VAT Tour Operator Use of TOMS to Calculate Output Tax Appellant S Ability to Choose Method

18940

VAT — tour operator — use of TOMS to calculate output tax — appellant’s ability to choose method of calculating liability either by reference to all supplies or to those made wholly or partly within EU —provisions for timing of election — Notice 709/5 — whether ultra vires UK legislation and/or incompatible with arts 26 and 22(8) 6th Directive — alternatively, whether on facts appellant entitled to use single method of calculation in financial years covered by assessments — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

MYTRAVEL GROUP PLC

(formerly AIRTOURS PLC)Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISERespondents

Tribunal: Mr J David Demack (Chairman)

Sitting in public in Manchester on 7 January 2005

Mr Nigel Gibbon solicitor for the Appellant

Mr Nigel Poole of counsel instructed by the solicitor for the Customs and Excise for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.Tour operators, such as the appellant company, MyTravel Group plc (“MyTravel”), are required to use the Tour Operators Margin Scheme (“the TOMS”) to account for VAT on supplies of designated travel services. The scheme is to be found in Customs Notice 709/5, and the parts thereof relevant to this appeal have force of law. (At the time of events with which the appeal is concerned, MyTravel was known as Airtours plc. For convenience, I shall throughout refer to the company as MyTravel).

2.The primary method of calculation provided by the TOMS, the “single method” as I shall describe it, is designed to apply to all supplies wherever they are enjoyed. But a tour operator may elect, on satisfying certain conditions, to make the calculations specified for the single method separately for (a) supplies to be enjoyed wholly outside the European Union, and (b) other supplies. I shall call the alternative method the “separated supplies method”. Since 1996, election to use the separated supplies method or, where an election has already been made to use that method, to revert to the single method, may be made only at the start of the tour operator’s financial year, i.e. no later than the due date for its first VAT return for that year. MyTravel challenges the timing provisions for that election.

3.Before setting out the basis of that challenge, there is one further aspect of the TOMS I must explain. The scheme recognises that a tour operator may find it difficult to establish precise figures at the time it makes each VAT return because, e.g. it may not know what discounts it has given or received. Consequently, the scheme requires the tour operator to calculate provisional figures for inclusion in each return, and to make an annual calculation and adjustment at the end of its financial year, i.e. on the first VAT return due after that date.

4.MyTravel contends that the relevant TOMS provisions requiring election at the start of its financial year for the two years ending on 30 September 1998 and 30 September 1999 are unenforceable against it for either or both of the following reasons:

(i)both paragraphs 13(c) of Notice 709/5/96 (“the 1996 Notice”) and section TL3 of Appendix E of Notice 709/5/98 (“the 1998 Notice”) are ultra vires section 53 of the Value Added Tax Act 1994 (“the 1994 Act”) and article 7 of the Value Added Tax (Tour Operators) Order 1987 (SI 1987/1804) (“the 1987 Order”); and / or

(ii)if the provisions of paragraph 13(c) of the 1996 Notice and section TL3 of Appendix E of the 1998 Notice are not ultra vires section 53 of the 1994 Act and article 7 of the 1987 Order, they are in any event incompatible with articles 26 and 22(8) of the EC Sixth VAT Directive (EEC/1977/388) (“the Sixth Directive”) as they require an election to be notified in advance, or shortly after the commencement, of a tour operator’s year.

(Section 53 of the 1994 Act and article 7 of the 1987 Order (the latter made under the earlier consolidating legislation of 1983) are the primary and secondary legislation respectively under which the TOMS, as tertiary legislation, was made. Section 53 provides that the Treasury may by order modify the Act in relation to goods and services by tour operators. The 1987 Order is an order made under section 53. Article 7 of the 1987 Order lays down the principle of the margin in the following terms:

“the value of a designated travel service [as detailed in article 3 of the Order] shall be determined by reference to the difference between sums paid or payable to and sums paid or payable by the tour operator in respect of that service, calculated in such a manner as the Commissioners of Customs and Excise shall specify”).

5.Further in the alternative, MyTravel contends that, by operation of UK law, it is entitled to use the single method of calculation for 1997/98 and 1998/99, whereas the Commissioners of Customs and Excise maintain that it must use the separated supplies method for those years.

6.The facts are essentially agreed and, put into context of the relevant versions of Notice 709/5 and case law, may be stated in the following way.

7.As already mentioned, MyTravel is a tour operator and is required to calculate its VAT liability under the TOMS. It is a repayment trader, and makes VAT returns monthly. Its financial year ends on 30 September.

8.The version of the TOMS in force from 1988 until 31 December 1995 was Notice 709/5/88. Paragraph 23 thereof, in a box on page 16, contained the following provision:

“The method [for calculating the value of designated travel services made by the tour operator] is designed to apply to all supplies wherever they are enjoyed. However, you can elect to work out the value of your supplies which are to be enjoyed wholly outside the EC separately, if you notify your local VAT office in writing of your intention to do so and you can satisfy your local VAT office that you can separate your records of costs, including any that relate to in-house supplies if appropriate, to work out accurate but separate sets of margins.”

9.Late in 1995, in an appeal by Aspro Travel Ltd (see Aspro Travel Ltd v CCE (1996) Decision No 14027), the Manchester Tribunal was required to interpret certain parts of the 1988 Notice. The learned chairman, Mr A W Simpson, in its decision released in March 1996, dealt with the proper interpretation of paragraph 23 of the 1988 Notice in this way:

“In my judgment on the true construction of the leaflet the time by which a valid election to use the separated method must have been made is the time when the tour operator adjusts his VAT account under paragraph 23 after the end of the financial year in question and makes his next return of VAT accordingly. If he uses the primary [i.e. the single] method, as the Appellant did after the end of each of the four relevant financial years, in my judgment he thereby demonstrates that he has not elected to use the separated supplies method for that year, and it is not open to him thereafter to elect to use it.

In my judgment this construction follows from the description of Part I at the beginning of paragraph 23 as setting out the steps which are to be followed `to make your final calculations at the end of each financial year and to make your annual adjustment', and from the description of Part II in the same place as setting out the steps which are to be followed `to work out your provisional output tax for the next financial year'. In my judgment it is then, at the end of each financial year, that the tour operator is required to decide which method to use, and I see nothing in the scheme to suggest that, having made his choice, he can alter it.

To my mind this construction produces a result which is fair to both sides. The tour operator is not obliged to gamble on the unpredictable, by being forced to make his decision before the end of the financial year, although he can do so if he wishes. He is obliged, however, to make his decision after the end of the year, by which time he has all the figures before him and can decide which method will be more beneficial to him. Once he has made his decision, which he will demonstrate either by accounting for his VAT for that year in accordance or purported accordance with the primary method, as the Appellant did, or by electing to use the separated supplies method and, I would say, by accounting for his VAT for that year in accordance or purported accordance with that method, he cannot thereafter change his mind and require the Commissioners to reopen the matter.

I therefore hold that the Appellant was not entitled to elect to use the separated supplies method as it purported to do.”

10. Aspro appealed against the tribunal decision and, in the High Court (see [1997] STC 151), Keene J adopted the tribunal’s construction of the language of paragraph 23 of the 1988 Notice.

11.For 1994/95 MyTravel used the single method to calculate its provisional VAT liability. Following a telephone conversation on 28 March 1996 between Mrs H Quinn, representing the Commissioners, and Mr P J Richardson, a VAT consultant to MyTravel, Mr Richardson wrote to Mrs Quinn in the following terms:

“I am writing to confirm the content of our telephone conversation of today, concerning the confusion arising out of the decision of the Tribunal in the case of Aspro Travel Ltd. and its apparent conflict with the new legislation regarding the ‘Tour Operators Margin Scheme’.

My specific query related to the time at which the election to account separately for non-EC supplies should be made, as the Tribunal stated that it should be made at the time of the annual adjustment, whilst the new legislation states that the election must be made at the start of the financial year.

You confirmed that, in consultation with your Surveyor, your opinion was that Airtours plc could retrospectively opt to use either accounting method for its financial years ending 30 September 1995 and 1996, (sic) however, at the beginning of its financial year commencing 01 October 1996 it should notify HM Customs as to which accounting option it intended to utilise for that year.

I trust that you will agree that this is an accurate representation of our discussion.”

12.Mr O’Connell, an officer of the Commissioners, replied to Mr Richardson’s letter on 10 April 1996 simply saying, “The details of your conversation with Mrs Quinn outlined in your letter of 28 March 1996 are confirmed”.

13.Meanwhile, on 4 April 1996, Mr Gareth Davies, the chief accountant of MyTravel wrote to Mr Fisher, the surveyor at the Blackburn local VAT office, making an election to use the separated supplies method for the 1994/95 annual adjustment in the following terms:

“We would be grateful if you would accept this letter as formal notification that, for the purposes of this Company’s operation of ‘The Tour Operators Margin Scheme’ we have elected to account separately for non EC supplies when calculating the annual adjustment for the year ended 30 September 1995.

Please note that this election is based on the opinion of your office expressed to our representatives, Taxation Projects Ltd, on 28 March – their letter of the same date refers.”

14.On 18 April 1996 Mr Fisher replied to Mr Davies’s letter, saying:

“With reference to your letter of 4 April 1996 concerning the TOMS Annual Adjustment. The method of calculation which accounts separately for EC and non EC supplies (when calculating the annual adjustment) is acceptable for the financial year ending 30/9/95.

This confirms the information given to Patrick Richardson of Taxation Projects. If you have any further queries on this matter please do not hesitate to contact any of the members of the Airtours control team.”

15.Although the tribunal in the Aspro case concluded that a tour operator had to make its election by the time it finally adjusted its actual output tax for the year, and its conclusion was confirmed as correct by the High Court, that conclusion was not reflected in a new version of Notice 709/5/96 which took effect on 1 January 1996. Paragraph 13(c) of the 1996 Notice required the annual adjustment to be made on the taxpayer’s first return after the end of its financial year. It read:

“If you provide some supplies, or packages of supplies, which are enjoyed wholly outside the EC, you can elect to do a separate annual calculation in respect of such supplies. You must first ask permission from the VAT Business Advice Centre for your area. Permission will be granted provided that they are satisfied that your records of costs and sales are adequate to work out accurate sets of margins. You can only ask to do a separate calculation or revert to a single calculation at the start of your financial year. Permission will not be granted retrospectively.”

16.For 1995/96, MyTravel submitted the annual adjustment with its return for period 08/97, having used the separated supplies method. It made no election to use that method, simply submitting the adjustment. The Commissioners accepted the adjustment submitted.

17.For 1996/97, MyTravel submitted the annual adjustment with its return for period 09/99, again using the separated supplies method. It sought no permission from the Commissioners either to use that method, or to revert to the single method.

18.Notice 709/5/98 superseded Notice 709/5/96 on 1 January 1998. The parts of the former relevant to the present appeal are the following:

Paragraph 5.8:

“If you provide some supplies, or packages of supplies which are enjoyed wholly outside the EC, you may elect to do a separate annual calculation for those supplies. You must first ask permission from the VAT Business Advice Centre for your area. Permission will be granted provided that they are satisfied that your records of costs and sales are adequate to work out accurate but separate sets of margins. You may only switch to a separate calculation (or revert to a single calculation) at the start of your financial year, that is no later than the due date of your first VAT return for that financial year. Permission will not be granted retrospectively …

The relevant tertiary law for this method is at Section TL3 of Appendix E.”

Section TL3 of Appendix E is in these terms:

“2.Where a tour operator, in the same financial year, supplies:

(a)designated travel services or margin scheme packages which are to be enjoyed wholly outside the European Community; and

(b)designated travel services or margin scheme packages which are to be enjoyed wholly or partly within the European Community;

the Commissioners of Customs and Excise may, on being given written notification by the tour operator no later than the due date for rendering his first VAT return for the financial year in which the supplies are to be made, allow the supplies under sub-paragraph (a) to be valued separately from those under sub-paragraph (b).

3.Where a tour operator, under paragraph 2 above, has separately valued supplies of designated travel services or margin scheme packages enjoyed wholly outside the European Community from supplies of designated travel services or margin scheme packages enjoyed wholly or partly within the European Community, the Commissioners of Customs and Excise may, on being given written notification by the tour operator no later than the due date for rendering his first VAT return for any subsequent financial year, allow supplies to be made in such subsequent financial year to be valued using the method specified at Appendix A of this Notice [i.e., the single method].”

19.On 20 December 2000, MyTravel submitted the annual TOMS adjustments for its financial years 1997/98 and 1998/99, saying that it was “exercising the option to account for VAT on all TOMS supplies”, i.e. using the single method for the purpose. It sought no permission from the Commissioners to do so.

20.From 1 October 1996 to December 2000, MyTravel submitted VAT returns using provisional calculations based on the separated supplies method of calculation.

21.MyTravel used the separated supplies method when calculating figures included in voluntary disclosures for the 1995/96 TOMS made on 29 October 1999 and for the 1996/97 TOMS made on 28 October 2000.

22.On 22 August 2001, MyTravel was notified of an assessment to tax of £1,042,425 (plus interest), that being the difference in its liability to VAT between the single method and the separated supplies method for 1997/98. That was followed on 24 September 2001 by an assessment for £1,081,389 (plus interest) for 1998/99. It is against the two assessments that MyTravel now appeals.

23.In relation to his submission that the relevant parts of Notice 709/5/96 and 709/5/98 were ultra vires the domestic legislation Mr Gibbon, for MyTravel, observed that under section 53(2)(b) of the 1994 Act the Commissioners were authorised to “specify” a manner, or more than one manner, in which the value of the designated travel service might be determined. He added that there was nothing in either section 53 or article 7 of the 1987 Order which permitted the Commissioners to impose a condition that a tour operator must elect at any specific time which calculation to adopt to value its supplies. More particularly, he further noted, nothing in section 53 or article 7 permitted them to impose a condition that such election must be made in advance or shortly after the commencement of its financial year. Mr Gibbon particularly emphasised that the imposition of such a condition placed a tour operator at a manifest disadvantage for it required it to make an election when it had insufficient information to enable it to make an informed choice. He submitted that, in the absence of a timing vires, the only requirement the Commissioners could impose was one which was reasonable, and the Commissioners’ requirement of advance notification imposed an obligation on the operator which Keene J expressly viewed as unreasonable in his judgment in the Aspro case.