Introduction

The appeal was described as follows:

This appeal concerns the liability for Value Added Tax (“VAT”) of a company which markets and arranges holiday accommodation through an on-line website. The outcome turns on the appropriate characterisation of the relationship between the company, the operators of the hotels, and the holiday-makers or their travel agents (which is an English law issue).

The basic facts were outlined as follows:

• The appellant marketed holiday accommodation, consisting of around 2,500 resort hotels, villas, and apartments in the Mediterranean and the Caribbean, through a website. Around 94% of the sales of rooms were made to travel agents who sold them to holiday makers, the remainder of the sales were directly to holiday makers.
• A hotelier who wished his hotel to be marketed by the appellant had to enter into a written agreement with the appellant (the “Accommodation Agreement”).
• When a potential customer identified a hotel at which she (or a client of a travel agent) wished to stay, she would make a booking through a form on the website. The whole of the sum was required to be paid to the appellant before the holiday-maker arrived at the hotel. However, the appellant paid a lower sum to the hotel (i.e., the net sum) in respect of the holiday, pursuant to an invoice which was rendered by the hotel when the holiday had ended.

The contentions

The Revenue assessed the appellant on the basis that the appellant booked a room in a hotel for the net sum, which it paid to the hotelier when the holiday had ended, and the appellant supplied the room to its customer in return for the gross sum, which it received in advance of the holiday – the appellant was therefore liable to VAT on the margin.

The appellant contended that, through its agency, the hotelier supplied a hotel room to a customer for the gross sum, and that the appellant was entitled to the difference between the gross sum and the net sum as a commission from the hotelier for acting as his agent. On this basis, VAT would not be payable in the UK, but would be payable in Greece.

The decisions below

Before the First Tier Tribunal (FTT) the main issue was identified as whether the appellant acted as principal, or as an agent, when making the supplies of hotel accommodation. The FTT found for the Commissioner, after taking into account the contractual documentation and the way the appellant’s business was conducted and concluding that “the document as a whole” was not consistent with the notion that the appellant was the agent and the hotel was the principal.

On appeal, the Upper Tribunal allowed the appeal. The Commissioners then successfully appealed to the Court of Appeal (in a judgment by Sir John Chadwick, with which Ward and McFarlane LJJ agreed – [2012] EWCA Civ 1571) which found that the FTT was plainly entitled to reach the conclusion that they did, in the light of the contractual documentation and the way in which Med conducted its business.

The appeal

The Court then observed that in order to decide whether the FTT was entitled to reach the conclusion that it did, one must identify the nature of the relationship between the appellant, the hotelier, and the customer, and, in order to do that, one must first consider the effect of the contractual documentation, and then see whether any conclusion is vitiated by the facts relied on by either party.

The Court then made the following observations on determining the legal and commercial nature of a relationship between parties to a written agreement:

• it is necessary to interpret the agreement in order to identify the parties’ respective rights and obligations, unless it is established that it constitutes a sham.
• When interpreting an agreement, the court must have regard to the words used, to the provisions of the agreement as whole, to the surrounding circumstances in so far as they were known to both parties, and to commercial common sense. When deciding on the categorisation of a relationship governed by a written agreement, the label or labels which the parties have used to describe their relationship cannot be conclusive, and may often be of little weight.
• In English law it is not permissible to take into account the subsequent behaviour or statements of the parties as an aid to interpreting their written agreement

The Court found that both the Accommodation Agreement and the website make it clear that, both both as between the appellant and the hotelier, and as between the appellant and the customer, the hotel room is provided by the hotelier to the customer through the agency of the appellant, and the customer pays the gross sum to the hotelier, on the basis that the amount by which it exceeds the net sum is to be appellant’s commission as agent.

The Court then considered the way in which the appellant conducted its business and the following matters which persuaded the FTT and the Court of Appeal that the appellant in fact marketed and sold the hotel accommodation to customers as a principal:

• the appellant dealt with customers in its own name (a) in respect of the use of its website and (b) in the services of its local handling agents;
• the appellant dealt with customers in its own name (and not as intermediary) in those cases where the hotel operator was unable to provide accommodation as booked and the customer rejected the alternative accommodation offered;
• the appellant dealt with matters of complaint and compensation in its own name and without reference to the hotelier;
• the appellant used the services of other taxable persons (the hoteliers) in the provision of the travel facilities marketed through its website;
• in relation to VAT, the appellant dealt with hoteliers in other Member States in a manner inconsistent with the relationship of principal and agent; and
• the appellant treated deposits and other monies which it received from customers and their agents as its own monies.

The Court was not persuaded by any of these factors and found that Morgan J of the Upper Tribunal was correct.