All UK-based travel businesses should review their tax position following the overturning of a tax tribunal decision that left a hotel agent with a £7m VAT bill.

The Upper Tribunal this week issued its judgment in favour of Secret Hotels 2 (formerly MedHotels), following a challenge by HM Revenue & Customs which said the agent should be liable for UK VAT under the Tour Operators Margin Scheme (TOMS).

The Upper Tribunal has determined that it is the contractual relationships between the relevant parties that establishes whether an intermediary in a supply chain acts as a disclosed agent or principal. According to Deloitte, the much awaited decision will have ramifications throughout the travel sector.

Daniel Barlow, an indirect tax partner at Deloitte, said: “This case is very significant because UK-based travel businesses acting as a principal are obliged to account for UK VAT under TOMS. Agents have no such obligation. This difference in tax treatment means it is far more beneficial from a UK VAT perspective to trade as a disclosed agent, but has resulted in HMRC launching a series of challenges to businesses using this model. The Secret Hotels 2 case has caused uncertainty for travel businesses when price-setting. This decision is therefore a very significant win for the taxpayer and will impact all intermediaries in the travel sector.”

He added: “The judgment may not be the end of the story; an appeal from HMRC is possible. Nevertheless, all travel agents and intermediaries - especially those facing a challenge from HMRC - should review their position urgently in light of this decision.”