© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
P1. Tour operator margin scheme
GENERAL
- Special tax regime, not special exemption
"[40] Furthermore, it should be noted that the scheme laid down by Article 26 of the Sixth Directive, which seeks to adapt the relevant rules on VAT to travel agents and traders supplying identical or comparable services, is a special tax scheme and not a special exemption scheme applicable to certain activities carried out by those traders." (ISt internationale C-200/04)
Purpose of TOMS regime
- Only applies to the extent necessary to achieve objective
"[34] Finally, it should be recalled that the scheme under Article 26 constitutes an exception to the normal rules of the Sixth Directive and must be applied only to the extent necessary to achieve its objective." (Madgett and Baldwin C-308/96)
- Address the practical problems of multiplicity of services and places of supply
"[21] Second, as regards the status of a trader covered by Article 26 of the Sixth Directive, it should be noted that, according to the case-law, the services provided by travel agents and tour operators most frequently consist of multiple services, in particular transport and accommodation, supplied either within or outside the territory of the Member State in which the undertaking has established its business or has a fixed establishment. The application of the normal rules on place 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. In order to adapt the applicable rules to the specific nature of such operations, the Community legislature set up a special VAT scheme in Article 26(2), (3) and (4) of the Sixth Directive (see Van Ginkel, paragraphs 13 to 15; Joined Cases C-308/96 and C-94/97 Madgett and Baldwin [1998] ECR I-6229, paragraph 18, and Case C-149/01 First Choice Holidays [2003] ECR I-6289, paragraphs 23 and 24)." (ISt internationale C-200/04)
Territorial scope
- Applies to supplies of services within a single state
"[19] Although the principal reason for the special margin scheme under Article 26 of the Sixth Directive is the existence of problems in connection with travel services which include elements in more than one Member State, the wording of that provision is such that it applies also to supplies of services within a single Member State." (Madgett and Baldwin C-308/96)
SUPPLIER
- Not limited to travel agents within the ordinary meaning
"[22] The Court has held in that regard that the underlying reasons for the special scheme for travel agents and tour operators are equally valid where the trader is not a travel agent or tour operator within the normal meaning of those terms, but effects identical transactions in the context of another activity, such as that of hotelier. To interpret Article 26 of the Sixth Directive as applying solely to traders who are travel agents or tour operators within the normal meaning of those terms would mean that identical services would come under different provisions depending on the formal classification of the trader (Madgett and Baldwin, paragraphs 20 and 21)." (ISt internationale C-200/04)
- Traders who organise travel or tour packages in their own name and entrust other traders with supply of such services
"[23] It must therefore be held that the scheme under Article 26 of the Sixth Directive applies to traders who organise travel or tour packages in their own name and entrust other taxable persons with the supply of the services generally associated with that kind of activity, even if they are not, formally speaking, travel agents or tour operators." (Madgett and Baldwin C-308/96)
- Applies to hotelier
"[20] Furthermore, the underlying reasons for the special scheme for travel agents and tour operators are equally valid where the trader is not a travel agent or tour operator within the normal meaning of those terms, but effects identical transactions in the context of another activity, such as that of hotelier." (Madgett and Baldwin C-308/96)
- Applies to supplier of education
"[48] It follows from all of the foregoing considerations that the reply to the question referred for a preliminary ruling should be that Article 26 of the Sixth Directive should be interpreted as meaning that it applies to a trader who offers services such as the ‘High School’ and ‘College’ programmes involving the organisation of language and study trips abroad and which, in consideration of the payment of an all-inclusive sum, provides in its own name to its customers a stay abroad of three to 10 months and buys in services from other taxable persons for that purpose." (ISt internationale C-200/04)
NATURE OF SUPPLIES
- Must provide services of a kind provided by travel agents
"[23] In the case in the main proceedings, it is not in dispute that iSt is not a travel agent or tour operator within the normal meaning of those terms. It is however necessary to decide whether it provides services identical to those of a travel agent or tour operator." (ISt internationale C-200/04)
- Only relevant criterion is that the travel must not be ancillary
"[34] It is true that that article does not include a definition of the concept of travel. However, in applying that article there is no need to set out in advance the factors constituting travel. That provision applies provided that the trader in question is a trader for the purposes of the special scheme for travel agents, acts in its own name and uses in its operations supplies and services provided by other taxable persons. More particularly, in respect of operations for which the trader should be taxed under Article 26 of the Sixth Directive, the only relevant criterion for the application of that article is whether or not the travel service is ancillary." (ISt internationale C-200/04)
- Not concerned with the objective of the travel
"[35] Furthermore, if the observations submitted in that respect, in particular by the German Government, were followed, Article 26 of the Sixth Directive would apply on the basis of the objective of the travel offered and the duration of the stay in the host State. Such an interpretation would have the effect of adding an additional condition to any application of that article.
...
[37] Furthermore, it is clear that imposing such an additional condition for the implementation of Article 26 of the Sixth Directive might amount to drawing a distinction between traders on the basis of the purpose of the stay which they offer in the host State and would unquestionably distort competition between the traders concerned and compromise the uniform application of that directive." (ISt internationale C-200/04)
- Exempt supplies can be included
"[38] Second, the German Government considers that Article 26 of the Sixth Directive cannot apply to the dispute in the main proceedings in so far as the services offered by iSt concerning the language training and education of its customers essentially fall within the services exempted under Paragraph 4(23) of the UStG 1993. The German Government submits that, if the service offered falls ratione materiae within the cases exempted under that directive and, in particular, Article 13A(1)(i) thereof, the special tax scheme laid down in Article 26 does not apply.
[39] There is nothing to suggest that the application of Article 26 is dependent on such a condition. It should be noted that in respect of operations involving bought-in supplies and services for which traders should be taxed under that article, the only relevant criterion is whether or not the travel service is ancillary." (ISt internationale C-200/04)
- Includes travel for the purposes of education
"[48] It follows from all of the foregoing considerations that the reply to the question referred for a preliminary ruling should be that Article 26 of the Sixth Directive should be interpreted as meaning that it applies to a trader who offers services such as the ‘High School’ and ‘College’ programmes involving the organisation of language and study trips abroad and which, in consideration of the payment of an all-inclusive sum, provides in its own name to its customers a stay abroad of three to 10 months and buys in services from other taxable persons for that purpose." (ISt internationale C-200/04)
Bought in services must not be ancillary to in house services
"[26] It is not ruled out in that respect that traders supplying services usually associated with travel might be required to use travel supplies acquired from third parties which, compared with the other supplies of those traders, represent a small proportion of the total package. Those bought-in services do not therefore constitute for customers an aim in itself, but a means of better enjoying the principal service supplied by the trader (see, to that effect, Madgett and Baldwin, paragraph 24).
[27] It should be noted that in such circumstances the services bought in from third parties remain purely ancillary in relation to the in-house services, and the trader should not be taxed under Article 26 of the Sixth Directive (Madgett and Baldwin, paragraph 25)." (ISt internationale C-200/04)
- Transport and accommodation not ancillary to education (substantial effect on price)
"[28] However, it should be noted in that regard that where a trader such as iSt habitually offers its customers travel services, in addition to services associated with the language training and education of its customers, which cannot be carried out without a substantial effect on the package price charged, such as travel to the host State and and/or the stay in that State, such services are not to be equated with purely ancillary services. As is clear from the order for reference, the services in question do not represent a marginal share in relation to the corresponding services associated with the language training and education which iSt offers its customers.
[29] In those circumstances, Article 26 of the Sixth Directive must be interpreted as meaning that it applies to a trader such as iSt which habitually offers to its customers, in addition to services associated with the language training and education of those customers, services bought in from other taxable persons such as travel to the host State and/or the stay in that State." (ISt internationale C-200/04)
- Short distance travel supplied by hotelier ancillary
"[24] However, as the Advocate General notes in point 36 of his Opinion, traders such as hoteliers who provide services habitually associated with travel frequently make use of services bought in from third parties which take up a small proportion of the package price compared to the accommodation and are among the tasks traditionally entrusted to such traders. Those bought-in services do not therefore constitute for customers an aim in itself, but a means of better enjoying the principal service supplied by the trader.
[25] In such circumstances the services bought in from third parties remain purely ancillary in relation to the in-house services, and the trader should not be taxed under Article 26 of the Sixth Directive." (Madgett and Baldwin C-308/96)
- Long distance travel with significant effect on price not ancillary
"[26] Where, however, a hotelier habitually offers his customers, in addition to accommodation, services which go beyond the tasks traditionally entrusted to hoteliers, and which cannot be carried out without a substantial effect on the package price charged, such as travel to the hotel from distant pick-up points, such services are not to be equated with purely ancillary services." (Madgett and Baldwin C-308/96)
- Buying in long leases of property is not for the direct benefit of the traveller where short lets granted
"[113] Looking at the facts as a whole, we are satisfied that the service which was supplied by Sonder to the traveller was materially altered from that which was supplied by the third party landlord to Sonder having regard to the direct benefit requirement. Sonder acquired an interest in land for a term of years. The terms on which it did so were described by the FTT at [28] to [35] of the Decision which we have summarised above. We have taken into account all those terms, and give particular weight to the fact that Sonder entered into internal repairing and insuring leases for a term of years between two and ten years.
[114] The supply which Sonder then made was a short term licence to the traveller to occupy property it had leased as holiday accommodation. We have summarised the FTT's findings above, although the FTT does not describe in any detail the terms on which Sonder entered into licences with travellers. The evidence before the FTT included an overview of the "customer journey" which included signing up to Sonder's terms and conditions. The material terms and conditions simply required payment by the traveller including authorisation to charge a credit card in the event that any damage was caused to the apartment in consideration of the grant of a temporary right of occupation to the traveller. Overall the way in which the traveller's licence to occupy is described indicates that there is no reason to think that those terms would be any different to the basis on which a hotel or similar establishment might offer accommodation for the benefit of travellers, which is the basis on which the TOMS Order is said to apply in the first place. It is a very different bundle of rights from those which were granted to Sonder by the landlords." (HMRC v. Sonder Europe Limited [2025] UKUT 14 (TCC), Trower J and Judge Cannan)
- Differential VAT treatment of bought in supplies v. supplies made indicative but not determinative
"[115] The services received by the traveller in consequence of the grant of a licence to occupy are described in [36] to [42] of the FTT's decision and are markedly different to the services which Sonder itself acquired on entering into the leases with the landlords. In our view, it is relevant even if not determinative, that these marked differences were themselves reflected in the difference in the VAT treatment of the supply to Sonder and Sonder's supply to the traveller. The fact that both Sonder's rights under its leases with the landlords and a traveller's rights under its licence from Sonder both gave rights of occupation does not mean that what Sonder acquired was supplied to the traveller without material alteration or further processing such that it was supplied for the direct benefit of the traveller. In our view the services supplied by the landlord to Sonder were not for the direct benefit of Sonder's own customers and the services were not supplied by Sonder for the benefit of the traveller without material alteration and further processing. In short, the services supplied by Sonder to the traveller were its own in-house supplies, which therefore fall outside the ambit of TOMS." (HMRC v. Sonder Europe Limited [2025] UKUT 14 (TCC), Trower J and Judge Cannan)
CALCULATING MARGIN
- Only applies to bought in services, not in house supplies
"[32] Here, it must first be borne in mind that under Article 26(1) of the Sixth Directive the scheme applies to the operations of travel agents where the supplies and services of other taxable persons are used in the provision of travel facilities, and that under Article 26(2) the taxable amount is the difference between the total amount to be paid by the traveller, excluding VAT, and the actual cost to the travel agent 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 to in-house services, and that the essential aim of that provision is to avoid the difficulties to which traders would be exposed by application of the general principles of the Sixth Directive concerning transactions involving the supply of services bought in from third parties.
[34] Finally, it should be recalled that the scheme under Article 26 constitutes an exception to the normal rules of the Sixth Directive and must be applied only to the extent necessary to achieve its objective.
[35] The special scheme under Article 26 of the Sixth Directive must therefore be held to apply only to the services bought in from third parties." (Madgett and Baldwin C-308/96)
Scope: supplies covered
Apportioning between in house and bought in
- Cannot be required to use actual cost where market value apportionment possible
"[45] The actual cost method in relation to the in-house services requires a series of complex sub-apportionment exercises and thus also means substantial additional work 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 of simplicity, since there is no need to distinguish the various elements of the value of the in-house services.
[46] In those circumstances - bearing in mind that it is common ground in the present case that calculation of the VAT on the margin for the bought-in services by using one alternative or the other in principle gives the same figure for VAT - a trader may 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 part of the package on the basis of the market value of services similar to those which form part of the package." (Madgett and Baldwin C-308/96)