OHG business destroyed by HMRC withholding £4.5m disputed TOMS VAT

The directors of OHG Accommodation Ltd have today announced that they been forced by HMRC continuing to withhold £4.5m of disputed TOMS VAT to put the business into administration. This is because they are unable to pay all hotel bills as they are falling due and want to secure an orderly wind up of the business from a customer and travel agency partner perspective. As a result its Dubai based trading partner Euro Rooms Direct Ltd has also decided to stop taking forward bookings.

OHG has had lengthy discussions with most of the major bed banks over the last week, to try to persuade one of them to take over the client account and the £19m of forward bookings carrying £600k of profit. Again this would have minimised disruption to customers and OHG’s travel agency partners. However, we are saddened to report that only one bed bank was willing to complete a deal to help their travel agency partners. Unfortunately, this deal floundered last night, because of deliberate and inaccurate leaks to the Spanish press along with legal complexities relating to the client account.

All monies received from agents is held in ring fenced client accounts and will be returned by the On Holiday Group to agents in the next few days along with the bookings effected in resort. Unfortunately, this does mean customers will have to pay their bills in resort and reclaim the funds from our travel agency partners.

On Holiday Group CEO Steve Endacott commented, “The timing of the Supreme Court ruling in favour of Medhotels could not be more ironic and maddening. We are obviously glad that it gives a virtually guaranteed £4.5m pay out to our hotel partners, however it is likely that this will take a further 6-9 months to secure from HMRC and we have had legal advice that we can not trade until this point, without going into Administration.

I am outraged that HMRC have been able to take £4.5m of disputed VAT charges on a “guilty until proven innocent basis” and it has taken a ridiculous 4 years for to receive a Supreme court ruling that ratifies all our legal advice that we were acting correctly as the “Agent of the Hotelier” and HMRC where wrong in their stance.
The withholding of £4.5m money has effectively destroyed the OHG bed bank business, since it forced us to stop selling EU VAT zone hotels and removed the working capital required to effectively operate a bed bank. We are obviously exploring the potential for a damages claim, but our lawyers advise it is very hard to secure damages against HMRC who seem to have virtually unlimited rights when you are in a VAT reclaim position.

We have been forced to take the decision to put the company into administration due to pressure from hoteliers to make payments, which OHGA cannot do without the return of the £4.5m held by HMRC. Not surprisingly our hotel partners are not willing to wait up to another 9 months to receive payment. Obviously, I am absolutely gutted and deeply sorry to put 65 staff at risk today”

Endacott explained the background to the VAT dispute as follows, “Traditional tour operators, who own their own aircraft, shops networks and have ATOL licences, are deemed “principals” operating in the UK. As such, they have always paid VAT on the profit related to the accommodation element of holidays under the TOMS VAT scheme. However, when the UK market evolved and dynamic packing was invented, bed banks all set up on the basis that they were the “agent of the hotel” and the relevant VAT should be paid in the local market, where the actual product e.g. the hotel stay, is consumed. Unfortunately, Med Hotels (latterly renamed to Secrethotels2) made a mess of their structuring and actually changed in a matter of weeks from an agent to a principal and back again, sparking an investigation from HMRC.

Unbelievably this dispute has raged for over 4 years and in the meantime HMRC has applied a “guilty until proven innocent” approach to the rest of the UK bed bank sector, accessing all players retrospectively over a 4 year period and forcing bed banks to pay TOMS VAT under protest until their individual cases can be heard.

It has always been our lawyer’s opinion that OHG has followed the correct procedures from day one and has not breached the disputed Medhotels behaviours. However, because Medhotels has been the “case precedent” OHG has not been able to effectively progress our own case until this case was resolved and a clear ruling on the subject made.

The other key problem is that UK Travel Agents self-invoice and deduct VAT when making payments to bed banks on both EU VAT zone and non-EU VAT zone hotels where no VAT is payable. OHG then has to reclaim millions of pounds of this VAT from HMRC every year, before paying VAT on its much smaller profits. Hence, when the dispute arose HMRC just refused to pay back any travel agency VAT moneys. Although, there are numerous hardship protections for companies disputing what VAT they should pay to HMRC, unbelievably there is absolutely nothing you can effectively do if you’re in a reclaim position.”

The Supreme Court ruling has now been received and clears Medhotels but unfortunately it is to late to save OHG, however it does make it virtually certain that OHG’s administrators will be able to recover the disputed £4.5m of VAT and repay it to OHG’s creditors who are mostly overseas hoteliers.

Endacott explained that the directors had not been able sell On Holiday Group as a going concern. “On Holiday Group as the largest independent bed bank in the UK obviously has major strategic value to any of the large OTA’s. There are multi-million pound synergies by placing a higher proportion of OTA’s buying requirement in-house and the buying power advantages of combining B2C focused distribution with a broad B2B distribution networks. We have therefore had extensive and detailed discussion over the last 6 months with a number of interested parties, however all deals have floundered because of the £4.5m VAT dispute and its inherent risks. We obviously would have liked to resurrect these discussions, but again we have run out of time.

It is expected that the collapse of OHG will leave its creditors which are primarily its overseas hotel partners with unpaid debts of £7m plus, since the collapse will make worthless many of OHG’s assets such as investments in other source markets or IT systems.

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