VAT battle hotelier plans to sue government

A Devon hotelier plans to sue the UK Government for £1.5m in lost earnings after receiving indications that he has won an eight-year legal battle over VAT at the European Court of Justice.

If the court confirms the preliminary ruling of its advocate-general that Terry Madgett, of the Howden Court hotel in Torquay, has been charged too much VAT, Customs and Excise could also be forced to pay back up to £200,000 in tax.

It would also pave the way for similar claims from hoteliers running similar operations to Madgett, who arranges coach travel for guests to the hotel and back home again.

The case arose because Customs and Excise treated Howden Court as a travel firm (rather than a hotel) where VAT is levied on profits, not income, and VAT cannot be claimed back on expenditure.

The marathon legal wrangle has included two VAT tribunals and a High Court case and has, said Madgett, prevented him from investing in and developing the business.

The advocate-general has advised the European court to tell the UK Government that, for mixed businesses like Madgett's, the special scheme should apply only to the part of the business directly related to travel.