement with the hotels did not provide for a charge to the Appellant in cases where administrative charges were received by the Appellant, nor was there a clause in the agreement with the hotels for the cancellation charges in the Appellant’s Booking Conditions to be paid to the hotels.  There was no evidence that they were in fact passed on to the hotel, despite the fact that the Appellant was entitled to charge the holidaymaker up to 100% of the price payable.  

63.	Mr Grodzinski placed reliance on the following term in the Booking Conditions: “If in the unlikely event that we are informed by the accommodation owner that they are unable to provide the accommodation which you have booked, we will try to provide you with similar accommodation of equal standard.  If we are unable to do this or you prefer not to accept our alternative, you may cancel free of charge.”  This is an unusual undertaking by an agent, and it was Mr McLintock’s evidence that it was an undertaking made in order to create good customer relations, the reality being that the Appellant would then look to the hotel to reimburse it for any consequent expenditure.  However, on the basis of this clause in the Booking Conditions a holidaymaker could look to the Appellant to provide accommodation rather than to the hotel he had anticipated staying at.  The following clause states:  “Because we are acting only as a booking agent we have no liability for any of the accommodation arrangements and in particular no liability for any illness, personal injury, death or loss of any kind, unless caused by our negligence.  Any claim for damages for injury, illness or death arising from your stay in the accommodation must be brought against the owner of the accommodation and will be under the jurisdiction of the law of the country in which the accommodation is based.”  This paragraph informs the holidaymaker where compensation has to be sought, but it is not certain that the Appellant would necessarily succeed in defending any action against it by an injured holidaymaker who, despite Clause 6 of the Terms of Use (see paragraph 36 above), would in fact have no contract with the accommodation provider in question.  The above clauses are contradictory, an onus in the one being on the Appellant to provide alternative accommodation in certain circumstances, but in the other the Appellant states that the liability for injury is that of the accommodation provider.  We therefore find that the Appellant cannot rely on the Booking conditions for its claim that it is an agent.

64.	The Agency Agreement, made between the Appellant and the various travel agents, obliges the travel agent to promote and use its reasonable endeavours to increase sales of accommodation etc. through all means.  This is in contrast to the Appellant’s relationship with the hotel where there is no such obligation on the Appellant, a matter which we find is inconsistent with the role of an agent.  There are further indicia that the hotels were treating the supply of accommodation as being made by it to the Appellant, for example a sales invoice which was issued by the hotel to the Appellant showed the price it expected to receive from the Appellant in respect of each customer’s stay and included local VAT on that value only.  Also the fact that the Appellant retained handling agents at the location where the accommodation was situated, there being no condition in the contracts between the hotels and the Appellant which required or allowed the Appellant to provide in-resort services.    

65.	The Commissioners placed great emphasis on the fact that the only amendments to the Terms and Conditions following the Appellant’s decision to change its claimed status from that of agent to that of principal was the change of title and the addition of paragraphs 3 and 9.6, as set out above.  It was submitted by Mr Grodzinski that the post-June 2007 agreement does not differ from the pre-June 2007 agreement in any material respect and therefore it was difficult for the Appellant to argue that its contractual position with the hotel fundamentally changed after June 2007.  It was submitted that the Tribunal should therefore be very slow to conclude that the Appellant acted on a wholly different basis in the earlier period and the change in labels between the two periods cannot have changed the substance of the Appellant’s role.  Whilst we accept that there is very little material difference between the contracts in the different periods, nonetheless that does not necessarily lead to the conclusion that the Appellant was incorrect in its claim with regard to the earlier period.  We heard little evidence of any procedural changes which were made by the Appellant in the latter period.  In our judgment the wording of the contract after June 2007 cannot affect our decision with regard to the position before 3 June 2007.

66.	With regard to the way the Appellant conducted its business, it is relevant that the Appellant set its own commission, and did not disclose it to the hotel.  We have cited above the cases of International Life Leisure Ltd and Spearmint Rhino Centres (UK) Ltd relied on by Mr Grodzinski as showing that this fact is strongly indicative of the fact that the Appellant was indeed acting as principal.  Mr Milne relied on the case of J K Hill for the proposition that an agent can be an agent even if it determines its own commission.  However, in that case the agent made clear that it would on request supply the principal with monthly details of the retail sales value, a factor which was missing in the present case.  In addition the case of J K Hill was expressly said to turn on its own individual facts, and was decided long before the case of Spearmint Rhino.  We do not accept Mr Milne’s attempt to distinguish International Life Leisure on the basis that the hotel is responsible for honouring accommodation requests in this case.  The responsibility to provide accommodation was owed to the Appellant by the hotel, and not to the holidaymaker.  The holidaymaker contracted with the Appellant.  Whilst in a situation of agency not involving VAT the fact that the party may not know the commission charged by its agent may not be relevant to the question of agency, in the present situation it is important that the hotel knows the amount of commission of its true agent because it is only if the hotel knows the price its agent will charge that it can properly account for VAT.  In the present case the Appellant did not invoice the hotel with its commission or even inform it of what it was, which assumes that the hotel will not be accounting for VAT based on the full price paid for by the holidaymaker.  The hotel only accounted for local VAT on the net amount payable by the Appellant to it.  The VAT due on the amount retained by the Appellant should have been payable by the Appellant in the UK, and it was not.  If the Appellant were simply supplying agency services to the hotel it should have charged VAT to the hotel on its commission unless it had issued an invoice indicating that the hotel was liable to pay the VAT on the Appellant’s services under the reverse charge procedure, which did not ever happen.  Similarly there is no evidence that the hotels were accounting for VAT on the full price paid by the holidaymaker.  This fact supports the conclusion that the hotel was treating the supply as a supply of accommodation made by it to the Appellant, not a supply of intermediary services made by the Appellant to it. The Appellant would deposit a payment from holidaymakers into its own account so that any accrued interest or bank charges arising belonged to it and it did not account for these to the hotel.  It therefore carried the benefit/risk of currency fluctuations between payment by the holidaymakers and payment to the hotels.  Additionally the Appellant made compensation payments to the holidaymakers and then charged these on to the hotels, despite there being no basis in the agreement with the hotel for its so doing.  Furthermore the compensation on occasion took the form of discounts/vouchers in respect of future bookings with the Appellant, not the hotel.  The Appellant did not maintain a suspense account in respect of the compensation payments it allegedly made on behalf of the hotels.  We find these mattes more indicative of the Appellant acting as a principal than an agent.

67.	Mr Milne relied on Article 43 of Bowstead for his submission that there was no breach of an agent’s fiduciary obligation to its principal in a situation where an agent holds title to money or other property for his principal mixed with his own assets.  Whilst there is no obligation to retain such monies in a separate account, it is clear from Article 43 that an agent will hold such monies subject to a duty to transfer or account for it to its principal.  In the present case the Appellant did not make such an account.  Similarly, Mr McLintock accepted that on occasions where the Appellant had been overpaid by the hotel in respect of a particular booking it would retain that money, but where the hotel had underpaid the Appellant, the Appellant would immediately invoice the hotel for the difference.  These matters all point to the Appellant acting as a principal and not as an agent for VAT purposes.

68.	In our judgment the principal document for our consideration is the contract between the Appellant and the hotel.  Despite the clear statement in that document to the effect that the Appellant is the agent and the hotel is the principal, we do not find the document as a whole consistent with that declaration when taken together with the way it is implemented by the Appellant, considering the further factors which we have set out above.  The Appellant’s failure to account to the hotel (its alleged principal) for all the funds received by it, which if it were truly an agent it would be obliged to do (see Bowstead Article 43 supra) and its failure either to account for VAT or put the hotel in a position to pay the relevant VAT on those sums, render its actions those of a principal in the supply of accommodation not an agent particularly when viewed in the whole context of its actions.  We do not accept Mr Milne’s submission that in this case the failure to account may be regarded as no more than a breach of the Appellant’s fiduciary duty.  It is the Appellant who dictates to the accommodation providers the terms of the relationship, the accommodation providers impose no terms on the Appellant, and no hotel could go to any holidaymaker to demand payment for the accommodation provided.  In all the above circumstances we find that the Appellant was not simply supplying agency services to the hotels, but was itself supplying the holiday.  

69.	With regard to the Appellant’s alternative argument that the third party travel agents were dealing with the Appellant as principal and that the Appellant was therefore making wholesale supplies which fall outside TOMS, we accept the Respondents’ argument as set out at paragraph 54 above and for the reasons given there by Mr Grodzinski dismiss this further argument as well.  In all the circumstances this appeal is dismissed.

70.	This appeal is dismissed and the Appellant is directed to pay the Respondents’ costs.  In the event of any dispute as to costs the matter to be referred to a Costs Judge of the High Court.

MISS J C GORT
TRIBUNAL JUDGE
RELEASE DATE: 15 March 2010

A party wishing to appeal this decision to the Upper Tribunal must seek permission by making an application in writing to the Tribunal within 56 days of being provided with these full written reasons for the decision.  An application for permission must identify the alleged error(s) in the decision and state the result the party making the application is seeking.