Flashback on ECJ cases C-149/01 (First Choice Holidays) – Total amount to be paid by the traveler includes the additional amount charged by a travel agent acting as an intermediary on behalf of a tour operator

On June 19, 2003, the ECJ issued its decision in the case C-149/01 (First Choice Holidays).

Context: Sixth VAT Directive – Article 26(2) – Special scheme for the taxation of travel agents and tour operators – Taxable amount – Margin – Total amount to be paid by the traveller.

Article in the EU VAT Directive

Article 26(2) of the Sixth VAT Directive (Article 307 and 308 of the EU VAT Directive 2006/112/EC).

Article 307 (Special scheme for travel agents)
Transactions made, in accordance with the conditions laid down in Article 306, by the travel agent in respect of a journey shall be regarded as a single service supplied by the travel agent to the traveller.
The single service 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 carried out the supply of services.

Article 308
The taxable amount and the price exclusive of VAT, within the meaning of point (8) of Article 226, in respect of the single service provided by the travel agent shall be the travel agent’s margin, that is to say, the difference between the total amount, exclusive of VAT, to be paid by the traveller and the actual cost to the travel agent of supplies of goods or services provided by other taxable persons, where those transactions are for the direct benefit of the traveller.

Facts

First Choice Holidays organises package holidays by combining various component elements which it buys. It leaves travel agents to sell the final product to customers under agency agreements.
The agency agreements between First Choice Holidays and the travel agents contain no provision concerning the price at which the agents may sell the holidays. The travel agents are free to sell them at prices below the prices published in First Choice Holidays’ brochures. Travel agents routinely grant discounts on holidays without obtaining prior agreement in each case from First Choice Holidays.
However, the agency agreements provide that First Choice Holidays is to receive from the agent the full price appearing in the brochure and that the agent is to receive a commission equal to a given percentage, usually 10% of that price.
In a case where the full price is GBP 1 000 and the agent gives the customer a discount of GBP 50, the customer will have to pay GBP 950 to First Choice Holidays. In practice, First Choice Holidays will receive the GBP 950 through the travel agent who will have to pay First Choice Holidays GBP 50 in addition, corresponding to the difference between the price indicated in the brochure and that in fact charged. The agent will also charge First Choice Holidays a commission of GBP 100, that is 10% of the brochure price.
When a holiday was sold, First Choice Holidays drew up a customer invoice which it sent to the agent. The copy intended for the customer indicated the price of the holiday appearing in the brochure, but said nothing about any discount or commission. When the agent forwarded the invoice to the customer, he either sent a statement showing the actual holiday cost, after deduction of the discount, or made a manual amendment to the invoice to show this actual price. First Choice Holidays frequently did not know the amount of any discount and therefore did not know the amount actually paid by the customer.
In 1998, First Choice Holidays submitted a claim to the Commissioners for the repayment of GBP 921 456, on the basis that it had incorrectly accounted for VAT in respect of the discounts given by travel agents when selling its holidays.
The Commissioners rejected that claim.
First Choice Holidays appealed against that decision to the VAT and Duties Tribunal, London. By a decision of 22 November 1999, the Tribunal held the appeal to be admissible and well founded. It held that the payment made by the travel agents in respect of the difference between the brochure price and the reduced price fell outside the scope of the scheme provided for by Article 26 of the Sixth Directive.
The Commissioners appealed against the Tribunal’s decision to the High Court of Justice of England and Wales, Chancery Division. By a decision of 28 June 2000, the High Court held that Article 26 of the Sixth Directive did not apply, in the above example, to the GBP 50 payable by the travel agent because it was not an amount to be paid by the traveller. It held that in any event that sum could fairly be regarded either as payment for the holiday or as payment for a service provided by First Choice Holidays to the travel agent consisting in providing him with the facility of selling the holiday at whatever price he saw fit. Observing that the VAT and Duties Tribunal, London, had treated the payment as the latter, it held that this was a finding of fact which ought not to be disturbed on appeal.
The Commissioners appealed against that decision of the High Court of Justice of England and Wales, Chancery Division, to the Court of Appeal (England and Wales) (Civil Division). They submitted that in the above example the additional GBP 50 paid by the travel agent to First Choice Holidays on behalf of the customer or for his direct benefit amounted to part of the total consideration received by the tour operator, paid by a third party, such that that sum had to be taken into account for the purposes of calculating the VAT.

Questions

Where a tour operator within the meaning of Article 26 of Council Directive 77/388/EEC,

(a) supplies package holidays to customers through the disclosed agency of a travel agent;
(b) permits the agent to arrange the supply of package holidays at a discount from the price published in the tour operator’s brochure (the customer being liable to pay only the discounted price for the holiday);
(c) requires the agent who arranges the supply of a package holiday at a discount not only to pass on to the tour operator the price actually charged to the customer but also to pay to the tour operator an additional sum equal to the discount given to the customer (who is unaware of the financial arrangements between the tour operator and the agent), so that the agent accounts to the tour operator for the full brochure price of the holiday;
(d) agrees to pay the agent a commission based on the brochure price of the holiday, which in practice is paid by set-off against the sums due from the agent as mentioned in (c) above;
(e) does not know whether or not the agent has arranged the sale of a particular holiday at a discounted price, or the amount of the discount;
(f) as between itself and the agent, accounts for the sale of the holiday on the basis that it has been paid the full brochure price of the holiday;
- (1) Having established the above facts, how should the additional sum (referred to in (c) above) paid by the travel agent to the tour operator be characterised for the purposes of Article 26(2)?
- (2) Does the total amount to be paid by the traveller within Article 26(2) include the additional sum referred to in (c) above?

AG Opinion

Article 26(2) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the rules of the Member States relating to turnover taxes – common system of value added tax: uniform basis of assessment is to be interpreted as meaning that the concept total amount to be paid by the traveller contained in that provision covers all amounts received by way of consideration for the supply of the holiday by the travel agent or by the tour operator to which the special scheme laid down by that provision applies, regardless of whether those amounts are paid by the traveller himself or by third parties. It is for the national court to ascertain whether the amount that, in the circumstances indicated by that court, a travel agent, acting as agent on behalf of a tour operator, has paid to the latter in addition to the price paid by the purchaser of a package holiday constitutes consideration of that kind.

Decision

Article 26(2) of Sixth Council Directive 77/388/EEC 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 must be interpreted as meaning that the total amount to be paid by the traveller within the meaning of that provision includes the additional amount that a travel agent, acting as intermediary on behalf of a tour operator, must, in circumstances such as those described in the order for reference, pay to the tour operator on top of the price paid by the traveller and which corresponds in amount to the discount given by the travel agent to the traveller on the price of the holiday stated in the tour operator’s brochure.

Summary

Special tax regime for travel agents and tour operators – Taxable amount – Profit margin – Total amount to be paid by the traveler”

Article 26(2) of the Sixth Directive must be interpreted as meaning that the concept of total amount to be paid by the traveler within the meaning of that provision includes the additional amount charged by a travel agent acting as an intermediary on behalf of a tour operator in circumstances such as those described in Article 26(2) of the Sixth Directive must pay the latter the order for reference in addition to the price paid by the traveller, and which corresponds to the discount granted to the traveler by the travel agency on the price stated in the tour operator’s brochure.

Source