Flashback on ECJ cases C-308/96 & C-94/97 (Madgett and Baldwin) – Composite supplies: a service is ancillary when it is not an end in itself for the customers but a means to make the main service of the provider more attractive

On October 22, 1998, the ECJ issued its decision in the joined cases C-308/96 & C-94/97 (Madgett and Baldwin).

Article in the EU VAT Directive

Article 26 of Council Directive 77/388/EEC

Article 26 (Travel Operating Margin)

1. Member States shall apply value added tax to the operations of travel agents in accordance with the provisions of this Article, where the 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. This Article shall not apply to travel agents who are acting only as intermediaries and accounting for tax in accordance with Article 11(A)(3)(c). In this Article travel agents include tour operators.

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 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.

3. If transactions entrusted by the travel agent to other taxable persons are performed by such persons outside the Community, the travel agent’s service shall be treated as an exempted intermediary activity under Article 15(14). Where these transactions are performed both inside and outside the Community, only that part of the travel agent’s service relating to transactions outside the Community may be exempted.

4. Tax charged to the travel agent by other taxable persons on the transactions described in paragraph 2 which are for the direct benefit of the traveller, shall not be eligible for deduction or refund in any Member State.’

Facts

Mr Madgett and Mr Baldwin run the Howden Court Hotel in Torquay, Devon,England. 90% of the hotel’s customers, most of whom come from the north ofEngland, buy a ‘package’, that is to say that they pay a fixed price covering (i)half-board accommodation, (ii) transport by coach from various pick-up points in the north of England and (iii) a day excursion by coach during their stay at thehotel. Mr Madgett and Mr Baldwin obtain the transport services from third parties.The other customers make their own travel arrangements to and from the hotel.They do not have the sightseeing excursion and pay a different price.
Mr Madgett and Mr Baldwin consider that Article 26 of the Sixth Directive doesnot apply to them, on the ground that they are hoteliers, not tour operators. Theyalso state that, using the general rules of the Sixth Directive for determining thetaxable amount, the quarterly VAT returns involved Mr Madgett in only half aday’s work, whereas TOMS calculations, by requiring a series of sub-apportionmentexercises, would involve substantial additional work.
The Commissioners of Customs and Excise take the view, however, that TOMSapplies also to hoteliers who offer their customers travel packages containing bothcomponents which the operator provides himself (‘in-house services’) andcomponents which he buys in from third parties; in the notices of assessment forthe period from 1 May 1988 to 31 January 1993, they therefore considered that MrMadgett and Mr Baldwin should be taxed under that scheme.

Questions

1. What are the criteria for determining whether the operations of a taxable person are the operations of a “travel agent” or “tour operator” to which the provisions of Article 26 of Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover tax (the Sixth Directive on Value Added Tax) 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 travellers services of a kind commonly provided by travel agents or tour operators?

2. Having regard to the answer to Question 1, do the said provisions apply to operations of the kind in issue in the present case, where the owners of a hotel in the south of England, as part of their business as hoteliers, offer to customers at a single inclusive charge a week’s stay at the hotel, transport by coach between
the hotel and points in the north of England, and a local sightseeing trip by coach during their stay at the hotel (the transport elements being bought in by the owners of the hotel from a coach hire company)?

AG Opinion

Where a trader who comes under the provisions of Article 26 of the Sixth Directive 77/388 carries out, in return for payment of a package price, operations which consist of services supplied partly by himself and partly by other taxable persons, the VAT scheme provided for in Article 26 may be applied only to the latter, in so far as they are of direct benefit to the traveller.
The margin which constitutes the taxable amount within the meaning of Article 26(2) of the Sixth Directive is to be obtained by apportioning the package price, exclusive of tax, between the in-house services and the services bought in from other taxable persons on the basis of the market value of the in-house services.

Decision

1. Article 26 of the Sixth Council Directive 77/388/EEC of 17 May 1977 on theharmonisation of the laws of the Member States relating to turnover taxes Common system of value added tax: uniform basis of assessment appliesto a hotelier who, in return for a package price, habitually offers hiscustomers, in addition to accommodation, return transport between certaindistant pick-up points and the hotel and a coach excursion during theirstay, those transport services being bought in from third parties.

2. On a proper construction of Article 26 of the Sixth Directive 77/388, wherea trader subject to that article effects, in return for a package price,transactions consisting of services supplied partly by himself and partly byother taxable persons, the VAT scheme under that article applies solely tothe services supplied by third parties. A trader may not be required tocalculate the part of the package corresponding to the in-house services bythe actual cost method where it is possible to identify that part of thepackage on the basis of the market value of services similar to those whichform part of the package.

Summary

The ECJ found that where the hotelier provided travel services traditionally or habitually entrusted to such traders, and these services took up a small proportion of the package price, such services were not an aim in themselves. They were a means of enjoying the principal service (the accommodation), and were therefore ancillary and did not fall under Article 26. (This definition is open to interpretation and subjective analysis, but taking into account the remainder of the judgment, it is regarded as applying only to something as insignificant as a bought-in taxi journey to transport a holidaymaker from the station to the hotel).

The court then contrasts this with bought-in travel services that go beyond the tasks traditionally entrusted to hoteliers, and which have a substantial effect on the price charged. In Madgett & Baldwin’s case this was the passenger transport (coach + driver) they bought in to bring guests from the North of England to the hotel and home again at the end of the package, plus taking them on an excursion during the week’s stay. The ECJ saw such services as being supplied separately from the accommodation and eligible to be treated as a single service in respect of a journey under Article 26 (now Articles 306 – 310 of the Principal VAT Directive).

Therefore, there were two separate principal supplies for VAT purposes of accommodation and transport. However in this case, because of the special rules of the TOMS, these two separate principal supplies are then treated as a single margin scheme supply, which the scheme calculation apportions for VAT purposes.

Clearly these principles about what can be regarded as ancillary are returned to by the ECJ in CPP, but the Madgett and Baldwin decision remains important because it gives reasons as to why in these particular circumstances the transport was not ancillary and there was a multiple supply situation.

Source