The Upper Tribunal (Tax and Chancery Chamber) has upheld an appeal by Secrets Hotels2 - formerly Med Hotels - against a decision that had left the company with a £7m VAT bill.

Mr Justice Morgan has now overturned an original decision by the First Tier Tribunal (FTT), which found in favour of a claim brought by HM Revenue and Customs (HMRC). HMRC had argued that Med Hotels was an undisclosed agent buying in and selling on hotel rooms, and was therefore liable for Tour Operators Margin Scheme (TOMS) VAT.

However, Mr Justice Morgan said in his ruling: "It seems to me that the FTT was persuaded by the Commissioners to approach the question in an impermissible way." Responding to the successful appeal, KPMG indirect tax director Alan McLintock said: "This is a key decision for the travel industry as a whole and provides some degree of certainty for travel businesses operating similar business models.

"Travel companies need to remain vigilant in ensuring VAT is being actively managed with VAT effective contract wording." Deloitte indirect tax partner Daniel Barlow said: "This case has caused uncertainty for travel businesses when price-setting. This decision is therefore a very significant win for the taxpayer and will impact all intermediaries in the travel sector.

"All travel agents and intermediaries (especially those facing a challenge from HMRC) should review their position urgently in light of this decision."