The taxpayer company was part of a group of travel-related businesses and operated a website marketing hotel accommodation. HMRC raised two assessments relating to output tax in respect of supplies of hotel accommodation calculated under the tour operators’ margin scheme (‘TOMS’) on the basis that the taxpayer had at all times been acting as principal, and accordingly was liable to account for VAT in the UK.

The taxpayer appealed on the basis that it was merely acting as disclosed agent on behalf of the hotels involved and that this was in fact the effect of the contractual arrangements entered into with all parties including the hotels, travel agents and holidaymakers. Thus the supplies were to be treated as made where the hotel was situated.

The First Tier Tribunal (FTT) dismissed the taxpayer's appeal on the basis that the evidence pointed to the taxpayer being a principal in the relevant transactions and that Secret Hotels2 Ltd was not simply supplying agency services to the hotels, but itself was supplying the holiday.

The FTT did not see as having any merit the taxpayer's alternative argument that the third-party travel agents were dealing with it as principal and that the taxpayer was, therefore, making wholesale supplies which fell outside the TOMS. Accordingly, the taxpayer was liable to account for VAT in the UK under TOMS. The taxpayer appealed to the Upper Tier Tribunal (UTT).

The UTT allowed the taxpayer's appeal stating that the question as to the identity of the supplier of holiday accommodation was to be answered by considering the contracts entered into between the relevant parties and determining their effect as a matter of contract. Two cases were in point in establishing this identity (C & E Commrs v Reed Personnel Services Ltd [1995] BVC 222 and A1 Lofts Ltd v R & C Commrs [2009] BVC 924). Once the supplier under the contract was identified in that way, that party would be the supplier for the purpose of the VAT provisions.

The UTT found that the FTT had erred in concluding that the terms of the written agreements could not be relied upon as setting out the governing terms of the relevant arrangements.

It was clear that the express terms as a whole clearly and unambiguously stated that the contract for the provision of hotel accommodation was to be between the hotel operator and the holidaymaker.

It was irrelevant whether the holidaymaker contracts were made as a result of direct contact with SecretHotels2 Limited or by means of indirect contact through a travel agent.

SecretHotels2 Limited had authority to make contracts on behalf of the hotel operators to provide hotel accommodation to holidaymakers under the terms of the agreements between it and the hotel operators.

The UTT further found that none of the matters relied upon by the FTT, nor the other circumstances of the case, allowed the tribunal to ignore the express grant of authority to the taxpayer. It was not alleged that the express terms of the agreements were a sham. The hotel operators were the suppliers of that accommodation both for the purposes of the law of contract and for the application of the VAT provisions.

The Upper Tribunal allowed the taxpayers appeal deciding that contracts made for the supply of hotel accommodation to holidaymakers were made by the hotel operators acting through the agency of the taxpayer. The supplies were treated as taking place in the jurisdiction in which the hotels belonged and were thus outside the scope of UK VAT.

The full text of the case is published on the Tribunal's judiciary website at http://www.tribunals.gov.uk/financeandtax/Documents/decisions/SecretsHotels2LimitedvHMRC.pdf