VAT – Tour Operators Margin Scheme – Article 306 of Directive 2006/112/EC – Appellant marketing hotel accommodation through website – Whether liable for VAT as tour operator supplying designated travel service – Whether making supply in own name or as intermediary for hotel operators – Appeal allowed
The appellant company operated a website through which it marketed hotel, villa and apartment accommodation in resorts in the Mediterranean and Caribbean pursuant to agreements with hoteliers. Most sales were made to travel agents although some were made direct to holidaymakers. The appellant’s sole obligation under those agreements was 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”. The hotelier in turn undertook to provide accommodation as described in its advertising material, to honour accommodation bookings, or provide alternative accommodation where it could not do so, and to indemnify the appellant in respect of any liability to clients that arose as a result of certain matters relating to the hotel operator’s breach of the agreement or wrongful or negligent omission.
The appellant operated its own booking conditions, which applied to all customers; these stated that it acted as booking agent on behalf of all hotels, apartments and villas features on its website and that the customer’s contract would be made with those accommodation providers. Customers paid a gross sum for their rooms before they arrived at the hotel; those payments included the appellant’s commission in an amount that it set for itself and did not disclose to the hotel. The appellant then paid a lesser net sum to the hotel on receipt of its invoice after the customer’s stay had ended.
The respondents assessed the appellant to VAT of nearly £5.644m in respect of output tax under the Tour Operators Margin Scheme (TOMS) promulgated under the Value Added Tax (Tour Operators) Order 1987. That order implemented the requirements of article 26 of the Sixth Council Directive 77/388/EEC, which was in force for the majority of the relevant period, but was later replaced by the equivalent provisions in articles 306 to 2010 of Directive 2006/112/EC (the Principal VAT Directive).
The first-tier tribunal dismissed the appellant’s appeal against the assessment, holding that the appellant was not simply supplying agency services to the hotel but was itself supplying the holiday, and that it was therefore required to account for VAT in the UK in respect of its supply of a designated travel service within article 3(1) of the 1987 Order: see [2010] UKFTT 120 (TC). That decision was reversed by the Upper Tribunal ([2011] UKUT 308 (TCC)) but reinstated by the Court of Appeal: [2012] EWCA Civ 1571; [2012] PLSCS 262.
The appellant appealed to the Supreme Court. The issue was whether the appellant was a travel agent dealing with customers in own name, so as to fall within article 306(1)(a) of the directive and the TOMS scheme, or whether it was acting solely as an intermediary within article 306(1)(b), such that TOMS did not apply.
Held: The appeal was allowed.
The meaning of article 306 of the Principal VAT Directive, and how it was to be applied, was a matter of EU law. However, so far as the provisions of article 306 depended on the precise nature and character of the contractual relationship between two or more parties, that had to be determined by reference to the proper law of the contract concerned, as did the extent to which the subsequent conduct of the parties affected the nature and character of that relationship. Article 306(1)(a) and (b) postulated two categories of travel agent, respectively those who dealt with customers in their own name, and used supplies of goods or services provided by other taxable persons, in the provision of travel facilities and, on the other hand, those who acted solely as intermediaries. The two categories were mutually exclusive and, take together, were comprehensive in the sense that a travel agent arranging accommodation for a customer had to be within one or the other.
Where the relevant arrangements involved more than one contractual relationship between different parties, the issue of who supplied what services for VAT purposes fell to be determined having regard to all the circumstances in which the transaction, or combination of transactions, took place: Revenue and Customs Commissioners v Aimia Coalition Loyalty UK Ltd [2013] UKSC 15; [2013] 2 All ER 719 applied.
Under domestic law, where parties had entered into a written agreement that appeared, on its face, to be intended to govern the relationship between them, then the legal and commercial nature of that relationship fell to be determined by reference to the parties’ respective rights and obligations under that agreement unless it was established that the agreement was a sham. In interpreting the agreement, the court would have regard to the words used, the provisions of the agreement as a whole and the surrounding circumstances known to both parties, as well as to commercial common sense. When categorising a relationship governed by a written agreement, the labels that the parties had used to describe their relationship could not be conclusive and might often have little weight: A1 Lofts Ltd v Revenue and Customs Commissioners [2009] EWHC 2694 (Ch); [2010] STC 214; [2010] PLSCS 1 applied. In English law, it was not permissible to take into account the subsequent behaviour or statements of the parties as an aid to interpreting their written agreement, although those matters could be relevant in other ways.
They might support a contention that the written agreement was a sham, or on a claim for rectification of the written agreement. They might be relied on to support a claim that the written agreement had subsequently been varied, rescinded or replaced by a subsequent contract agreed by words or conduct. Finally, they might be used establish that the written agreement represented only part of the totality of the parties’ contractual relationship.
Since there was no suggestion in the instant case that the written agreements between the appellant and the hotel operators, or the terms on the appellant’s website governing its relationship with customers, were a sham or liable to rectification, the starting point was to characterise the nature of the relationship between the various parties in the light of that contractual documentation. It then had to be decided whether that characterisation represented the economic reality of the relationship in the light of any relevant facts. If so, the final issue was the result of that characterisation for the purposes of article 306.
Applying that approach, both the appellant’s agreement with the hoteliers and its website terms made clear that, both as between it the appellant and the hotelier and between the appellant and the customer, the hotel room was provided to the customer through the agency of the appellant and that the amount by which the gross sum aid by the customer exceeded the net sum was to be the appellant’s commission as agent. That characterisation was unaffected by the fact that the appellant fixed its own commission, or that the hoteliers gave various covenants to the appellant while the appellant’s express obligations were very limited. Those matters reflected the fact that the appellant had a substantial business in the holiday market and was in a much more powerful negotiating position than the hoteliers with which it was contracting. There was nothing in the relationship between the parties that displaced the principal/agent analysis. Although the appellant had to deal with the customer in its own name until that customer selected a hotel, that did not undermine the conclusion that, once a hotel was selected, the appellant acted as the hotelier’s agent. While the appellant appointed its own agents to look after holidaymakers, that was not inconsistent with its status as an agent of the hotelier, and was explicable by reference to the appellant’s need to maintain goodwill in the holiday market. The fact that the appellant dealt with customer complaints and compensation in its own name without reference to the hotelier, although involving a departure from one of the terms of the contractual documentation, was not a significant departure since the appellant recovered any compensation that it paid from the hotelier and its activities in that connection were not inherently inconsistent with its status as the hotelier’s agent. Nor did it make any difference that the appellant failed to provide the hoteliers with the information necessary for them to provide proper VAT returns and that it failed to account to them for VAT, as it should have done as agent. Finally, do far as the appellant reserved a number of rooms in many hotels, for which it paid the net sum in advance, there was nothing inconsistent in the appellant reserving a room in its own name in anticipation of subsequently offering it on the marker on the basis that the customer would contract not with the appellant but through it with the hotelier.
Although the application of article 306 to those facts was a matter of EU law, the approach taken by the Court of Justice of the European Union, in order to decide whether a party such as the appellant was an intermediary, was very similar to the approach applied in English law to determine whether it was an agent. The concepts of a person dealing in his own name and a principal were similar in EU law and English law. Likewise, the word “intermediary” was not a term of art and in most cases it would equate to an “agent” in English law, although it had a wider meaning. A conclusion that, in English law, the appellant was an agent for the hotelier would generally lead to the conclusion that it fell within article 306(1)(b) rather than (a): Belgium v Henfling Case C-464/10 [2011] STC 1851 applied. That was the appropriate conclusion to reach in the instant case. The contractual documentation supported the notion that the appellant was an intermediary and the economic reality of the relationship did not assist a contrary view. Accordingly, the appellant was not a travel agent dealing with customers in its own name within article 306(1)(a), but was acting solely as intermediary within article 306(1)(b).
David Milne QC and Nicola Shaw QC (instructed by Pinsent Masons LLP) appeared for the appellant; Sam Grodzinski QC, Eleni Mitrophanous and Hanif Mussa (instructed by the elgal department of HM Revenue and Customs) appeared for the respondents.
Sally Dobson, barrister
