Indirect Tax Update 10/2014: Indirect Tax Update for week ending 7 March 2014

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Information about Indirect Tax Update 10/2014: Indirect Tax Update for week ending 7 March...
Finance

Published on March 10, 2014

Author: GrahamBrearley

Source: slideshare.net

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Indirect Tax Update for the week ending 7 March 2014

Indirect Tax Update for week ending 07 March 2014 A big week for 'bed banks' and a bad week for HMRC as the UK's Supreme Court issues its judgment in the Secret Hotels2 Ltd (formerly Med Hotels) – VAT on holidays case. A resounding and unanimous defeat for HMRC. The Supreme Court has ruled that the taxpayer acted as an agent of the hotel when selling holidays. A battle that had been raging since 2009 came to an abrupt end last week with a stunning unanimous judgment issued by the Supreme Court in the case of Secret Hotels2 Ltd (Med). In a case where the tax at stake was over £5 million, HMRC had tried to argue that under the business model operated by Med, the taxpayer acted as principal in the supply of hotel accommodation to holidaymakers. Med argued that this was not the case and that the contractual obligation to supply the accommodation was with the hotel owner. Med's supply was simply that of arranging the supply of accommodation as agent and, as such, it earned a commission. HMRC took the view that Med bought accommodation from the hoteliers and then sold these on to the holidaymakers as principal. It argued that the pricing structure adopted (whereby Med charged the holidaymaker a gross price but paid the hotel a net price for the accommodation) suggested that, in fact, Med was the seller of the hotel accommodation. Had this been the case, Med would have been obliged under VAT law to account for VAT in the UK under the Tour Operators' Margin Scheme (TOMS). Med contended that, as an agent, it was not so obliged. Indeed, it was only required to account for VAT on the commission it earned and, even then, it was the hotelier's responsibility to account for the VAT due on the commission through the reverse charge mechanism. In a unanimous judgment, the Supreme Court has dismissed all of HMRC's arguments. The contracts between Med and the Hotels made it absolutely clear that the Hotel owner was the principal in the supply of the accommodation to the holidaymaker. Similarly, the contract between Med and the holidaymaker made it clear that Med was acting as agent. The arrangements relating to how commission was calculated (being the difference between the gross selling price paid by the customer and the net price paid to the hotel) was immaterial. The contracts were not a sham and were negotiated between the parties to the bargain. As such, as a matter of UK law, Med was acting as an agent. As a matter of EU law, this meant that there was no requirement for Med to account for VAT under the TOMS scheme. Comment – this matter has been through all of the tiers of the UK judicial system and it has swung both ways at the various stages of litigation. The Supreme Court has effectively ruled that, absent a sham, the contracts are decisive. This will come as a huge relief to many other businesses operating a similar business model. For further information in relation to any of the issues highlighted in this Indirect Tax Update please contact: London/South East Karen Robb karen.robb@uk.gt.com The Regions Stuart Brodie stuart.brodie@uk.gt.com The Midlands Mike Sheppard mike.sheppard@uk.gt.com © 2014 Grant Thornton UK LLP All rights reserved ‘Grant Thornton’ means Grant Thornton UK LLP, a limited liability partnership Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. Services are delivered by the member firms. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another's acts or omissions. This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication. www.grant-thornton.co.uk Indirect Tax Update 10/2014

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