LAWYERS TO THE TRAVEL
AND LEISURE INDUSTRY
www.klng.com
Autumn 2006
Travellers’ Checks
TOMS? It’s enough to make you
quite ill!
Every now and then along comes a
legal decision which has far reaching
consequences, not for taxpayers as a
whole but for a very specific area of
business. Such was the case with the
long awaited decision of the VAT and
Duties Tribunal in the case involving
International Life Leisure Ltd
(“ILL”). This case considered the
circumstances in which a business
selling travel services must pay VAT
under the Tour Operators’ Margin
Scheme (“TOMS”), a question which
has frequently been debated and which
has been the subject of much
disagreement between taxpayers, their
advisers and the tax authorities. This
case has clarified a number of the
difficult areas but several questions
remain and the outcome of the CAA's
appeal in the case brought by ABTA
may add new complications and
uncertainties to this complex area of
VAT.
ILL contested a decision of HM
Revenue & Customs that the company
should account for VAT on holidays
and other travel services under the
TOMS. ILL’s appeal was dismissed,
the Tribunal holding that ILL’s
circumstances were such that the
company falls within the TOMS.
Background
Welcome to the Autumn Edition
TOMS is a special scheme which must
be used by suppliers of travel services
when, among other conditions, those
suppliers “deal with customers in their
own name”. The meaning of this
expression has been hotly debated and
was the central issue in the ILL case.
What it boils down to essentially is
whether the supplier is a principal,
agent or undisclosed agent in the sale
of travel.
Welcome to the Autumn Edition of
Travellers' Checks. Summer is over
and the conference season is with us
once again. One of the topics for
debate will be the effect of a recent
tax case. Our guest writer, David
Bennett of Deloittes, comments on
the recent case which highlights the
need to create an agency model in
substance rather than name only.
ILL's main business activity is the
provision of self-drive holidays,
including the arranging of supplies of
accommodation in privately owned
cottages, holiday villas, hotels,
apartments, tents and mobile homes,
predominantly in France. Often, ILL
enters into arrangements to market
properties for agents who in turn act for
a number of owners of the properties.
ILL produces two annual brochures
featuring the properties and the hotel
accommodation that it has agreed to
market.
In respect of the marketing of
properties ILL carries no significant
risk. If the marketing is unsuccessful,
ILL earns no income and normally has
no obligation to pay the
accommodation providers.
Contents
TOMS? It’s enough to make you
quite ill!
1
Compensation Act 2006
5
Assessment of damages
5
Rights of disabled passengers Regulation (EC) 1107/2006
7
Who to contact
8
Travellers’ Checks
(Where ILL has agreed a rental
guarantee, the company was already
accounting for VAT under TOMS).
The nature of ILL’s
business
Key to the outcome of the Tribunal
was a consideration of the status of
ILL. Of central importance was the
meaning of the “Booking Conditions”
contained in the brochures. Therefore,
it is necessary to summarise the terms
under which ILL sells the travel
services in order to gain a proper
appreciation of the decision and its
possible implications. In general the
Booking Conditions stated that ILL:
n
acts as an agent for travel and
accommodation providers;
n
will send a confirmation invoice to
the consumer that will specify the
names of the travel and
accommodation providers;
n
reserves the right to make changes to
bookings, for example a change of
cottage, a change of resort or a
change to accommodation of a lower
standard;
n
accepts responsibility on behalf of
the travel and accommodation
provider if any of the services which
are agreed to be provided to the
consumer under the contract prove
deficient or not of a reasonable
standard; and
n
accepts responsibility on behalf of
the travel and accommodation
providers should a member of the
party suffer death, personal injury or
illness.
Upon booking ILL issues an invoice to
the consumer. The invoice issued
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AUTUMN 2006
typically contains the name of the
accommodation provider (who is
usually the owner), albeit that he is not
designated as the owner on the invoice.
For sales of hotel accommodation, ILL
states the name of the hotel on its
confirmation invoices. Where sales are
made via travel agents, ILL issues its
own confirmation documents, including
its confirmation invoice, and ticket
pack for onward transmission to the
consumer.
The Tribunal also considered in detail
the nature of the agreements which
ILL enters into with property owners.
Three were produced in evidence: the
seasonal lettings contract, the Ace Tour
contract and the Pierre & Vacances
contract.
n
the contract refers to ILL as the
agent;
n
the contact allows ILL to set the
rental rates to be paid by the
consumers and for it to retain the
difference between the rates charged
and the price set by the owner;
n
ILL will confirm all bookings in
writing. When it receives the
payment from the consumer the
provider will be notified that they
have a contract with the consumer;
n
ILL is not (normally) obliged to
make any rental or other payments to
the accommodation provider except
in relation to the confirmed
bookings.
The Seasonal Lettings Contract
Ace Tour (“Ace”) Contract
This is the standard contract under
which ILL acquires accommodation
from private property owners. The
salient points of this contract are as
follows:
This is a contract under which ILL
acquires accommodation from Ace, a
company with a chain of hotels:
n
the contract refers to ILL as a tour
operator;
www.klng.com
n
ILL agrees under this contract to
promote the hotels on behalf of Ace;
n
under the contract ILL agrees to
provide a floating deposit guarantee
to Ace;
n
n
n
at the end of each month Ace will
invoice ILL detailing all reservations
confirmed during the previous
month;
Ace accepts no responsibility for any
complaints relating to the tour
operator’s resale price of the
voucher;
ILL is allocated a number of rooms
which can be withdrawn by Ace at
any time;
n
ILL marks up the price charged to it
by Ace. ILL is under no obligation to
inform Ace of the charges it makes
for the rooms; and
n
ILL is directly responsible for the
settlement and consequences arising
from a consumer complaint or
dispute.
Pierre & Vacances (“P&V”)
Contract
This is a further contract for the
acquisition of accommodation, in this
case in mobile homes and caravans.
n
the contract refers to ILL as a tour
operator;
n
ILL is contracted to market the
products of P&V;
n
ILL is responsible for the settlement
of a client’s claim; and
n
rental charges are set by P&V (and
not by ILL).
Collectively, the seasonal lettings
contract, the Ace contract and the P&V
contract are referred to as “the three
supplier contracts”.
arrange the holiday destination
including a change from one
accommodation provider to another.
Furthermore, ILL took on a
contractual obligation to the
customer to ensure that
accommodation was provided (and
was to the requisite standard);
Issues
The ILL appeal concentrated on the
following issues:
n
whether the Booking Conditions in
ILL's holiday brochures had the
effect of ILL acting as an agent for
the hotel and other accommodation
providers; and
n
if this was the case, whether ILL was
acting as an agent in respect of the
three supplier contracts.
It seems to have been accepted that
ILL would fall outside TOMS if it was
acting as an agent. The Tribunal
considered that ILL’s Booking
Conditions were of paramount
importance – if these did not support
agency, ILL could not be an agent
regardless of the terms of the three
supplier contracts.
Outcome
ILL’s case was dismissed because its
Booking Conditions did not support its
claimed agency status. On the
contrary, the Booking Conditions
meant the company was acting as a
principal or agent of an undisclosed
principal. Strictly, therefore, this
meant the terms of the three supplier
contracts were irrelevant to the
conclusion but the Tribunal also
concluded that these did not support
agency.
As far as the Booking Conditions are
concerned, the key considerations
were:
n
the Booking Conditions were
inconsistent with agency. ILL could
n
the documents failed to identify the
supposed principal. The name of
the property owner may appear on
the confirmation invoice but his
status was not clear and he was not
identified as a party to the contract;
and
n
the accommodation provider/hotel
did not know the full selling price
and therefore could not account for
the VAT which would be due if the
supply to the customer was indeed
(as contended by ILL) made by the
accommodation provider/hotel.
ILL argued that the accommodation
providers agreed to be bound by the
Booking Conditions. However, no
evidence was produced to support this
and the Tribunal found that the
accommodation providers were not
bound by the Booking Conditions.
It is worth quoting a part of paragraph
82 of the decision as this encapsulates
the conclusions on the effect of the
booking conditions:
“... in the section of the Booking
Conditions entitled “the Contract
between us”, ILL undertakes
obligations to the customer. In return,
the customer undertakes to pay ILL
the package price (or to become liable
for cancellation charges). Critically, in
our judgment, the customer does not
undertake any obligation vis a vis any
hotel or accommodation provider: the
latter cannot go to the customer and
AUTUMN 2006
3
Travellers’ Checks
the selling price was of considerable
importance. The seasonal lettings
contract authorised ILL to set the
selling price and retain the excess over
the net rate payable to the property
owner as commission. However,
Counsel for HMRC argued that it is a
fundamental obligation of an agent to
account to his principal and the lack of
any obligation to do so in this case
negated agency. This argument was
also accepted by the Tribunal.
What next?
demand the package price. We
consider that fact fatal to ILL’s case on
the Booking Conditions question. The
documentation is clearly in error in
stating that ILL acts as agent for the
travel and accommodation providers.....
Equally fatal, again in our judgment, is
the fact that the hotel/accommodation
provider does not know the price for
which he has supposedly supplied the
accommodation”.
Therefore, in the Tribunal’s view, ILL
could not be acting as agent of a named
principal. It must be a principal or
agent of an unnamed principal and
either was sufficient to require it to
account for VAT under the TOMS. In
other words, ILL was held to “deal
with customers in its own name”.
The Package Travel
Regulations
It should be noted that the decision
also contains consideration of a number
of the requirements of The Package
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Travel, Package Holidays and Package
Tours Regulations 1992. ILL argued
that many of its booking conditions
were designed to meet the
requirements of these Regulations and
that agents had responsibilities under
the Regulations in terms of consumer
protection – the existence of statutory
consumer protection could not alter the
identity of the person making the
supply. The Tribunal accepted these
points but concluded they did not help
ILL.
The Three Supplier
Contracts
Even though the Tribunal had found
against ILL on the Booking Conditions
question, it went on to consider the
true nature of the three supplier
contracts. Although each is different,
the overall conclusion was that none
supported ILL’s claimed agency status.
In the case of Ace and the seasonal
lettings contract, the fact that the
accommodation provider did not know
Where travel services are provided in
circumstances in which the Package
Travel Regulations require the supplier
to operate under conditions similar to
those adopted by ILL, it seems very
likely that the TOMS should be used.
What is less clear is whether the
TOMS applies where services fall
outside the Regulations. For example,
single services e.g. flight onlys and
room onlys, can be distinguished from
the circumstances of ILL and arguably,
therefore, still fall outside the TOMS
even if, for example, the pricing
mechanism adopted is similar to that
used by ILL. Nevertheless, this
decision demonstrates the importance
not only of the contractual terms but
also of the customer’s perception of the
nature of the transaction. Clearly, it is
not enough for a business merely to
state it is an agent. To fall outside the
TOMS, a supplier of travel services
must trade with genuine agency terms
& conditions both with his customer
and his principal suppliers of the
services in question. The customer
must be aware of the identity of the
principal from whom he is purchasing
the service. The pricing arrangements
are also of great importance.
David Bennet, Director at Deloitte’s
Gatwick office. Tel 01293 761295 or
email davidbennet@deloitte.co.uk
www.klng.com
Compensation Act 2006
When we last reported, the
Compensation Bill was still being
considered by the House of Lords. On
25 July 2006, The Compensation Act
2006 (the "Act") received Royal Assent.
The Act contains provisions relating to
the law of negligence and breach of
statutory duty and the regulation of
claims management services.
The Act includes two provisions
intended to address concerns about
"compensation culture". In cases in
England and Wales involving
allegations of negligence (or breach of
statutory duty) the courts are now
permitted to take into account the
deterrent effect of potential liability.
In particular, the provisions on
negligence and breach of statutory duty
make clear that courts considering what
standard of care is reasonable in a claim
for negligence or breach of statutory
duty can take into account whether
requiring particular steps to be taken to
meet the standard of care would
prevent or impede a desirable activity
from taking place. This will improve
awareness of this aspect of the law and
will help to ensure that normal
activities are not prevented because of
a fear of litigation and excessively risk
averse behaviour.
A second provision of the new Act
clarifies, rather than changes, the law in
a way that is meant to promote a less
adversarial approach to accidents and
injuries. It provides in claims for
negligence or breach of statutory duty,
an apology, offer of treatment or other
redress shall not of itself amount to an
admission of liability.
In addition, Part Two of the Act
provides the statutory framework for
the regulation of claims management
services. Initially, the Secretary of
State will be the regulator, supported
by a senior civil servant who will be the
Head of Regulation. A trading
standards unit will provide the
monitoring and compliance function,
including processing applications for
authorisation, investigating any
suspected evasions of authorisation and
monitoring compliance with the
regulatory rules. A person providing
claims management services without
the requisite authorisation (or if
exempted or subject to a waiver) will
be committing an offence and liable to
a maximum of up to 2 years
imprisonment. Those providing claims
management services will be required
to give consumers clear advice about
the validity of their claim, options for
funding the costs and provide a
complaints mechanism if things go
wrong.
Assessment of
damages
On 5 July 2006, the speeches of the
House of Lords in the appeal of
Harding v Wealands from the Court of
Appeal ([2004] EWCA Civ 1735; [2005]
1 W.L.R. 1539) were delivered. The
appeal was allowed. The result of this
decision is that, in any tort case tried in
this country all questions concerning
assessment of damages will be
determined in accordance with English
Law, regardless of the fact that the tort
itself is governed by foreign law.
Facts
The claimant, Mr Harding was an
English resident who was rendered
tetraplegic, when he was involved in a
road traffic accident in New South
Wales ("NSW"), Australia. Liability for
the accident rested with the driver, the
claimant’s girlfriend, Miss Wealands, an
Australian National driving her own car
in NSW on NSW insurance. The
claimant returned to England with the
defendant, and was able to sue her
here, by reason of her continued
presence in England for a few months
after the accident.
Miss Wealands admitted liability and it
was decided that the law of NSW
should apply to the claim. The
disputed issue, however, was whether
or not the quantum of damages should
be decided by the law of the forum
(England) or by the law governing the
claim (NSW). This was an important
issue, since under the law of NSW,
damages for personal injury arising out
of motor accidents in NSW are
restricted under the Motor Accident
Compensation Act 1999 ("MACA"). In
particular, there is a cap on general
damages for pain and suffering and loss
AUTUMN 2006
5
Travellers’ Checks
of amenity well below the English level
of award for injuries of maximum
severity; and there is a statutory
discount rate of 5% imposed for
calculation of the present value of an
award of damages for future economic
loss – compared to the discount rate of
2½% utilised in English Law.
The determinative factor in deciding
which law should apply for the
quantum of damages is whether
quantum of damages is part of the
procedure of the court, or whether it
constitutes part of the substance of the
claim. If it is the former, then it is the
law of the forum that applies as
dictated in the Private International
Law (Miscellaneous Provisions) Act
1995, where it is specified that
procedural rules must be determined
by English law.
It was decided that the quantum of
damages was indeed procedural due to
the fact that the award of damages can
only be made by the court and it does
not concern the scope of the
defendant's liability. Ministerial
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AUTUMN 2006
statements from the drafting of the
1995 Act were also considered, and it
was seen that Parliament clearly
intended for the award of damages to
be included in the term, 'questions of
procedure' that was used in the act.
In all events, the result of the case
could not be clearer: all questions of
assessment of damages should be
determined in accordance with the
English Law of Damages. In the case
in point, this will result in a materially
increased award, when compared with
one regulated by the NSW statutory
regime.
This is an important decision for all
those concerned with victims of
accidents abroad who have the
opportunity of suing in this country,
since English awards are some of the
most generous in the world. For
instance, a Spanish pedestrian or
motorist who is run into by an English
tourist already has the right to pursue
that Defendant in England (being the
domicile of the Defendant) or in Spain
(being the place where the tort was
committed). In either case, the law
applicable to the tort will be Spanish
Law. However, if the victim sues in
England he will now be entitled to
obtain a substantially higher award of
damages than would be available in the
Spanish Courts, because the former will
apply the English Law of Damages and
the latter the Spanish Law of Damages.
Indeed, in some jurisdictions, where
liability to pedestrians or cyclists is
strict, the application of the foreign law
of liability, in conjunction with the
English Law of damages will create a
win-win situation for Claimants.
The decision will no doubt be
welcomed by victims and regretted by
insurers. It will certainly encourage
forum shopping, especially in the
absence of the doctrine of forum non
conveniens in relation to claims falling
under the Brussels-Lugano Regime. If
claims farmers and credit hire
companies take advantage of this
decision by setting up business in
foreign resorts frequented by English
tourists, this will be good news for
English lawyers and more bad news for
insurers.
www.klng.com
Rights of disabled passengers Regulation (EC) 1107/2006
On 26 July 2006, Regulation (EC)
1107/2006 (the "Regulation"),
concerning the rights of disabled
persons and persons with reduced
mobility when travelling by air, was
published and entered into force on 15
August 2006. The thrust of the
Regulation is to prevent unfair
treatment, that is refusal of carriage on
the basis of reduced mobility and to
guarantee the provision of assistance
that passengers with reduced mobility
require for air travel, free of charge.
The Regulation establishes rules for
the protection of and provision of
assistance to disabled persons and
persons with reduced mobility
travelling by air, both to protect them
against discrimination and to ensure
that they receive assistance. The
definition of disabled persons and
persons with reduced mobility includes
those with permanent or temporary
physical, intellectual or age related
disabilities.
where carriage is not possible due to
applicable safety standards established
by law, or where carriage is physically
impossible due to the size of the
aircraft or its doors.
If a reservation is refused, the person
should be offered an acceptable
alternative. If embarkation is refused,
the Regulation provides for
reimbursement or re-routing.
The Regulation places duties on
airlines, their agents and tour operators
to put in place sufficient mechanisms at
the point of sale (including by
telephone and internet) to allow
disabled passengers to notify their
needs for assistance and for the
transmission of that information within
stated time limits to the relevant airport
managing body. Airlines are required to
provide information in accessible
formats to disabled passengers on
safety rules and restrictions applicable
to the carriage of disabled persons.
The Regulation seeks to clarify which
of the carrier and the airport managing
body are responsible for what
assistance. Essentially this places
responsibility on the airport managing
body for all assistance through the
airport to allow the disabled passenger
to check-in and embark the flight
booked (including assistance with
embarkation/disembarkation and initial
storage/final removal of luggage in the
overhead lockers). The Regulation
places responsibility on the carrier for
assistance aboard the aircraft after
embarkation and before
disembarkation (including carriage of
recognised assistance dogs in the cabin,
subject to national laws; carriage of up
to two pieces of mobility equipment, in
addition to medical equipment but
subject to advanced warning;
communication of essential information
concerning the flight in accessible
The majority of the Regulation takes
effect on 26 July 2008. However,
Articles 3 and 4 take effect on 26 July
2007. Article 3 prohibits airlines, their
agents and tour operators from refusing
to accept a reservation or from refusing
carriage on the grounds of disability or
reduced mobility. Article 4, states that
notwithstanding the provisions of
Article 3, airlines, their agents and tour
operators may refuse, on the grounds of
disability or of reduced mobility, to
accept a reservation from or to embark
a disabled person or a person with
reduced mobility for specific limited
grounds. These include, for example,
AUTUMN 2006
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Travellers’
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Travellers’ Checks
formats; and reasonable efforts to
arrange seating to meet the needs of
disabled passengers on request).
Neither the carrier nor the airport
managing body may charge disabled
passengers for the provision of
assistance.
Airport managing bodies may provide
assistance to disabled passengers
themselves or outsource this to third
party service providers. Airport
managing bodies may, on a nondiscriminatory basis, levy a specific
charge on airport users for the purpose
of funding this assistance, but subject
to principles of reasonableness,
transparency, cost relatedness and prior
consultation.
The Regulation also sets out a
complaints procedure and requires
individual Member States to set
penalties for breach of the Regulation.
Payment of compensation to disabled
passengers for breaches of the
Regulation is dealt with by reference to
applicable law.
Who to Contact
Kirkpatrick & Lockhart
For further information contact
Nicholson Graham LLP
Cynthia Barbor
cbarbor@klng.com
T: +44 (0)20 7360 8170
110 Cannon Street
Laura Harcombe
lharcombe@klng.com
T: +44 (0)20 7360 8186
London EC4N 6AR
www.klng.com
T: +44 (0)20 7648 9000
F: +44 (0)20 7648 9001
Kirkpatrick & Lockhart Nicholson Graham (K&LNG) has approximately 1,000 lawyers and represents entrepreneurs, growth and middle
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AUTUMN 2006
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