In Hotelbeds UK Ltd vs HMRC [2025] EWHC 2312 (Admin), the High Court allowed the company's claim for judicial review, finding that HMRC should have allowed repayment of input VAT in line with its published guidance where there is no valid VAT invoice.
Hotelbeds UK Ltd (Hotelbeds) described itself as a 'bed bank'. It was in the business of making wholesale supplies of hotel rooms. It purchased hotel accommodation from UK VAT-registered hotels and sold this to other accommodation suppliers, for example, UK tour operators, events companies, or other entities in their corporate group, for onward distribution.
- Under general principles, where Hotelbeds paid VAT on the purchase of UK hotel rooms, it was recoverable because it was incurred for the purpose of making onward taxable supplies of hotel accommodation upon which VAT is payable and accounted for on Hotelbeds’ VAT returns.
- Regulation 29 of The VAT Regulations 1995 provides that to exercise the right to deduction of input tax, a taxpayer must generally hold an invoice containing certain prescribed information to enable verification of the supplier, the recipient of the supply, its value and so forth.
- Regulation 29 also allows HMRC to accept other evidence of the input VAT being reclaimed if an invoice is not available. The other types of evidence, along with examples of circumstances in which HMRC may exercise discretion in allowing input VAT claims, are set out in the following HMRC policy documents:
- VIT31200: 'How to treat input tax; alternative evidence for claiming input tax'.
- HMRC's Statement of Practice: 'VAT Strategy: Input Tax deduction without a valid VAT invoice' – March 2007.
- VAT Notice 700: The VAT Guide, section 16.8.
- Despite continuous chasing, Hotelbeds experienced extreme difficulty in obtaining VAT invoices from its suppliers. This was because the industry norm is now to pay supplier hotels by means of a virtual credit card when the hotel guest checks in or checks out of the hotel. There is no longer an incentive for the supplier to issue an invoice because payment is not against invoice.
- HMRC said they did not accept Hotelbeds had acted sufficiently diligently or reasonably, and for this reason, among others, they said that repayment of two Error Correction Notices (ECNs) could be refused under their policy:
- VAT Notice 700 was the ‘operative’ policy, taking precedence over HMRC’s VAT Input Tax Manual and the Statement of Practice.
- VAT Notice 700, when read literally, stated that HMRC officers should only exercise discretion in allowing input VAT claims in cases where the trader holds an invalid VAT invoice, not in cases where the trader holds no invoice at all.
- VAT Notice 700 stated that in cases where the trader ‘systematically’ fails to obtain a valid VAT invoice, HMRC do not need to exercise discretion in granting the input VAT claim.
Hotelbeds applied for judicial review on the following grounds:
- Two previous ECNs, made on the same basis, had been accepted by HMRC.
- The refusal to accept the two later ECNs showed a misunderstanding of the effect of Regulation 29 and a misapplication of the policy set out in HMRC's documents.
The High Court (HC) found:
- VAT Notice 700 did not take precedence over the VAT Input Tax Manual or Statement of Practice.
- All three sources of HMRC’s guidance were unclear as to whether the guidance applied to situations where no invoice was held or to situations where an invalid invoice was held.
- HMRC should exercise discretion in allowing input VAT claims in cases where the trader does not hold a valid invoice, which covers cases where the trader holds an invalid invoice or no invoice at all.
- VAT Notice 700 stated that HMRC can refuse to allow input VAT claims in cases where the trader ‘systematically fails’ to obtain VAT invoices. HMRC’s interpretation of ‘systematically’ to mean ‘repeatedly’ was incorrect. ‘Systematic’, in this context, meant ‘a threat to the recovery of VAT emerging from a planned system’.
- Hotelbeds’ systems did not present a risk of fraud and HMRC were wrong to disallow the input VAT reclaims, given the alternative evidence held by Hotelbeds.
The application for judicial review was allowed.
Useful guides on this topic
Input VAT: What constitutes a valid claim (&VAT invoice)?
What is Input VAT? Who can claim it? What is needed for a valid claim? What needs to be included on a VAT invoice and can you make a claim without one?
Accommodation & hotels
Will there be an accommodation Benefit In Kind when a company rents a flat for a director instead of a hotel room? This guide considers tax relief available where accommodation is provided through the business.
External link