Graham Elliott considers Secret Hotels2 concerning VAT and agency
The Supreme Court decision in Secret Hotels2 [2014] UKSC 16 (see last week’s Tax Journal) has received considerable comment within the tourism trade, being a case relating to the tour operators’ margin scheme (TOMS). Whilst of central importance to TOMS, the case is also key to the general distinction between an agent and a principal.
That distinction is vital, since (ignoring TOMS) the taxable value of the service provided by a principal incorporates the value of the underlying procured supplies. The taxable value of the service provided by the agent is limited only to his own charge. Furthermore, an agent makes his agency supply either to the seller or to the purchaser, whereas the principal only sells to the purchaser. This can give rise to differences of VAT liability, or place of supply. It can even affect the date upon which VAT registration becomes compulsory. So this Supreme Court decision has wide ramifications. Furthermore, it is the last point of appeal. The Supreme Court has not made a reference to the CJEU, so its decision is final.
Fortunately for us, the Supreme Court provided a clear decision on a point where uncertainty was created by earlier decisions.
It could be said there were two competing doctrines, though the courts would say that it is more a case of differences in the application of facts to the agreed doctrine, but I will present the more polarised position here, since I think the surprising levels of hesitation in the courts in reaching the correct answer stem from an ideological dichotomy. The first doctrine, favoured by the court of first instance and Court of Appeal, was that the terms of contracts between the parties were one of several ‘pointers’ as to whether agency or principal status applied, but that it was also important to ‘stand back’ and look at the entire commercial picture (‘economic reality’), including the actions of the parties in the day-to-day management of the arrangements, and come to a conclusion from a combination of these two factors. This, of course, would reduce the importance of terms in the contract which might be intended to settle the position.
That holistic approach competes with the one that the Supreme Court itself favoured, which was to say that the terms of the contract determine the position, as long as the day-to-day actions which it governs do not contradict its terms, and that there is no conflict between the contract and ‘economic reality’. Such a contradiction would mean the contract would be a sham, or that there was an additional constructive or oral contract which overrode the written terms. On this basis, the Supreme Court held that Secret Hotels2’s assertion, in its contractual terms, that it acted as an agent for a disclosed principal, was not contradicted by its actions taken on a day-to-day basis, was not contrary to normal economic approaches, and there was no need to try to view the position on a separate holistic basis in order to pull the carpet from under the contract itself.
The Supreme Court reviewed factors, which, according to HMRC, showed a direct conflict, and found that these were not sufficient to displace the contractual terms.
This decision is helpful to taxpayers. It creates greater certainty around arrangements. It restricts HMRC’s ability to impose its view of ‘commercial reality’ on the parties and to bypass the contractual terms. It also reasserts the point that, except where abuse exists, taxpayers can structure their affairs as they wish, irrespective of the fiscal consequences. The Supreme Court would say that it had a different take on the facts, compared with the First-tier Tribunal and the Court of Appeal, but the decision has the flavour of setting the parameters rather differently as well, and in doing so makes the position much clearer.
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‘Solving the Secret’ on agency and VAT
Graham Elliott considers Secret Hotels2 concerning VAT and agency
The Supreme Court decision in Secret Hotels2 [2014] UKSC 16 (see last week’s Tax Journal) has received considerable comment within the tourism trade, being a case relating to the tour operators’ margin scheme (TOMS). Whilst of central importance to TOMS, the case is also key to the general distinction between an agent and a principal.
That distinction is vital, since (ignoring TOMS) the taxable value of the service provided by a principal incorporates the value of the underlying procured supplies. The taxable value of the service provided by the agent is limited only to his own charge. Furthermore, an agent makes his agency supply either to the seller or to the purchaser, whereas the principal only sells to the purchaser. This can give rise to differences of VAT liability, or place of supply. It can even affect the date upon which VAT registration becomes compulsory. So this Supreme Court decision has wide ramifications. Furthermore, it is the last point of appeal. The Supreme Court has not made a reference to the CJEU, so its decision is final.
Fortunately for us, the Supreme Court provided a clear decision on a point where uncertainty was created by earlier decisions.
It could be said there were two competing doctrines, though the courts would say that it is more a case of differences in the application of facts to the agreed doctrine, but I will present the more polarised position here, since I think the surprising levels of hesitation in the courts in reaching the correct answer stem from an ideological dichotomy. The first doctrine, favoured by the court of first instance and Court of Appeal, was that the terms of contracts between the parties were one of several ‘pointers’ as to whether agency or principal status applied, but that it was also important to ‘stand back’ and look at the entire commercial picture (‘economic reality’), including the actions of the parties in the day-to-day management of the arrangements, and come to a conclusion from a combination of these two factors. This, of course, would reduce the importance of terms in the contract which might be intended to settle the position.
That holistic approach competes with the one that the Supreme Court itself favoured, which was to say that the terms of the contract determine the position, as long as the day-to-day actions which it governs do not contradict its terms, and that there is no conflict between the contract and ‘economic reality’. Such a contradiction would mean the contract would be a sham, or that there was an additional constructive or oral contract which overrode the written terms. On this basis, the Supreme Court held that Secret Hotels2’s assertion, in its contractual terms, that it acted as an agent for a disclosed principal, was not contradicted by its actions taken on a day-to-day basis, was not contrary to normal economic approaches, and there was no need to try to view the position on a separate holistic basis in order to pull the carpet from under the contract itself.
The Supreme Court reviewed factors, which, according to HMRC, showed a direct conflict, and found that these were not sufficient to displace the contractual terms.
This decision is helpful to taxpayers. It creates greater certainty around arrangements. It restricts HMRC’s ability to impose its view of ‘commercial reality’ on the parties and to bypass the contractual terms. It also reasserts the point that, except where abuse exists, taxpayers can structure their affairs as they wish, irrespective of the fiscal consequences. The Supreme Court would say that it had a different take on the facts, compared with the First-tier Tribunal and the Court of Appeal, but the decision has the flavour of setting the parameters rather differently as well, and in doing so makes the position much clearer.
