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Secret Hotels2 reveals importance of agency and intermediaries

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Prior to the judgment of in Secret Hotels2, concern had been expressed that some travel agents would consider relocating their businesses outside of the UK in order to avoid paying VAT under TOMS. In addition, those travel agents who had previously paid VAT may now look at the ruling to determine whether VAT paid under TOMS can be recovered.

The implications of the case extend beyond simply the online travel accommodation sector. VAT, as a tax, is notorious for having several areas of considerable complexity – and the issue of agency and intermediaries is one such area. In the past, HMRC has been criticised for applying a narrow interpretation of what constitutes an intermediary or agency relationship.

It is worth noting that the court also saw fit in its judgment to note that taxpayers were free to choose the organisational structures and the form of transactions which they consider to be most appropriate for their economic activities and for the purposes of limiting their tax burden. With the exception of ‘abusive transactions’, there was no onus on the appellant to structure their commercial activities so as to supply the greatest amount of tax revenue to HMRC.

The court stated that the concept of ‘intermediary’ (the terminology used in the EU legislation) was similar to that of ‘agent’ in English law. Therefore, regard should be had to established English common law precedents when considering the issue of intermediary for VAT purposes.

Accordingly, when advising clients, advisers should be emboldened in asserting that a contractual relationship is capable of constituting an agency/intermediary based on UK common law principles.