C-308/96

COMMISSIONERS OF CUSTOMS AND EXCISE v MADGETT AND BALDWIN

OPINION OF ADVOCATE GENERAL LÉGER delivered on 30 April 1998 *

1. The High Court of Justice asks the Court feature of which is that it includes both accom­ for a ruling on whether the special scheme of modation provided by the hotelier from his VAT provided for by Article 26 of the Sixth own resources, which in principle falls within 1 VAT Directive 77/388/EEC (hereinafter 'the the general system of VAT, and services bought Sixth Directive'), intended for travel agents in from third parties for the direct benefit of and tour operators, may apply to a hotelier the traveller, which are services of the type who, in addition to accommodation, offers expressly referred to in Article 26. his customers travel to and from the hotel and arranges an excursion during the stay, in return for a single payment.

Legal background

2. The Value Added Tax Tribunal, hearing a point raised for the first time in the High Court of Justice, which remitted the matter to the Tribunal, asks supplementary questions Article 26 of the Sixth Directive on the method of calculation of the taxable amount, on the assumption that the hotelier comes under the scheme in Article 26.

4. Article 26 of the Sixth Directive makes an exception to the general system laid down by 3. The Value Added Tax Tribunal essentially that Directive for defining the taxable seeks to know how to compute the taxable 2 amount. amount for such a transaction, the special

United Kingdom legislation 2. 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 estab­ lishment from which the travel agent has pro­ vided the services. The taxable amount and the price exclusive of tax, within the meaning 6. Article 26 of the Sixth Directive was trans­ of Article 22(3)(b), in respect of this service posed into United Kingdom law, at the mate­ shall be the travel agent's margin, that is to rial time, by Section 37A of the Value Added 3 say, the difference between the total amount Tax Act 1983 and by the Value Added Tax to be paid by the traveller, exclusive of value (Tour Operators) Order 1987. added tax, and the actual cost to the travel agent of supplies and services provided by other taxable persons where these transac­ 3 — The corresponding provisions are now contained in Section tions are for the direct benefit of the traveller. 53 of the Value Added Tax Act 1994.

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COMMISSIONERS OF CUSTOMS AND EXCISE v MADGETT AND BALDWIN

7. The detailed provisions of the United an agreement with a coach hire firm for the Kingdom legislation are set out in Leaflet whole of the summer season. The coach col­ 709/5/88 of the Commissioners of Customs lects the customers on Saturday at various and Excise of 1 April 1988, entitled 'Tour places in the north of England and takes them Operator's Margin Scheme' ('TOMS'). back to the same places on the following Friday. The coach can also be used on the Tuesday for a tour of Devon.

OPINION OF MR LÉGER —JOINED CASES C-308/96 AND C-94/97

ings and referred the following two questions their stay at the hotel (the transport elements to the Court for a preliminary ruling: being bought in by the owners of the hotel from a coach hire company)?'

13. In the proceedings in the High Court Mr Madgett and Mr Baldwin raised a new argument, namely that the method of appor­ '1 . What are the criteria for determining tionment prescribed by Leaflet 709/5/88 for whether the operations of a taxable person determining the tour operator's margin was are the operations of a "travel agent" or "tour contrary to the Community rules. The High operator" to which the provisions of Article Court held that it had no jurisdiction to 26 of Council Directive 77/388/EEC of 17 decide the point, as it had not been consid­ May 1977 on the harmonisation of the laws ered by the Value Added Tax Tribunal and of the Member States relating to turnover tax was not therefore the subject of the appeal (the Sixth Directive on Value Added Tax) before the High Court. apply? In particular, do the said provisions apply to the operations of a person who, though not a "travel agent" or "tour operator" in the ordinary English meanings of those expressions, provides for the benefit of trav­ ellers services of a kind commonly provided by travel agents or tour operators? Case C-94/97

'If it is determined in Case C-308/96 that the provisions of Article 26 of the Sixth Direc­ (b) as authorising Member States to require tive do apply to operations of the kind in apportionment by reference to such costs issue in the present case, (i) generally or (ii) in the case of opera­ tions of the kind in issue in the present case, or

1. On the proper interpretation of Article 26, where in a single transaction a tour operator provides a service to the traveller part of which is supplied to the tour operator by (c) as leaving such apportionment to be made other taxable persons ("bought in") and part in accordance with the normal principles of which is supplied by the tour operator for determining the taxable amount under from its own resources ("in-house"), on what Article 11?'

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OPINION OF MR LÉGER — JOINED CASES C-308/96 AND C-91/97

Preliminary remarks The questions referred by the High Court of Justice

17. It may be of help at this stage, for a better 20. By its first question the High Court seeks appreciation of the circumstances of the main to ascertain whether the special scheme of proceedings and the characteristics of the rules VAT defined by Article 26 of the Sixth Direc­ for defining the taxable amount, to explain tive applies to supplies of services by a trader why Mr Madgett and Mr Baldwin may con­ who is not regarded as a travel agent or tour sider it to be in their interest to remain sub­ operator by his national law, where those ser­ ject to the general tax scheme of the Sixth vices are of the kind generally supplied by Directive rather than the scheme provided for travel agents and tour operators. in Article 26.

'The services provided by [travel agents and tour operators] most frequently consist of 24. Those concepts are Community concepts, multiple services, particularly as regards trans­ however, whose definition may not be left to port and accommodation, either within or 5 the discretion of the Member States. Besides, outside the territory of the Member State in the harmonisation of the laws of the Member which the undertaking has established its busi­ States relating to turnover taxes is the prin­ ness or has a fixed establishment. cipal aim of the Sixth Directive. Consequently, recourse to a formal criterion which made the application of the tax scheme provided for by Article 26 depend on the legal status con­ ferred by each Member State on the traders described as travel agents or tour operators (hereinafter 'travel agents') could jeopardise its uniform application on the territory of the 6 The application of the normal rules on place Community. of taxation, taxable amount and deduction of input tax would, by reason of the multiplicity of services and the places in which they are provided, entail practical difficulties for those undertakings of such a nature as to obstruct their operations.

27. The justification for the scheme provided agent, as that term may be defined in the for in Article 26 is thus the specific nature of Member State concerned. the operations of travel agents, who supply services provided by other taxable persons who are often located in other Member States. Article 26 is therefore intended to erase the difficulties flowing from the multiplication of administrative formalities resulting from the variety of systems in the different Member 30. The concern for simplification shown by States, by defining a single place of taxation the Community legislature applies in the same and providing for a scheme for taxation of the travel agent's margin. The travel agent is way with respect to two traders who carry on thus released from compliance with certain identical activities and are thus logically con­ binding requirements of the tax authorities of fronted with comparable difficulties. other Member States and avoids double taxa­ tion, given that tax paid in another Member State may not be deducted and, in the state of Community law at the time of adoption of the Sixth Directive, was difficult to recover.

36. I consider that a service is ancillary if, 33. The Article 26 scheme must therefore be first, it contributes to the proper performance applied to traders who habitually arrange of the principal service and, second, it takes travel or tours and, in order to supply the up a marginal proportion of the package price services generally associated with activity of compared to the principal service. It does not that kind, have recourse to other taxable per­ constitute an object for customers or a service sons. sought for its own sake, but a means of better enjoying the principal service.

The questions referred by the Value Added Tax Tribunal 39. Thus where a hotel habitually offers its customers, in addition to accommodation, services such as tourist excursions which are outside the tasks traditionally entrusted to hotels and which cannot be performed without having a substantial effect on the package price charged, it seems to me that the associ­ 42. The Value Added Tax Tribunal assumes, ated services supplied may not be treated as as a hypothesis, that Article 26 of the Sixth ancillary services. By reason of their existence Directive applies to a trader, not recognised the activity of the trader then takes on a dif­ as a travel agent or tour operator by national ferent character. law, who supplies his customers in return for a package price with services which consist partly of services provided by himself and partly of services bought in from third par­ ties. It asks the Court how to calculate the taxable margin of the services supplied, under Article 26. 40. The trader must in that case be regarded as subject to the provisions of Article 26 of the Sixth Directive, even if under national law he is not considered to be a travel agent or tour operator.

43. To that end, the Value Added Tax Tri­ bunal wishes to know the basis on which to assess the elements which make up the package price.

41. The second question from the High Court of Justice concerns the application in the main proceedings of rules of Community law, not their interpretation. Like the Commission, I consider that it is not for the Court to decide the dispute in the place of the national court, and that it is for the national court, having 44. A preliminary point must be to define regard to all the facts at its disposal and in the scope of Article 26 in such a case, where particular its knowledge of the proportion of a package covers different kinds of services, bought-in services in the package, to give in-house and bought in from third parties.

47. However, it appears to me to be consis­ tent with neither the wording nor the spirit 51. The aim pursued by the legislature, which of Article 26 of the Sixth Directive. is to adapt the applicable rules to the specific nature of the operations of travel agents, con­ firms that approach. The supply of in-house services takes place for the most part in the Member State in which the trader has estab­ lished his business or has a fixed establish­ ment, and that is also the place of taxation of

48. Article 26(1) states very clearly that the system it prescribes is to apply to the opera­ 10 — My emphasis. tions of travel agents where they 'use the 11 — My emphasis.

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OPINION OF MR LÉGER —JOINED CASES C-308/96 AND C-94/97

the bought-in services under Article 26. The 55. The first apportionment establishes the place of taxation of those services is thus the common margin by deducting the expendi­ same as the place of taxation of the in-house ture incurred to produce the in-house and services, as in the case where a trader uses bought-in services. bought-in services exclusively, so that, first, the distortion of competition between traders objected to by the Swedish Government is not likely to occur particularly often and, second, the application of Article 26 to in-house services is not so advantageous, on 56. The second apportionment distinguishes this hypothesis, from the point of view of the margins for each category of services, in simplification. order to identify the taxable amount of the bought-in services.

suggests two possible methods, one based on 61. The second method, supported by cost, the other on the value of the compo­ Mr Madgett and Mr Baldwin and by the nents of the package. Commission, is based on the market value of the components of the package. In other words, the expenditure incurred by the trader must, in the opinion of Mr Madgett and Mr Baldwin, be assessed in accordance with Article 11(A)(1)(a) of the Sixth Directive, which refers to the amount received as con­ sideration for the services. 60. The former corresponds to the British TOMS scheme. It is supported by the United Kingdom and German Governments. The trader calculates the total cost he incurs in supplying mixed services in return for the package price. That cost consists of, first, what he has paid for the bought-in services and, second, the cost generated by the supply of in-house services. The common margin for 62. A final possibility, put forward by the both kinds of services is obtained by deducting Swedish Government, is to calculate the tax­ from that total cost the amount of the package able amount, in order to ensure neutrality of payments received. taxation, by reference to the actual costs of the bought-in services and to the amount which the trader would have spent had he obtained the in-house services from third par­ ties. The Swedish Government suggests that the wholesale price of the latter services should be used. That is to be calculated on the basis of the price charged for an identical service The common margin is then divided into its by a third party. Note that this method of two components: the margin on the bought-in calculation is applied in the context of taxa­ services and the margin on the in-house ser­ tion of the common margin on the different vices. To do that, the apportionment takes services. place on the basis of the ratio of the expen­ diture on the bought-in services to the cost of the in-house services.

64. The Court has held that the taxable reference to the market value of the compo­ amount for a supply of services consists of nents of the in-house services. It proposes everything received as consideration for the that reference be made to the room price service supplied, that consideration being a charged by the hotel where customers are not subjective value, since the taxable amount is on the package, that is, when they travel the consideration actually received and not a independently and do not go on the excur­ figure estimated according to objective crite­ sion. 12 ria. That is an expression of the idea that it is the parties to the contract alone who decide the price which can be charged by reference to the criteria they consider appropriate. It may no doubt be supposed that, out of con­ cern for economic efficiency, they will set 67. I consider, however, that each of the prices by reference to objective factors, but methods suggested contains an element of the taxable amount cannot be determined on arbitrariness, which suggests that the criterion the basis of hypothetical reasonable behav­ based on the closeness of the taxable amount iour. What must prevail is the reality of the to the reality of the economic operation con­ economic operation to be taxed. cerned is not a criterion which will make it possible to select one method in preference to the others.

65. This approach cannot, however, simply be applied as such to the present case. The existence of a package price covering both categories of services without distinction pre­ 68. The method proposed by the Commis­ vents assessment of the taxable amount by sion presupposes that the price of accommo­ reference to the consideration within the dation offered as an in-house service as part meaning of Article 11 (A)(1)(a) for the in-house of the package is identical to the price of services supplied as part of the package. It is accommodation where that is offered as a single service. evidently impossible to isolate that consider­ ation from the remainder of the package, so that the margin for the bought-in services cannot be ascertained by this method.

71. The method suggested by the United 74. Consequently, I propose that the Court Kingdom and German Governments appears should adopt — however imperfect it may be to me to have comparable inadequacies. — the method suggested by Mr Madgett and Although this method of calculation begins Mr Baldwin and the Commission, which mini­ by referring to the costs of the services pro­ mises the practical difficulties of implementa­ vided, -which are actual figures, it continues tion while not encountering any major with a deduction which owes nothing to the problem from the point of view of lawful­ reality of the taxable transaction, in order to ness. apportion the common margin between the margin on bought-in services and the margin on in-house services. In fact there is no reason to suppose that the respective margins on the services which make up the package are pro­ portional to their respective shares of the costs. It is thus at least as arbitrary to make that correspondence into a rule as to say that the price of the in-house services in the 75. A first stage is to deduct from the package package is the same as the price charged for price paid by the consumer the price paid for them outside the package. the bought-in services. These two elements are beyond dispute, since they are matters of fact. This stage is also consistent with Article 26.

72. The Swedish Government's method requires the use as comparators of averages based on like services supplied by other traders. The wish to refer to a representative 76. Deduction of the market value of the figure by means of such an assessment is in-house services has the advantage of sim­ legitimate. However, the figure arrived at is plicity but does not, as I have stated, reflect largely fictitious, since it has no direct rela­ precisely the structure of the prices of those tion to the service which is to be taxed. services within the package. Whereas with the Moreover, there is a risk of imprecision, as cost-based method of calculation the taxable the reference average may be disputed and margin must be identified on the basis of the thus become the subject of arguments among common margin, here there is no need to dis­ experts. tinguish the different elements of the value of

80. That point should not, in my opinion, distort the assessment of the taxable amount, 78. Having recourse to market value also as the package itself constitutes a value which avoids uncertainties to do with the nature of is made up of various costs and margins. Since the costs which must be deducted. The third the object of the method chosen is to identify sentence of Article 26(2) of the Sixth Direc­ the taxable margin in respect of the bought-in tive provides for the deduction of the actual services, it is possible to deduct from the costs to the travel agent of the bought-in ser­ package price the market value of the in-house vices where those transactions are for the services, which includes the cost and margin direct benefit of the traveller. It follows that for those services. overheads, which do not satisfy that condi­ tion but are nevertheless used for the whole of the trader's activity, form part of the tax­ able margin for the bought-in services but are

13 — As with the cost-based method, the Swedish Government's 81. For the above reasons, I consequently method requires identification of the proportion of the value of the in-house services which constitutes the margin for conclude that the margin should be assessed those services, so as to reconstruct the common margin, on the basis of the market value of the in-house which in the Government's opinion must be taxed as a whole. services.

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Conclusion

82. In the light of the above considerations, I propose the following answer to the questions referred by the High Court of Justice, Queen's Bench Division:

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