Tax authorities are looking to target travel as the government tries to plug its huge public sector deficit, according to a leading business advisor.

Andrew Burnham, head of travel and tourism team at MacIntyre Hudson, said travel was one of the sectors identified by HM Revenue & Customs in its search to find extra sources of tax.

He added that bed banks were particularly vulnerable if Medhotels lost its appeal against an £11 million VAT claim. A decision on the VAT appeal, which was heard in November 2009, is expected soon.

If Medhotels’ appeal is dismissed, then all bed banks, currently classing themselves as agencies, could be forced to take on principal status and then become liable to pay VAT under the Tour Operators’ Margin Scheme (Toms).

Burnham said the extra cost of paying VAT would further erode bed banks' margins which were already under severe pressure.

“A further attack on margins would not be welcome and this could fuel the push for consolidation,” he added.

“Customs is gathering intelligence to capture more VAT from travel. If Customs wins the Medhotels test case, then pretty quickly they will go across the industry and look to move everybody in that business into Toms.”

Burnham said that taxes were “nailed on” to increase after the UK General Election due to the size of the public sector deficit.

“It’s been mooted that 20% VAT is on its way so it’s important that we squeeze out every saving we can,” he said.

Even if Medhotels’ appeal is upheld, Burnham added that the tax authorities were still likely to pursue travel companies for extra payments.

Burnham said it was important for travel firms to use legitimate ways to reduce VAT such as using wholesale arrangements.