VAT – consideration - discounts – whether prompt payment discounts reduce the taxable amount where the discount is not achieved – para 4(1) Sch 6 VAT Act – tour operators – whether package price reduced by prompt payment discounts where not achieved.

LONDON TRIBUNAL CENTRE

	SAGA HOLIDAYS LIMITED	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	RICHARD BARLOW   (Chairman)
						MISS D M WILSON

Sitting in public in London on 8 September 2003

Mrs Amanda Brown of Messrs KPMG, for the Appellant 

Mrs Melanie Hall QC, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

The appeals

1.	This decision is the unanimous decision of the tribunal in respect of two appeals, heard together, in which the appellant has appealed against decisions by the respondents contained in letters dated 14 February 2001 and 26 September 2000.  Both those letters conveyed the respondents’ decisions that they would not accept in full ‘voluntary disclosures’ by the appellant being claims under section 80 of the Value Added Tax Act 1994 (‘the VAT Act’) for repayment of overpaid tax.

2.	The appellant claims to have overpaid tax because, when accounting for its takings relating to supplies of holiday services over a number of years, it had accounted for tax on the full price without taking account of discounts offered for early payment.  Customs and Excise have now accepted that tax was overpaid in cases where the appellant’s customers actually received discounts and that part of the voluntary disclosures is no longer in dispute but the appellant contends that there was also an overpayment of tax where discounts were available but not taken up and these appeals relate to that issue.  The sum in dispute is now agreed and the issue can be dealt with as one of principle only.  The sum in dispute is substantial.

3.	The parties had agreed the facts of this case in a three page statement of agreed facts.

4.	The appellant’s case in its barest essentials can be summarised as follows.  Much of the appellant’s trade consists of making supplies that fall within the tour operators’ margin scheme (‘TOMS’) but following the case of Customs and Excise Commissioners –v- Madgett and Baldwin [1998] STC 1189 and the judgment of the Court of Justice of the European Communities (‘the ECJ’) in that case, some of the appellant’s supplies, or aspects of its supplies, fall outside that scheme.  In so far as the supplies, or aspects of them, fall outside TOMS the ordinary rules for determining the taxable value of the supply apply. Further, following the ECJ’s judgment in Customs and Excise Commissioners –v- First Choice Holidays [2003] STC 934 the ordinary rules for determining the value of supplies provide the starting point for valuation of the supplies, even if they fall within TOMS.  As a consequence, paragraph 4(1) of Schedule 6 to the VAT Act and article 11A(3)(a) of Council Directive 77/388/EEC (‘the Sixth Directive’) provide that the taxable amount is the discounted price that is or was available to the customer, whether or not the discount is in fact achieved by early payment.

5.	The respondent’s case, as presented to us at the oral hearing, can be summarised in its barest essentials as follows.  At least in the case where a package of supplies is supplied and some of them fall within the TOMS scheme the ordinary rules for valuation of the supply are overridden and the TOMS scheme applies to the full package price.  The special rule about discounts plays no part in the calculation of the margin under the TOMS scheme, though where the discount is actually achieved the discounted price will, in fact, be the total amount paid by the traveller and will therefore form the basis for the calculation of the margin.  They therefore accepted the voluntary disclosure only so far as it related to overpayments where discounts had been achieved but the appellant had paid tax on the full price without deduction of the discounts.  

6.	At that stage, the respondents were in agreement with the appellant that paragraph 4(1) of Schedule 6 to the VAT Act and article 11A(3)(a) of the Sixth Directive should properly be interpreted as meaning that, where those provisions applied, the value of a supply is the discounted price offered whether or not the discount is actually achieved.  They therefore disputed only the balance of the voluntary disclosure, i.e. those amounts of it that related to cases where the discount had been available but was not achieved, on the grounds that those provisions did not apply at all in those circumstances.

7.	It appeared to the tribunal that that interpretation of paragraph 4(1) of Schedule 6 to the VAT Act and article 11A(3)(a) was by no means the only possible one. We therefore directed the parties to make further written submissions on that point.  We regard the issue as being one of the correct interpretation of both of those provisions, not just whether paragraph 4(1) correctly transposes the directive. Clearly the issue had wider implications than those applying only to this case and so Customs and Excise, quite properly and without objection from the appellant, took some time to make their submissions. The appellant responded promptly. It is in those circumstances that the decision is given so long after the hearing.

8.	Customs and Excise now contend that the correct interpretation of paragraph 4(1) of Schedule 6 to the VAT Act is that the value of a supply, where a discount is available, is only reduced by the discount where or to the extent that the discount is actually achieved.  The appellant contends that the taxable amount is the discounted price, even where the discount is not achieved, principally because the taxable amount has to be capable of being determined at the time of supply, which may be while the discount is still available but not by then achieved.

9.	At the same time as the appellant submitted its reply to the respondents’ further submissions it submitted an application for directions to the tribunal which were served on the respondents on 9 February 2004.  No reply or objection was made by the respondents within the 14 days allowed by the Tribunal Rules and so the proceedings were formally concluded on 23 February 2004. The application for directions was, as we read it, for directions that the tribunal should include in its decision its conclusions about the issues relating to the TOMS scheme and, in effect, invited it not to decide the issue solely on the narrow ground that the correct interpretation of paragraph 4(1) of Schedule 6 to the VAT Act is that the value of the supplies is only the discounted price where the discount is actually achieved; if that is the tribunal’s interpretation.  

10.	The tribunal cannot make a direction to itself but we intend to decide the TOMS issues as well as the narrower interpretation issues in case our decision about one or the other proves to be wrong.  

11.	We are provisionally holding that the application for directions appears to be misconceived, but we believe that this decision will do what was requested in the application.  In case we have misunderstood what was being applied for, we give leave to the appellant to apply to the tribunal to list the hearing of the applications, if it considers them to be necessary after the decision is given, such application for a hearing to be made within 28 days of the release of this decision.

The TOMS issues

10.	The TOMS scheme is based on article 26 of the Sixth Directive.

11.	Article 26(1) applies the scheme to cases where “travel agents deal with customers in their own name and use the supplies and services of other taxable persons in the provision of travel facilities”.  Travel agents include tour operators.  It might be said that the phrase “and use the supplies and services of other taxable persons” is unclear.  That provision may mean that the scheme only applies to the services of other taxable persons which are used by the tour operator or it might mean that the scheme applies to all the services supplied in the tour operator’s own name if they include at least some that use those of other taxable persons.  In other words does the use of such supplies trigger the application of the scheme to the composite supplies of tour operators which contain some of that nature, or does it only apply the scheme to such supplies as fall directly within that phrase?

12.	This is the dichotomy between what are referred to as ‘in-house services’ and ‘bought-in services’.

13.	Article 26(2) includes the following:

“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. … 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 …” [emphasis added].

The reference to “this service” can only be a reference to the single service supplied by the agent.  That provision appears therefore to clarify the possible ambiguity of article 26(1) in favour of concluding that the scheme applies to the whole package i.e. both the in-house and the bought-in supplies, by deeming them all to be part of a single service, provided they all relate to the same “journey”.
 
14.	Section 53 of the VAT Act which currently transposes article 26 into UK law follows what appears to be a similar pattern.  Section 53(1) provides for the making of a Treasury Order in respect of supplies of tour operators or such of those supplies as may be determined by the order.  Section 53(2) specifically allows for two or more supplies by the tour operator to be treated as one and for the value of that supply to be determined by reference to the difference between sums paid or payable to and sums paid or payable by the tour operator.  However the Value Added Tax (Tour Operators) Order 1987 limits the scope of the special scheme to supplies of a “designated travel service” which is limited to the bought-in supplies because designated travel services are supplies which are “supplied for the benefit of the traveller without material alteration or further processing”, having been acquired for the purpose of his business by the tour operator.      

15.	The order also allows for the calculation of the margin to be “calculated in such manner as the Commissioners of Customs and Excise shall specify”.  The method of calculation is therefore specified by Public Notice though that provision does not allow the Commissioners by notice to determine the nature of the margin, only its calculation.

16.	In the Madgett and Baldwin case the ECJ was asked to decide whether the taxpayers were within the scheme at all.  It is not disputed that the appellant in this case was within the scheme.  On the question whether the scheme only applied to the bought-in services the ECJ held, in paragraph 35 of its judgment, that the scheme only applies to the bought-in services.

17.	As far as valuation was concerned, the ECJ held, at paragraph 39 of its judgment, that article 26 does not contemplate the provision of packages comprising both bought-in and in-house supplies thus rejecting, by implication, any suggestion that article 26(1) is ambiguous in the way we suggested it might be in paragraphs 11 and 13 above.   

18.	The judgment then continues:

“40. In this connection it should be noted that art 11(1)(a) of the Sixth Directive states that the taxable amount for VAT consists, in respect of most services, of everything which constitutes the consideration for the service.  It has consistently been held that the consideration must be interpreted as what is actually received, not as a value estimated according to objective criteria …

41. As the Advocate General observes in paragraph 65 of his opinion, it follows from the existence of a package price covering both services bought in from third parties – and so covered by article 26 – and in-house services – not covered by that provision – that the consideration within the meaning of art 11A(1)(a) of the Sixth Directive cannot be used as the taxable amount for the in-house services which are provided as part of the package.

42. It is therefore necessary to determine the unit of reference to be used as an alternative to the consideration in order to identify the part of the package which relates to the in-house services.  There are two possible methods, one based on actual costs as under TOMS, the other based on market value.”

[Emphasis added in both paragraphs].

We point out that the problem was in respect of valuing the in-house services because the bought-in services fall within the scheme and are subject to the margin but before the margin calculation is made it is necessary to identify which part of the package price is referable to the in-house services to be able to begin the calculation.

19.	Mrs Brown, for the appellant, argued that Madgett and Baldwin establishes that the scheme only applies to the bought-in services, as is indeed the case, and she quotes paragraphs 63 to 65 of Advocate General Léger’s opinion as support for the proposition that the general scheme of art 11A still applies fully to the in-house and certain agency supplies which are not within the scheme.

20.	She points out that the Court agreed with the Advocate General and certainly the Court specifically agreed with, at least, paragraph 65 of the opinion which reads:

“65. This approach [the normal approach to identifying consideration], cannot, however, simply be applied to the present case.  The existence of a package price covering both categories of services without distinction prevents assessment of the taxable amount by reference to the consideration within the meaning of art 11A(1)(a) for the in-house services supplied as part of the package.  It is evidently impossible to isolate that consideration from the remainder of the package, so that the margin for the bought-in services cannot be ascertained by this method.”  [Emphasis added].

Mrs Brown therefore argues that the Court, following the Advocate General, was holding that art 11A still applies to the identification of the consideration for the package as a whole and that the TOMS scheme only requires the application of special rules for the apportionment of the overall consideration between the in scheme and out of scheme supplies.

21.	Mrs Brown relies upon Customs and Excise Commissioners –v- First Choice Holidays plc [2003] STC 934 as further support for those propositions.  She cites paragraphs 21 to 27 of the judgment of the ECJ.  The Court pointed out that article 26 of the Sixth Directive is an exception to the general rules and should therefore be applied only so far as is necessary to achieve its objective, which was to adapt the applicable rules to the specific nature of the activity of tour operators.  It then said this:

“26. The attainment of [art 26’s] objective in no way requires any derogation from the rule laid down in art 11A(1)(a) of the Sixth Directive which, for the purposes of determining the taxable amount, refers ‘to the consideration which has been or is to be obtained by the supplier from the … customer or a third party’.

27. The consideration is the same economic element as the total amount to be paid by the traveller mentioned in art 26(2) of the Sixth Directive.  Under both the general scheme and the special scheme, that element corresponds to the price paid to the supplier of the services.  Irrespective of the object pursued by art 26(2), the concept in question must have the same legal definition under both schemes.”

Mrs Brown then contends that the ‘concept in question’ i.e. the total amount to be paid by the customer (art 26) or the taxable amount (art 11A(1)(a)) is, by parity of reasoning, then equally subject to the exclusion provided for by art 11A(3)(a) i.e. discounts for early payment.

22.	Mrs Hall QC, for the respondents, argues that the ECJ had decided in Madgett and Baldwin that it was necessary to determine a unit of reference for the package price as an alternative to the normal rule in art 11.  She also pointed out that neither the Madgett and Baldwin nor the First Choice case established that art 11A(3)(a) applied to cases of this sort.   She contended that it is necessary to derogate from art 11A(3)(a) if the objective of art 26 is to be achieved because, having provided that the margin should be what the customer has paid less the actual cost of providing the service, it would make no sense to begin with a figure which is less than what the customer has paid.  Therefore in cases where the discount was available but has not been achieved by the customer (which we remind ourselves are the cases still in dispute) art 11A(3)(a) should not apply as the result would not be what art 26 clearly envisages. Mrs Hall pointed out that the ECJ had expressly excluded the application of art 11A(1)(a), which she recognised was in relation to the bought-in supplies, and she argued that it would have been odd if the ECJ then allowed that art 11A should apply for identifying the overall price.  In particular she emphasised that the ECJ did not reject the TOMS scheme as transposed into the UK legislation and explained in the Public Notice, which the court had referred to.

23.	 The tribunal holds that paragraphs 41 and 42 of the judgment of the ECJ in Madgett and Baldwin, particularly the words emphasised in those paragraphs as we have set them out in paragraph 18 above, make it clear that art 26 does not provide a code which establishes a separate means of identifying the consideration for bought-in supplies without any reference to art 11A(1)(a).  The First Choice case explained the position further.  The ECJ held, following established principles, that the attainment of the purpose of art 26, as a measure derogating from the normal rule, should be limited to the minimum required to attain that purpose. Accordingly art 11A(1)(a) applies for the purpose of establishing the taxable amount.  This is set out in paragraph 26 of the judgment quoted in paragraph 21 above.  The ECJ then went on to hold in paragraph 27, also quoted above, that in the case of a package payment the taxable amount under art 11A(1)(a) and the total amount paid by the traveller are the same.  

24.	Both those cases were really concerned with how the scheme can operate given the difficulty that it has been held that the scheme only applies to the bought-in services even where a single price has been paid for the package.  The First Choice case also dealt with the problem that some of the payment was made by a third party. 

25.	For the purpose of this appeal to the tribunal, the important point is that art 11A(1)(a) is not excluded from having any relevance by an argument that art 26 establishes a free standing code separate from general VAT system.

26.	Given that; it is possible to see that the establishment of the part of the package price that is correctly attributable to the bought-in (i.e. the scheme) supplies requires a two stage process.  First, it is necessary to establish what the overall price is.  This requires the application of the art 11A(1)(a) rule.  Concepts such as “subjective value”, “everything that is actually received by the supplier” and so on apply, as is abundantly clear from the reference to Naturally Yours Cosmetics –v- Customs and Excise Commissioners [1988] STC 879 in paragraph 40 of the ECJ judgment in Madgett and Baldwin.  Secondly, it is necessary to find a way to divide the consideration between the in-house and bought-in supplies and apply the margin to the latter and it is here, but only here, that special rules are required.

27.	Art 11A(1)(a) does not stand in isolation.  Paragraphs (2) and (3) respectively add to and subtract from amounts that might otherwise be omitted or included if paragraph (1) had stood alone.  Without taking account of paragraphs (2) and (3) paragraph (1) is incomplete.  In Boots Co plc –v- Customs and Excise Commissioners [1990] STC 387 at paragraph 19 of the judgment of the ECJ the court held that art 11A(3)(b) was “merely an application of the rule laid down in art 11A(1)(a) … according to which the taxable amount is the consideration actually received”.  It seems inconceivable that art 11A(3)(b) should be identified as an application of the rule in 11A(1)(a) without 11A(3)(a) being also an application of that rule i.e. essentially an integral part of it.  

28.	We hold therefore that art 11A(3)(a) applies at the stage of deciding what is the taxable amount and/or the total amount to be paid by the traveller for the purposes of calculating the first stage in determining the value of the supplies made by the tour operator.  That in itself says nothing about the division of the overall payment between in-house and bought-in supplies but in this case it would make no difference how they are divided between them, if the parties initial submissions about the meaning of art 11A(3)(a) and paragraph 4(1) of Schedule 6 are correct, because the discount applies to the whole price and it would not matter how much of it should be attributed to in-house or bought-in supplies.  The same overpayment will have occurred, if any, however the payment might be divided between the two types of supply.

29.	In this respect therefore we agree with the appellant’s argument.

The discount issue

30.	Paragraph 4(1) of Schedule 6 to the VAT Act reads:

“Where goods or services are supplied for a consideration in money and on terms allowing a discount for prompt payment, the consideration shall be taken for the purposes of section 19 as reduced by the discount, whether or not payment is made in accordance with those terms.”

We have to interpret that provision.

31.	When VAT was first created in the UK paragraph 4 of Schedule 3 to the Finance Act 1972 was the nearest equivalent provision and it read:

“Where goods or services are supplied for a consideration in money which is to be reduced if payment is made immediately or within a specified time the consideration shall be taken for the purposes of this Part of this Act as so reduced whether or not payment is so made.”

Section 14 of the Finance Act 1977 provided for substantial amendments to the then existing VAT legislation and stated that the amendments were “mainly to give effect to new Community provisions relating to the incidence and operation of the tax”.  The Finance Act 1977 was enacted on 29 July 1977.  The Sixth Directive had been made on 17 May 1977 and article 1 of the Directive required Member States to adopt the necessary laws “at the earliest opportunity and by 1 January 1978 at the latest”.  There can be no doubt that the Finance Act 1977 amendments were intended to implement the Sixth Directive and they should therefore be read consistently with the Directive if possible.  The amendments introduced the following in place of paragraph 4 of Schedule 3 to the Finance Act 1972:   

“Where goods or services are supplied for a consideration in money and on terms allowing a discount for prompt payment, the consideration shall be taken for the purposes of section 10 of this Act as reduced by the discount, whether or not payment is made in accordance with those terms.”

The wording is the same as it is now except for the cross reference to the changed numbering of the sections in the Act.  It is therefore equally clear that the present provision is intended to implement the same provision in the Directive.

32.	The provision in the Directive which is intended to be implemented by paragraph 4(1) can only be art 11A(3)(a) which reads:

“(3) The taxable amount shall not include:

(a) price reductions by way of discount for early payment;”

33.	Paragraph 4(1) could be more clearly worded. The reference to terms “allowing” a discount does open up the possibility of reading the provision as applying where, although the terms allowed for it, the discount had not been achieved.  The possibility of so reading it is diminished by the next phrase “the consideration shall be taken … as reduced by the discount”.  If it had been meant to reduce the consideration as long as the discount had been available, even if it was not achieved, the provision might more accurately have been expressed as “the consideration shall be reduced in accordance with those terms”, or words to that effect.  The words “by the discount” can more readily be interpreted as a reference to a discount that has actually come into existence than to one that is available but may never come into existence.  We hold that although the provision does contain an element of ambiguity the better construction of the words used is that the consideration is only reduced where the discount is achieved.

34.	The last phrase also gives rise to some ambiguity.  “Whether or not payment is made in accordance with those terms” could suggest that it is the existence of the right to a discount that gives rise to the reduced consideration for VAT purposes.  However, if the earlier words mean that the discount has to be achieved before it can affect the consideration, as we have held they do, the last words in the paragraph can be taken to apply to the situation where the discount is in fact allowed, even though on the strict terms agreed between the parties it could have been refused.  We do not therefore hold that the closing words contradict the interpretation that we have put on the opening words.  

35.	We have acknowledged an element of ambiguity in the words used but we hold that the correct meaning of the provision is that the discount has to be achieved and, apart from the interpretation of the words used, that is confirmed in two separate but related ways. 

36.	Firstly, the general scheme of VAT both in UK law and in community law is that the tax is payable by reference to the actual consideration paid, in the case of a monetary consideration, rather than by reference to the terms agreed between the parties, where there is a difference between the two.  We have already referred to the Naturally Yours and Boots cases at paragraphs 26 and 27 above; both of which afford examples of the concept that the consideration or the taxable amount should normally be the actual amount paid, where the consideration is a money consideration.  Clearly, the interpretation of paragraph 4(1) originally contended for by both parties to this appeal would offend against that concept.  As a matter of statutory interpretation in UK law the context of a provision can always help to resolve an ambiguity and on that basis the paragraph should be interpreted in the general context of VAT which would suggest that as the tax is a tax on value added it should be based on what has been paid not on some artificially reduced amount that would result in the tax applying to something less than the value added.  The concept of the taxable amount in community law requires the same interpretation in order to place the paragraph correctly in its context, for the same reason.

37.	Secondly, art 11A(3)(a) cannot be said to contain the same ambiguity as paragraph 4(1).  The phrase “price reduction by way of discount” cannot sensibly be read as meaning “a price reduction available by way of discount whether or not achieved”.  There is no reason why the extra words should be read into the provision.  Art 11A(3) is to be read as confirming the exclusion of items that are already impliedly excluded from art 11A(1), as to which see again the passage from Boots cited in paragraph 27 above.  Art 11A(1) and (3) are to be read as essentially part of a single concept.  In light of those facts the argument for an interpretation that focuses on the consideration actually paid and not some artificial amount becomes even stronger and so the interpretation of the implementing provision becomes even clearer.

38.	It follows that the appeal has to be dismissed because even though we have held that the TOMS provisions are not entirely free-standing and may in certain respects be affected by concepts derived from art 11A, the appellant’s case does depend upon the correct interpretation of paragraph 4(1) and art 11A(3)(a) being that the consideration or the taxable amount can be reduced by a discount that is available but not achieved, which we hold to be an incorrect interpretation of those provisions. 

Costs

39.	We make no award of costs but give leave to the parties to make such application, if any, as they may wish within 28 days of the release of this decision.

RICHARD BARLOW
CHAIRMAN

RELEASED:

LON/01/386-7