Case No: A3/2000/2534
Neutral Citation Number: [2001] EWCA Civ 308 
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
REVENUE LIST (Mr. Justice Neuberger)

Royal Courts of Justice
Strand, London, WC2A 2LL

Wednesday 7th March 2001

B e f o r e :

LORD JUSTICE MUMMERY
LORD JUSTICE RIX
and
SIR RONALD WATERHOUSE

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	The Commissioners of Customs and Excise	Appellants	
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	First Choice Holidays plc	Respondent	

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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
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Mr Philip Sales (instructed by Solicitor’s Office, VAT & Duties Tribunal Division, Customs & Excise for the Appellants)
Mr Kevin Prosser QC (instructed by Messrs Klegal, London, EC4A 2AB for the Respondent)

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Judgment
Lord Justice Rix:

1.		Article 26 of the European Union’s Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – common system of value added tax: uniform basis of assessment (77/388/EEC) (the “Sixth Directive”) provides for a special VAT scheme for travel agents, or what we would think of as tour operators. Article 26(2) provides:

“All transactions performed by the travel agent in respect of a journey shall be treated as a single service supplied by the travel agent to the traveller. It shall be taxable in the Member State in which the travel agent has established his business or has a fixed establishment from which the travel agent has provided the services. The taxable amount and the price exclusive of tax, within the meaning of Article 22(3)(b), in respect of this service shall be the travel agent’s margin, that is to say, the difference between the total amount to be paid by the traveller, exclusive of value added tax, and the actual cost to the travel agent of supplies and services provided by other taxable persons where these transactions are for the direct benefit of the traveller.”

2.		The question on this appeal is as to the meaning of the phrase “the total amount to be paid by the traveller” in that provision.

3.		The domestic legislation in implementation of Article 26(2) is to be found in article 7 of the VAT (Tour Operators) Order 1987 (made under section 53 of the VAT Act 1994) and under VAT Leaflet 709/5/88. Article 7 of the Order provides that –

“Subject to articles 8 and 9 of this Order, the value of a designated travel service shall be determined by reference to the difference between sums paid or payable to and sums paid or payable by the tour operator in respect of that service, calculated in such manner as the Commissioners of Customs and Excise shall specify.”

4.		The VAT Leaflet gives details for calculating the margin for the purpose of the special scheme. Para 16 of the Leaflet includes the language –

“The total selling price of your supplies under the scheme is your total charge to your customers.”
5.		The question under article 26(2) arises in the following circumstances. The respondent, First Choice Holidays Plc (“First Choice”), is a tour operator which sells package holidays to the public through intermediary travel agents. Under the arrangements between First Choice and its agents, the latter are permitted to sell First Choice’s package holidays at less than brochure price on condition that the discount allowed to the customer is made up by the travel agent. Thus where a £1000 holiday is sold by the travel agent for £950, the customer will pay £950, the travel agent will pay £50, and the travel agent will be entitled to its commission of, say, £100. In the past First Choice has paid VAT on the basis that its taxable margin is the difference between the full £1000 received by it for the holiday and the cost to First Choice of providing the services of direct benefit to the traveller. It is common ground that those costs do not include the cost of the travel agent’s commission, because his service is not “of direct benefit to the traveller”. Thus the £100 commission is assessed for VAT at the standard rate outside the special scheme. However, First Choice has now claimed a refund of VAT on the basis that the margin between receipts and costs, on the example given as an illustration above, should not take the figure of £1,000 as “the total amount to be paid by the traveller” but only the figure of £950. It would follow that the taxable margin would be £50 less than it might otherwise be. The same £50 would then fall to be treated, so First Choice submits, as the consideration payable by the travel agent for the right to sell the package holiday at less than brochure price and as such it too, like the travel agent’s commission, would be taxable at standard rates outside the special scheme as part of the arrangements between tour operator and travel agent.

6.		First Choice’s claim for a refund on this basis has been disputed by the Commissioners of Customs and Excise. Their dispute has gone to the VAT & Duties Tribunal (the “Tribunal”), which has decided in favour of First Choice. The Commissioners appealed from that decision to the High Court, where Mr Justice Neuberger also found in favour of First Choice. 

7.		The Commissioners now seek permission to appeal to the Court of Appeal. If granted permission, they submit that there should be a reference to the European Court of Justice on the basis that the proper interpretation of article 26(2) is not acte clair. The Commissioners submit that the additional £50 paid by the travel agent is paid for or on behalf of or for the benefit of the customer and thus comes within the words “the total amount to be paid by the traveller”. Nevertheless, they accept that the construction of article 26(2) which they favour is not acte clair. 

8.		The agreed facts on which the dispute went before the Tribunal and on appeal before Mr Justice Neuberger included the following:

“In a case where the brochure price of a holiday is £1000 and the travel agent gives the customer a discount of £50, the agent will tell the customer that he is able to reduce the price from £1000 to £950. The travel agents will not say to the customer that they are making a contribution of £50 towards the holiday or that they are paying £50 on the customer’s behalf,”
This enabled First Choice to submit that the contract between First Choice and customer was for a holiday at £950, not £1000: First Choice could not sue the customer for £1000, only for £950; and the £50 which the travel agent had to pay to First Choice was purely a matter of arrangement between them and had no part to play as between customer and travel agent or as between customer and First Choice.

9.		The Court has heard extensive submissions from both parties. On behalf of First Choice, the points have been made that on the facts found and agreed there could be no question that the travel agent had simply contributed to the payment of the price payable by the customer as a form of third party consideration; that the £50 payable by the travel agent therefore lay under the arrangements between First Choice and its travel agents and thus not as part of the “total amount to be paid by the traveller” within the special scheme pursuant to article 26(2) of the Sixth Directive; that the language and effect of article 26(2) has been correctly reflected in the domestic provision (in the VAT Leaflet) that “the total selling price…is your total charge to your customers”; and that it is a fundamental principle of VAT law that 

“it is intended to tax only the final consumer. Consequently the taxable amount serving as a basis for the VAT to be collected by the tax authorities cannot exceed the consideration actually paid by the final consumer which is the basis for calculating the VAT ultimately borne by him” (Elida Gibbs Ltd v. Customs and Excise Commissioners (Case C-317/94) [1996] STC 1387 at 1402, para 19).

10.		First Choice also submitted that, as found by Neuberger J, the analysis or categorisation of the transaction was a question of fact for the domestic Tribunal and not for the courts on appeal, let alone for the European Court of Justice. Thus, because it was a possible view of the facts that, on the example under discussion, the £50 paid by the travel agent was paid in consideration of the service provided by First Choice in permitting its travel agents to sell at less than brochure price, therefore Neuberger J was correct to say that “that is a conclusion of fact which the Tribunal was entitled to reach” (at para 40 of his judgment, 28 June 2000).

11.		On behalf of the Commissioners, on the other hand, the points have been made that, in the example given, the £50 is paid by the travel agent for or on behalf of or for the direct benefit of the traveller; that third party consideration is well recognised as part of the total consideration to be taken into account in such circumstances; that it is an equally fundamental principle of VAT law that the taxable amount is the “consideration actually received” for the supply (see Argos Distributors Ltd v. Customs and Excise Commissioners (Case C-288/94) [1996] STC 1359 at 1372 para 16); that the language of article 26(2) has to be given a purposive construction in the interests of reality and simplicity (see, for example, Customs and Excise Commissioners v. Madgett and Baldwin (trading as Howden Court Hotel) (Joined cases C-308/96 and C-94/97) [1998] STC 1189); that First Choice has not in practice known (and could not know, at any rate without requiring their travel agents to tell them) of any discount allowed by the travel agent; that in practice the £50 has been paid by the travel agent to First Choice as part of the £1000 price required and invoiced by First Choice for the holiday and that the treatment by the Tribunal of the £50 paid by the travel agent to First Choice as a separate item reflecting the consideration for permission to discount the brochure price of a holiday is unrealistic; that in such circumstances the factual analysis or characterisation adopted by the Tribunal was not open to it as a matter of law upon the true construction of article 26(2); and that the domestic legislation was to be construed in accordance with article 26(2).

12.		In my judgment the issues debated by the parties are not acte clair. “[T]he correct application of Community law [is not] so obvious as to leave no scope for any reasonable doubt as to the manner in which the question raised is to be resolved” (Srl CILFIT and Lanificio di Gavardo SpA v. Ministry of Health (Case 283/81) [1982] ECR 3415. In those circumstances it is a matter for the discretion of this court whether or not to order a reference. In Regina v. International Stock Exchange of the United Kingdom and the Republic of Ireland Ltd [1993] QB 534 at 545D/E, Sir Thomas Bingham MR said that – 

“if the facts have been found and the Community law issue is critical to the court’s final decision, the appropriate course is ordinarily to refer the issue to the Court of Justice unless the national court can with complete confidence resolve the issue itself.”

13.		In my view it is appropriate to grant a reference, since without the guidance of the European Court of Justice it will not be possible to rule on the issues on this appeal, and those issues are of importance in the travel industry as a whole.

14.		I would therefore grant the Commissioners permission to appeal and refer the European law issues to the European Court of Justice. I would propose that this court should hear the parties further in the light of this judgment as to the precise definition of the issue or issues to be referred.  

Sir Ronald Waterhouse:
15.		I agree.

Lord Justice Mummery:
16.		I also agree.

ORDER: Permission to appeal granted; reference to the European Court of Justice granted; draft order for preliminary reference for two questions by question 1 to read: “Having established the above facts, how should the additional payment (referred to in (c) above) made by the agent to the tour operator be characterised for the purposes of Article 26.2?”; costs of reference reserved.
(Order does not form part of approved Judgment)