Customs & Excise v First Choice Holidays Plc

Under the special VAT scheme for travel agents, the total amount attributable to a package holiday includes a directly linked payment made by an intermediary to the tour operator, even where the payment equals a discount given to the traveller.

The payment is part of the consideration for the holiday, not consideration for a separate service permitting the agent to discount. Domestic provisions implementing the scheme must be construed purposively and, so far as possible, consistently with binding EU law. A compliant interpretation may treat the tour operator’s total charge as including sums paid by or for the account of the customer.

First Choice operated package holidays sold through travel agents. Agents could sell holidays below the brochure price but were required to make up the discount from commission otherwise due to them. First Choice claimed repayment of VAT on the basis that its taxable margin should be calculated by reference to the discounted amount paid by the traveller.

The VAT and Duties Tribunal and Neuberger J found for First Choice. On an earlier hearing, the Court of Appeal referred questions concerning the meaning of Article 26(2) of the Sixth Council Directive 77/388/EEC to the European Court of Justice. After that ruling, the remaining issue was whether the domestic implementing provisions could be interpreted consistently with it.

1. Appeal allowed. The Court of Appeal allowed the Commissioners’ appeal. Lord Justice Rix gave the leading judgment, with Lord Justice Carnwath and Lord Justice Mummery agreeing.
2. For the purposes of Article 26(2) of the Sixth Council Directive 77/388/EEC, the total amount attributable to the holiday had to be understood consistently with the general concept of consideration in Article 11A(1)(a). Consideration could be obtained from a third party. The travel agent’s additional payment was a condition of the supply, corresponded to the discount, and had a direct link with the holiday supplied to the traveller. It therefore formed part of the tour operator’s consideration and could not be treated as payment for a separate service supplied to the agent.
3. Domestic contractual analysis did not determine the result. The Directive required a uniform taxation approach, whereas contractual and agency concepts could differ between member states. The relevant categorisation was therefore determined by the purposes and principles of the VAT scheme.
4. The domestic provisions could bear a conforming interpretation. The phrase your total charge to your customers in the VAT leaflet was to be read with section 53(2)(b) of the VAT Act 1994 and Article 7 of the VAT (Tour Operators) Order 1987. Those provisions focused on sums paid or payable to the tour operator. The leaflet could accordingly be read as referring to the full £1,000 charge, including a sum paid by or for the account of the customer.
5. The principles of conforming interpretation in Marleasing SA v La Comercial International de Alimentacion SA [1990] ECR I-4135 applied with full force once the European Court of Justice had authoritatively determined the Directive issue. Taxation and legal-certainty concerns did not prevent the interpretation because the domestic wording could reasonably support it. The court therefore allowed the appeal.

1. Court of Appeal (Civil Division): The appeal by the Commissioners was allowed.
2. Earlier Court of Appeal hearing: The court referred questions on the interpretation of Article 26(2) to the European Court of Justice; the reference is recorded at [2001] EWCA Civ 308.
3. Chancery Division: Neuberger J upheld the Tribunal’s conclusion in favour of First Choice.
4. VAT and Duties Tribunal: The Tribunal found in favour of First Choice’s repayment claim.