UK Court of Appeal decides that SecretHotels2 did not demonstrate "behaviour" of an agent

In multi-party arrangements, the question of who the supplier(s) of a service is and who acts as an agent is fundamental for VAT purposes. The recent decision by the Court of Appeal in SecretHotels2 is a landmark decision establishing that travel "agents" cannot simply rely on their contractual terms stating they are agents, and instead must consider whether their behaviour supports an agency analysis. If this cannot be supported, then such businesses will be considered to be acting in their own name and will therefore fall within the Tour Operators' Margin Scheme ("TOMS") regime for UK VAT purposes.

Outside the travel industry, this is also an important decision generally for the online sphere where the roles that the various parties play in the distribution of online services to the end consumer can often be blurred.

The case

SecretHotels2 (formerly known as MedHotels) operated a website through which customers could book hotel accommodations. The terms and conditions provided to customers stated that SecretHotels2 acted as an agent for the hotels and that the customer was contracting with the hotel for the provision of accommodation. Hotel providers were referred to as "Principal" and SecretHotels2 as "the Agent" in agreements between the tour operator and the hotels.

SecretHotels2 relied on these terms to assert that it was not subject to UK VAT under TOMS, which applies to travel agents dealing with customers in their own name. HMRC rejected this analysis and the Court of Appeal sided with HMRC, taking a "substance over form" approach and confirming that the correct approach was to take account of wider "behavioural" factors displayed by SecretHotels2.

The decision confirms that the identity of a supplier for VAT purposes (and the correct interpretation of a contract) requires an analysis of all the facts, and in the circumstances of this case, it was the tour operator and not the hotels which supplied the rooms for VAT purposes.

In deciding that "[SecretHotels2] was not simply supplying agency services to hotels, but was itself supplying the holiday", the Court of Appeal regarded the whole "package" of services. It highlighted, in particular, the fact that SecretHotels2 dealt with holidaymakers in its own name (and not as intermediary) in several key respects, and it dealt with hotel operators in other member states in a manner inconsistent with the relationship of principal and agent. In particular, SecretHotels2 did not provide the hotel operators with invoices in respect of its commission (nor even notify them of the amount of commission), making it impossible for them to comply with their VAT obligations. Another significant factor was that SecretHotels2 treated deposits and other money, which it received from holidaymakers and their agents, as its own money; it did not account to the hotel operators for those sums.


The decision will have a significant impact on the online travel industry. The ability for a supplier to adopt an operational structure that takes it outside the TOMS regime in the UK has been reduced.

The impact of the decision goes far beyond the travel industry, however. On the basis of the Court of Appeal's analysis, it is clear that the determination of who is the supplier of a service for VAT purposes will depend on an examination of the whole "package" of the taxpayer's business. It will not be possible to examine each supply contract in isolation, to rely on the descriptions applied to the parties, nor to define the supply in a specific way in order to secure a particular VAT treatment. The substance of the transaction is of critical importance in determining who is supplying what and to whom.

In the online sphere where novel channels of distribution of online services to end consumers have evolved and where a certain VAT compliance outcome is often desired, this decision highlights the importance that should be placed on the operational behaviours of the various parties involved, in addition to the terms that the parties have agreed to adopt between themselves.