JUDGMENT OF THE COURT (Fifth Chamber)

22 October 1998 (1)

(VAT — Article 26 of the Sixth VAT Directive — Scheme for travel agents andtour operators — Hotel undertakings — Accommodation and travel package —Basis of calculation of the margin)

In Joined Cases C-308/96 and C-94/97,

REFERENCES to the Court under Article 177 of the EC Treaty by the HighCourt of Justice of England and Wales, Queen's Bench Division, and the VAT andDuties Tribunal, London, for preliminary rulings in the proceedings pending beforethem between

Commissioners of Customs and Excise

and

T.P. Madgett and R.M. Baldwin, trading as The Howden Court Hotel (CaseC-308/96),

and between

T.P. Madgett and R.M. Baldwin, trading as The Howden Court Hotel,

and

Commissioners of Customs and Excise (Case C-94/97),

on the interpretation of Article 26 of the Sixth Council Directive 77/388/EEC of 17May 1977 on the harmonisation of the laws of the Member States relating toturnover taxes — Common system of value added tax: uniform basis of assessment(OJ 1977 L 145, p. 1),

THE COURT (Fifth Chamber),

composed of: J.-P. Puissochet, President of the Chamber, J.C. Moitinho deAlmeida, C. Gulmann (Rapporteur), L. Sevón and M. Wathelet, Judges,

Advocate General: P. Léger,

Registrar: H.A. Rühl, Principal Administrator,

after considering the written observations submitted on behalf of:

—    Mr Madgett and Mr Baldwin (Cases C-308/96 and C-94/97), by JeremyWoolf, Barrister, instructed by Rice-Jones & Smiths, Solicitors,

—    the United Kingdom Government (Case C-308/96), by Lindsey Nicoll, of theTreasury Solicitor's Department, acting as Agent, and Stephen Richards andHugh Davies, Barristers,

—    the United Kingdom Government (Case C-94/97), by Lindsey Nicoll,Nicholas Paines QC and Hugh Davies,

—    the German Government (Case C-308/96), by Ernst Röder, Ministerialratin the Federal Ministry of Economic Affairs, acting as Agent,

—    the German Government (Case C-94/97), by Ernst Röder and Claus-DieterQuassowski, Regierungsdirektor in the Federal Ministry of EconomicAffairs, acting as Agent,

—    the Greek Government (Case C-308/96), by Fokion Georgakopoulos,Deputy Legal Adviser in the State Legal Service, and Anna Rokofyllou,Adviser to the Deputy Minister for Foreign Affairs, acting as Agents,

—    the Swedish Government (Cases C-308/96 and C-94/97), by Erik Brattgård,Departementsråd in the Foreign Trade Division of the Ministry of ForeignAffairs, acting as Agent,

—    the Commission of the European Communities (Case C-308/96), byNicholas Khan and Enrico Traversa, of its Legal Service, acting as Agents,

—    the Commission of the European Communities (Case C-94/97), by RichardLyal, of its Legal Service, acting as Agent, and Enrico Traversa,

having regard to the Report for the Hearing,

after hearing the oral observations of Mr Madgett and Mr Baldwin, represented by Jeremy Woolf and Peter Burton, Solicitor; the United Kingdom Government,represented by Dawn Cooper, of the Treasury Solicitor's Department, acting asAgent, and Nicholas Paines and Stephen Richards; the German Government,represented by Ernst Röder; the Greek Government, represented by FokionGeorgakopoulos and Anna Rokofyllou; and the Commission, represented byNicholas Khan and Enrico Traversa, at the hearing on 5 February 1998,

after hearing the Opinion of the Advocate General at the sitting on 30 April 1998,

gives the following

Judgment

1.

    By order of 16 November 1995, received at the Court on 23 September 1996, theHigh Court of Justice of England and Wales, Queen's Bench Division, referred tothe Court for a preliminary ruling under Article 177 of the EC Treaty twoquestions on the interpretation of Article 26 of the Sixth Council Directive77/388/EEC of 17 May 1977 on the harmonisation of the laws of the MemberStates relating to turnover taxes — Common system of value added tax: uniformbasis of assessment (OJ 1977 L 145, p. 1, hereinafter 'the Sixth Directive‘).

2.

    By order of 26 February 1997, received at the Court on 3 March 1997, the VATand Duties Tribunal, London, referred for a preliminary ruling under Article 177of the EC Treaty two questions on the interpretation of the same provision of theSixth Directive.

3.

    Those questions were raised in proceedings in which Mr Madgett and Mr Baldwinare in disagreement with the Commissioners of Customs and Excise as to whetherthe special scheme under Article 26 of the Sixth Directive applies to them byreason of the fact that they offer travel packages to their customers in the contextof their hotel business.

4.

    Under Article 11A(1)(a) of the Sixth Directive, the taxable amount, in respect ofmost supplies of services, consists of 'everything which constitutes the considerationwhich has been or is to be obtained by the supplier from the purchaser, thecustomer or a third party for such supplies ...‘.

5.

    Article 26 of the Sixth Directive, which introduces an exception to the general ruleson the taxable amount with respect to certain operations of travel agents and touroperators, states:

'1.    Member States shall apply value added tax to the operations of travel agentsin accordance with the provisions of this Article, where the travel agents deal withcustomers in their own name and use the supplies and services of other taxablepersons in the provision of travel facilities. This Article shall not apply to travelagents who are acting only as intermediaries and accounting for tax in accordancewith Article 11A(3)(c). In this Article travel agents include tour operators.

2.    All transactions performed by the travel agent in respect of a journey shallbe treated as a single service supplied by the travel agent to the traveller. It shallbe taxable in the Member State in which the travel agent has established hisbusiness or has a fixed establishment from which the travel agent has provided theservices. The taxable amount and the price exclusive of tax, within the meaning ofArticle 22(3)(b), in respect of this service shall be the travel agent's margin, thatis 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 andservices provided by other taxable persons where these transactions are for thedirect benefit of the traveller.

3.    If transactions entrusted by the travel agent to other taxable persons areperformed by such persons outside the Community, the travel agent's service shallbe treated as an exempted intermediary activity under Article 15(14). Where thesetransactions are performed both inside and outside the Community, only that partof the travel agent's service relating to transactions outside the Community may beexempted.

4.    Tax charged to the travel agent by other taxable persons on the transactionsdescribed in paragraph 2 which are for the direct benefit of the traveller, shall notbe eligible for deduction or refund in any Member State.‘

6.

    Article 26 of the Sixth Directive was transposed in United Kingdom law by section37A of the Value Added Tax Act 1983 and the Value Added Tax (Tour Operators)Order 1987. A detailed explanation of the provisions of the United Kingdomlegislation is given in Leaflet 709/5/88 of the Commissioners of Customs and Excise,entitled 'Tour Operator's Margin Scheme‘ (hereinafter 'TOMS‘). That schemerequires the total amount received by the travel agent or tour operator to beapportioned between services bought in from third parties and in-house services,by reference to the actual cost of each component.

7.

    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.

8.

    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.

9.

    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.

10.

    In those circumstances, Mr Madgett and Mr Baldwin appealed to the VAT andDuties Tribunal, which held that Article 26 of the Sixth Directive did not apply tothem. The Commissioners of Customs and Excise appealed against that decisionto the High Court of Justice, which stayed proceedings and referred the followingtwo questions to the Court for a preliminary ruling (Case C-308/96):

'1.    What are the criteria for determining whether the operations of a taxableperson are the operations of a ”travel agent” or ”tour operator” to whichthe provisions of Article 26 of Council Directive 77/388/EEC of 17 May1977 on the harmonisation of the laws of the Member States relating toturnover tax (the Sixth Directive on Value Added Tax) apply? In particular,do the said provisions apply to the operations of a person who, though nota ”travel agent” or ”tour operator” in the ordinary English meanings ofthose expressions, provides for the benefit of travellers services of a kindcommonly provided by travel agents or tour operators?

2.    Having regard to the answer to Question 1, do the said provisions apply tooperations of the kind in issue in the present case, where the owners of ahotel in the south of England, as part of their business as hoteliers, offer tocustomers at a single inclusive charge a week's stay at the hotel, transportby coach between the hotel and points in the north of England, and a localsightseeing trip by coach during their stay at the hotel (the transportelements being bought in by the owners of the hotel from a coach hirecompany)?‘

11.

    In the proceedings before the High Court of Justice, Mr Madgett and Mr Baldwinraised the further argument that the method of apportionment prescribed byTOMS was contrary to the Sixth Directive. Since that point was not the subject ofthe appeal before the High Court, the proceedings before the VAT and DutiesTribunal were reopened.

12.

    In the latter proceedings, Mr Madgett and Mr Baldwin submitted that the provisionrequiring the price paid by the traveller to be apportioned between the componentsof the package bought in from third parties and the components provided as in-house services on the basis of the actual costs is neither rational nor logical. TheCommissioners of Customs and Excise contended that in providing that the touroperator's margin is to be calculated on the basis of the actual cost for bothbought-in supplies and in-house supplies, TOMS is consistent with the provisionsof Article 26 of the Sixth Directive.

13.

    In those circumstances, the VAT and Duties Tribunal stayed the proceedings andreferred the following two questions to the Court for a preliminary ruling (CaseC-94/97):

'If it is determined in Case C-308/96 that the provisions of Article 26 of the SixthDirective apply to operations of the kind in issue in the present case,

1.    On the proper interpretation of Article 26, where in a single transaction atour operator provides a service to the traveller part of which is supplied tothe tour operator by other taxable persons (”bought in”) and part of whichis supplied by the tour operator from its own resources (”in-house”), onwhat basis is the tour operator's margin under Article 26(2) to becalculated?

2.    Is Article 26 to be interpreted as

    (a)    requiring the apportionment of the total amount received by the touroperator from the traveller between bought-in and in-house suppliesby reference to the costs of the components; or

    (b)    as authorising Member States to require apportionment by referenceto such costs (i) generally or (ii) in the case of operations of the kindin issue in the present case; or

    (c)    as leaving such apportionment to be made in accordance with thenormal principles for determining the taxable amount under Article11?‘

14.

    By order of the President of the Court of 11 December 1997, the two cases werejoined for the purposes of the oral procedure and the judgment.

The questions referred by the High Court of Justice

15.

    By its questions, which should be examined together, the High Court essentiallyasks whether Article 26 of the Sixth Directive applies to a hotelier who, in returnfor a package price, offers his guests, in addition to accommodation, returntransport between distant pick-up points and the hotel and an excursion by coachduring their stay at the hotel, those transport services being bought in from thirdparties.

16.

    Mr Madgett and Mr Baldwin submit that for a trader to be subject to the specialscheme under Article 26 of the Sixth Directive, he must be either a 'travel agent‘or a 'tour operator‘. Those expressions refer to taxable persons whose activityconsists in organising, for the benefit of travellers, the supply of accommodation ortransport or other travel services, using the supplies of other persons which areacquired for the direct benefit of travellers. Those expressions do not refer totaxable persons who, as an ancillary part of another activity, buy travel services forthe direct benefit of travellers. They consider that their business is concentratedessentially on the service offered to hotel guests and that the transport is providedonly for their convenience, to encourage them to stay in the hotel. The transportshould therefore be regarded as purely ancillary to their activity as hoteliers.

17.

    The United Kingdom, German, Greek and Swedish Governments and theCommission submit that the criterion for determining whether a taxable person'stransactions are subject to Article 26 of the Sixth Directive is whether the suppliesof services in question are of the kind referred to in that provision, even if thetaxable person is not a travel agent or tour operator in the ordinary meaning ofthose terms. In those circumstances, the transactions effected by Mr Madgett andMr Baldwin fall within the scope of Article 26 of the Sixth Directive, since theyprovide services in their own name, offering their customers a single package whichincludes travel and accommodation, and using for that purpose a coach serviceprovided by a third party under a transaction which is for the direct benefit oftravellers.

18.

    It must be borne in mind at the outset that the services provided by travel agentsand tour operators most frequently consist of multiple services, in particulartransport and accommodation, supplied either within or outside the territory of theMember State in which the undertaking has established its business or has a fixedestablishment. The application of the normal rules on place of taxation, taxableamount and deduction of input tax would, by reason of the multiplicity of servicesand the places in which they are provided, entail practical difficulties for thoseundertakings of such a nature as to obstruct their operations. In order to adapt theapplicable rules to the specific nature of such operations, the Communitylegislature set up a special VAT scheme in Article 26(2), (3) and (4) of the SixthDirective (see Case C-163/91 Van Ginkel v Inspecteur der Omzetbelasting te Utrecht[1992] ECR I-5723, paragraphs 13 to 15).

19.

    Although the principal reason for the special margin scheme under Article 26 ofthe Sixth Directive is the existence of problems in connection with travel serviceswhich include elements in more than one Member State, the wording of thatprovision is such that it applies also to supplies of services within a single MemberState.

20.

    Furthermore, the underlying reasons for the special scheme for travel agents andtour operators are equally valid where the trader is not a travel agent or touroperator within the normal meaning of those terms, but effects identicaltransactions in the context of another activity, such as that of hotelier.

21.

    To interpret Article 26 of the Sixth Directive as applying solely to traders who aretravel agents or tour operators within the normal meaning of those terms wouldmean that identical services would come under different provisions depending onthe formal classification of the trader.

22.

    Finally, as the Advocate General observes in point 32 of his Opinion, to makeapplication of the special scheme under Article 26 of the Sixth Directive dependon a prior classification of a trader would prejudice the aim of that provision,create distortion of competition between traders and jeopardise the uniformapplication of the Sixth Directive.

23.

    It must therefore be held that the scheme under Article 26 of the Sixth Directiveapplies to traders who organise travel or tour packages in their own name andentrust other taxable persons with the supply of the services generally associatedwith that kind of activity, even if they are not, formally speaking, travel agents ortour operators.

24.

    However, as the Advocate General notes in point 36 of his Opinion, traders suchas hoteliers who provide services habitually associated with travel frequently makeuse of services bought in from third parties which take up a small proportion of thepackage price compared to the accommodation and are among the taskstraditionally entrusted to such traders. Those bought-in services do not thereforeconstitute for customers an aim in itself, but a means of better enjoying theprincipal service supplied by the trader.

25.

    In such circumstances the services bought in from third parties remain purelyancillary in relation to the in-house services, and the trader should not be taxedunder Article 26 of the Sixth Directive.

26.

    Where, however, a hotelier habitually offers his customers, in addition toaccommodation, services which go beyond the tasks traditionally entrusted tohoteliers, and which cannot be carried out without a substantial effect on thepackage price charged, such as travel to the hotel from distant pick-up points, suchservices are not to be equated with purely ancillary services.

27.

    In view of the foregoing, the answer to the questions referred by the High Courtof Justice must be that Article 26 of the Sixth Directive applies to a hotelier who,in return for a package price, habitually offers his customers, in addition toaccommodation, return transport between certain distant pick-up points and thehotel and a coach excursion during their stay, those transport services being boughtin from third parties.

The questions referred by the VAT and Duties Tribunal

28.

    By its questions, which should be examined together, the VAT and Duties Tribunalessentially asks how to calculate the taxable margin within the meaning of Article26 of the Sixth Directive where a trader who is subject to that provision effects, inreturn for a package price, transactions consisting partly of in-house services andpartly of bought-in services.

29.

    In order to answer that question, it must first be determined whether, wherepackages are made up of mixed services, Article 26 applies only to the servicesbought in from third parties, or to all the services. Thereafter, the method ofcalculating the part of the package relating to in-house services will be examined.

30.

    With respect to the first part of the question, Mr Madgett and Mr Baldwin, theUnited Kingdom and German Governments and the Commission submit that thespecial scheme under Article 26 of the Sixth Directive applies only to servicesbought in from third parties.

31.

    The Swedish Government, however, considers that Article 26 should also beapplied to in-house services.

32.

    Here, it must first be borne in mind that under Article 26(1) of the Sixth Directivethe scheme applies to the operations of travel agents where the supplies andservices of other taxable persons are used in the provision of travel facilities, andthat under Article 26(2) the taxable amount is the difference between the totalamount to be paid by the traveller, excluding VAT, and the actual cost to the travelagent of the supplies and services provided by other taxable persons.

33.

    Next, it is to be noted that Article 26 of the Sixth Directive makes no reference toin-house services, and that the essential aim of that provision is to avoid thedifficulties to which traders would be exposed by application of the generalprinciples of the Sixth Directive concerning transactions involving the supply ofservices bought in from third parties.

34.

    Finally, it should be recalled that the scheme under Article 26 constitutes anexception to the normal rules of the Sixth Directive and must be applied only tothe extent necessary to achieve its objective.

35.

    The special scheme under Article 26 of the Sixth Directive must therefore be heldto apply only to the services bought in from third parties.

36.

    With respect to the second part of the question, Mr Madgett and Mr Baldwin andthe Commission submit that the price of the in-house services should be calculatedon the basis of market value, in accordance with the normal principles fordetermining the taxable amount laid down in Article 11 of the Sixth Directive. Inthe present case the market value of the accommodation is the room price chargedby the hotel to customers not making use of the package.

37.

    The German Government, however, submits that the apportionment between thatpart of the travel which falls within the special scheme under Article 26 and thatpart to which Article 26 does not apply should in principle reflect the ratio of theactual costs of the services bought in from third parties to the costs incurred for thein-house services. The part of the travel price relating to in-house services may,however, be determined in another way in some cases, if that leads to anappropriate result.

38.

    The United Kingdom Government explains that under TOMS, which it considersto be compatible with Article 26 of the Sixth Directive, the trader must calculatethe total cost to him of providing packages, that cost being made up of, on the onehand, the sums he pays for the services bought in from third parties and, on theother, the cost to him of providing the in-house services. The total cost issubtracted from the total amount received, to produce the total margin. Thatmargin is then divided into the margin on the bought-in services and the margin onthe in-house services, in the proportion of the expenditure relating to the bought-inservices to the cost of the in-house services. To ensure uniform application of thetax, the same rules should apply regardless of the proportion of in-house andbought-in services in the package. Since Article 26 prescribes a system of taxing thebought-in element by reference to the margin, that is to say to the differencebetween actual cost and income, there is no reason to depart from that principlewith respect to the in-house services.

39.

    It should be recalled that Article 26 of the Sixth Directive, because it does notcontemplate the provision of packages comprising both bought-in and in-houseservices, does not define any criteria by which the margin on bought-in services maybe identified in distinction to the margin on in-house services.

40.

    In this connection, it should be noted that Article 11A(1)(a) of the Sixth Directivestates that the taxable amount for VAT consists, in respect of most services, ofeverything which constitutes the consideration for the service. It has consistentlybeen held that the consideration must be interpreted as what is actually received,not as a value estimated according to objective criteria (see Case 230/87 NaturallyYours Cosmetics v Commissioners of Customs and Excise [1988] ECR 6365,paragraph 16).

41.

    As the Advocate General observes in point 65 of his Opinion, it follows from theexistence 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 thatprovision — that the consideration within the meaning of Article 11A(1)(a) of theSixth Directive cannot be used as the taxable amount for the in-house serviceswhich are provided as part of the package.

42.

    It is therefore necessary to determine the unit of reference to be used as analternative to the consideration in order to identify the part of the package whichrelates to the in-house services. There are two possible methods, one based onactual costs as under TOMS, the other based on market value.

43.

    In this context, it should be observed, first, as the Advocate General notes in point71 of his Opinion, that the actual cost method used by the United KingdomGovernment could be problematical, as there is no reason to suppose that themargins on the different services which make up the package are proportional tothe respective costs of those services.

44.

    Second, use of the criterion of market value — in the present case the room andhalf-board prices charged by the hotel where customers do not make use of thepackage — may also be to some extent arbitrary if the price of the accommodationoffered as an in-house service as part of the package is taken as being the same asthe price for accommodation offered as a single service.

45.

    The actual cost method in relation to the in-house services requires a series ofcomplex sub-apportionment exercises and thus also means substantial additionalwork for the trader. By contrast, use of the market value of the in-house services,as the Advocate General observes in point 76 of his Opinion, has the advantage ofsimplicity, since there is no need to distinguish the various elements of the valueof the in-house services.

46.

    In those circumstances — bearing in mind that it is common ground in the presentcase that calculation of the VAT on the margin for the bought-in services by usingone alternative or the other in principle gives the same figure for VAT — a tradermay not be required to calculate the part of the package corresponding to the in-house services by the actual cost method where it is possible to identify that partof the package on the basis of the market value of services similar to those whichform part of the package.

47.

    In the light of the foregoing, the answer to the questions referred by the VAT andDuties Tribunal must be that, on a proper construction of Article 26 of the SixthDirective, where a trader subject to that article effects, in return for a packageprice, transactions consisting of services supplied partly by himself and partly byother taxable persons, the VAT scheme under that article applies solely to theservices supplied by third parties. A trader may not be required to calculate the

part of the package corresponding to the in-house services by the actual costmethod where it is possible to identify that part of the package on the basis of themarket value of services similar to those which form part of the package.

Costs

48.

    The costs incurred by the United Kingdom, German, Greek and SwedishGovernments and by the Commission, which have submitted observations to theCourt, are not recoverable. Since these proceedings are, for the parties to the mainproceedings, a step in the national proceedings, the decision on costs is a matterfor the court or tribunal before which those proceedings have been brought.

On those grounds,

THE COURT (Fifth Chamber)

in answer to the questions referred to it by the High Court of Justice of Englandand Wales, Queen's Bench Division, and by the VAT and Duties Tribunal, London,by orders of 16 November 1995 and 26 February 1997, hereby rules:

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.

PuissochetMoitinho de Almeida Gulmann Sevón Wathelet

Delivered in open court in Luxembourg on 22 October 1998.

R. Grass

J.-P. Puissochet

Registrar

President of the Fifth Chamber

1: Language of the case: English.