20193
VAT — TOMS — coach tour operator — whether allowed to use National Express coach fares as comparator in order to calculate market value of in-house supplies — no — alternatively whether in calculating value of in-house supplies appellant entitled to include notional rent and hire-purchase interest on purchase of vehicles — no — appeal dismissed 

MANCHESTER TRIBUNAL CENTRE

 
 	
					WELSH’S COACHES LIMITED	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: David Demack
						Alban Holden JP	
					
Sitting in public in Manchester on 4 May 2007

Nigel Gibbon, solicitor, of Omnis Consultancy, for the Appellant 
 
James Puzey of counsel instructed by the General Counsel and Solicitor to Her Majesty’s Commissioners for Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2007

DECISION

1.	The appellant company, Welsh’s Coaches Limited (“Welsh”), is a coach proprietor which trades, inter alia, as a tour operator from premises in Pontefract, West Yorkshire.  As part of its tour operations it “buys in” hotel accommodation, and is required to account for VAT on its “bought in” supplies under the Tour Operators Margin Scheme (“the TOMS”).  
2.	In the autumn of 2003 and January 2004 an officer of what were then the Commissioners of Customs and Excise, but are now Her Majesty’s Commissioners for Revenue and Customs (“the Commissioners”), visited Welsh and found that it had undertaken no TOMS calculations, as required by article 7 of the VAT (Tour Operators) Order 1987, notwithstanding that it had been buying in hotel accommodation and had been registered for VAT from the end of July 2001.  With the co-operation of Mrs Welsh, a director of Welsh, the officer completed the calculations required under the TOMS for the company’s financial year ended 30 September 2003.  Having done so, he compared the resulting output tax with that declared by Welsh in its VAT returns for periods 10/02 to 09/03 inclusive in order to calculate the adjustment required on its return for period 10/03, and subsequently assessed in that period for the difference of £26,300.  Strictly speaking, it is against that assessment that Welsh now appeals.
3.	The officer explained to Mrs Welsh that the figure of 11.42 per cent his TOMS calculations had revealed and upon which the assessment under appeal was based should be used to calculate Welsh’s output tax on TOMS supplies and packages for the financial year ended on 30 September 2004.  He further asked Welsh (i) to provide details of the VAT-inclusive selling prices of designated travel services and margin scheme packages for periods 10/03, 11/03 and 12/03; and (ii) to calculate its TOMS adjustments for its financial years ended in 2001 and 2002.  (By letter of 20 February 2004, Welsh refused to provide any calculations for 2001 and 2002.  Assessments for the annual adjustments for those years were later made on the same basis as that for 2003, but are not the subject of this appeal).  
4.	So far as relevant for present purposes, in its notice of appeal, given on 27 February 2004, Welsh claimed (i) that the assessing officer must have known that he was wrong in using a margin of £217,343 to calculate the output tax due under the TOMS for reconciliation with its annual accounts would have shown a pre-tax profit of £75,096, and accordingly he had failed to use best judgment in making the assessment; (ii) that in calculating the tax assessed the officer had valued Welsh’s in-house supplies at cost whereas, following the judgment of the Court of Justice of the European Communities (“the ECJ”) in Madgett and Baldwin v Commissioners of Customs and Excise [1998] ECR1-6229 [1998] STC 1189, he should have valued them at market value with the result that it was liable for more VAT under the TOMS than was due; and (iii) that the Commissioners had failed to take account of notional rent and hire-purchase interest in quantifying Welsh’s in-house supplies.  (In relation to (i) as we are merely required to decide the issues in dispute in principle, we may ignore the figures quoted).
5.	Following discussions and correspondence between the parties, the issues for decision have been narrowed to two, namely:
(a)	Whether the market value of in-house supplies of coach travel by Welsh can be calculated by using fares charged by National Express for similar journeys;
(b)	In the event of our holding that the market value cannot be so calculated, whether in calculating the value of in-house supplies of passenger transport Welsh may include:
(i)	notional rent; and
	(ii)	hire-purchase interest on the purchase of vehicles. 
6.	As Welsh’s in-house supplies are those of zero-rated transport, it is in its interests for the calculation of its TOMS VAT liability to be weighted in favour of in-house supplies, and for those of bought-in supplies to be correspondingly reduced.  It was against that background that Welsh instructed Mr Martin Pooley, a chartered accountant specialising in the TOMS, to act on its behalf and attempt to resolve its differences with the Commissioners.  Mr Pooley disputed the direct cost basis of calculating the cost of in-house supplies of transport used by the assessing officer, claiming that a market value approach based on “what other suppliers charged for similar journeys” showed that such margins as Welsh earned on its supplies were earned on the transport.  The application of that method of calculation showed a significantly lower amount of tax due and, in the opinion of the Commissioners, was inconsistent with the judgment of the ECJ in Madgett and Baldwin.  Subsequently, Mr Pooley provided the Commissioners with market value calculations based on fares for comparable journeys said to be charged by National Express.  They compared the total cost of Welsh’s package tours to the cost of their bought-in elements.  Typically, that resulted in Welsh achieving very low or negative margins on the accommodation element of the standard-rated packages.  The Commissioners again disputed the method of valuation, and in correspondence observed that at paragraphs 73 and 74 of his opinion in MyTravel plc v Commissioners of Customs and Excise (Case C-291/03) [2005] STC 1617 Advocate-General Leger said that he was “not in favour” of a valuation method taking account of similar services supplied by other taxable persons.  Mr Pooley then indicated that Welsh did in fact provide “coach travel only” to some customers, and would supply examples of them.  In the event, it failed to do so, and such evidence as was adduced as to the provision of ‘coach travel only’ indicated that it was restricted to a handful of cases each year.  The Commissioners then made the assessment under appeal, and the notice of appeal was served.
The relevant legislative provisions
7.	Article 26 of the Sixth EC VAT Directive (EEC/77/388) provides for a special scheme for travel agents in the following terms: 
	“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.
2.	… 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.
•	The special scheme only applies where a travel agent/ tour operator buys in supplies from other businesses to use for the benefit of travellers.
•	The taxable amount shall be the travel agent / tour operator’s ‘margin’.”
8.	That article is implemented in domestic legislation at three levels, primary, secondary and tertiary.  The primary legislation is to be found in section 53 of the Value Added Tax Act 1994, the secondary legislation in article 7 of the Value Added Tax (Tour Operators) Order 1987, and the tertiary legislation in Public Notice 709/5.  The relevant provisions of the Act and the Order read as follows:
	“Section 53  
	Tour Operators
(1)	The Treasury may by order modify the application of this Act in relation to supplies of goods or services by tour operators or in relation to such of those supplies as may be determined by or under the order. 
(2)	Without prejudice to the generality of subsection (1) above, an order under this section may make provision —
(b)  for the value of that supply to be ascertained, in such manner as may be determined by or under the order, by reference to the difference between sums paid or payable to and sums paid or payable by the tour operator.”
“Article 7:  … the value of a designated travel service 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 manner as the Commissioners of Customs and Excise shall specify”.
(By article 3 of the 1987 Order a designated travel service is defined as “a service purchased from a third party and supplied to a traveller (without material alteration).”)
9.	By section 2.3 of Notice 709/5 in its 1998 form as in force in 2003, a travel agent was required to exclude from the TOMS in-house supplies; but section 5.13 required him to include in his calculation the direct costs incurred in making in-house supplies (Section 5.13 directed the means of valuing in-house supplies so as to be able to schedule them out of the TOMS calculation in compliance with section 2.3).  Section 7.1 required the annual calculation to include the direct costs incurred in making in-house supplies supplied with the TOMS supplies as part of a package, and might include depreciation on vehicles, calculated on the same basis as the business’ audited accounts, rental or leasing of vehicles, drivers’ costs (including employer’s NIC), subsistence paid to drivers, fuel, insurance, repair and maintenance of vehicles, garaging and parking, bridge and road tolls, ferry costs, and road fund licences.  Section 8 of the Notice set out the calculation.
Relevant case law
10.	Madgett and Baldwin concerned tour packages provided by an hotel, travel to and from the hotel constituting the bought-in element of the services.   At paragraphs 41 to 46 of its judgment in that case, the ECJ said this:
“41.	As the Advocate General observes in para 65 of his opinion, it follows from the existence of a package price covering both services bought in from third parties—and so covered by art 26—and in-house services—not covered by that provision—that the consideration within the meaning of art 11A(1)(a) of the Sixth Directive cannot be used as the taxable amount for the in-house services which are provided as part of the package.
42. 	It is therefore necessary to determine the unit of reference to be used as an alternative to the consideration in order to identify the part of the package which relates to the in-house services. There are two possible methods, one based on actual 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 para 71 of his opinion, that the actual cost method used by the United Kingdom government could be problematical, as there is no reason to suppose that the margins on the different services which make up the package are proportional to the respective costs of those services.
44. 	Second, use of the criterion of market value—in the present case the room and half-board prices charged by the hotel where customers do not make use of the package—may also be to some extent arbitrary if the price of the accommodation offered as an in-house service as part of the package is taken as being the same as the price for accommodation offered as a single service.
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 para 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 its 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.”  
11.	In MyTravel, where the question in issue was whether the taxpayer could use the charge it made for “seat only” sales on flights as the market value, both the Advocate-General and the Court agreed that a market value approach should be used by a taxpayer where that value could be established; and the ECJ held that its use could not be restricted to instances where it was shown to produce a similar or the same liability as the “actual cost method”.  However, Advocate-General Leger suggested certain restrictions in the use of the market value approach, opining (at page 1632):
	“72.	It is for the national tax authorities, and in appropriate cases, the national courts to assess whether it is possible to identify the part of the package price relating to in-house services on the basis of their market value.
73.	In its judgment in Madgett and Baldwin the court held that the market value should be determined on the basis of the price of similar services supplied by the taxable person himself and not forming part of a package.  The Commission, for its part, takes the view that account could also be taken of similar services supplied by other taxable persons.
74.	I am not in favour of the latter approach for the following reasons.  First, it ties up with the proposal made by the Swedish Government in Madgett and Baldwin which, although it was not expressly rejected by the court, was not incorporated in its judgment.  Next, as I pointed out in my opinion in that case (see [1998] STC 1189, [1998] ECR I-6229, para 72), it might give rise to more difficulties than advantages.  The figure arrived at on the basis of like services supplied by other taxable persons is largely fictitious, since it has no direct relation to the service which is to be taxed.  Moreover, there is a risk of imprecision, as the reference average may be disputed and thus become the subject of arguments among experts.
75.	It seems to me that the facts of the main proceedings tend, rather, to confirm my analysis.  The great fluctuation in the prices of flights and the diversity of cost, according to destination, as a result, in particular, of competition in that area from ‘low cost’ airlines might make it difficult and controversial to establish relevant comparators on the basis of transport provided by other taxable persons.  Moreover, the referring court is not calling into question the method of establishing the market value of in-house services, which is set out in the judgment of Madgett and Baldwin.  It is therefore for that court to assess whether flights sold individually by MyTravel may constitute similar services to those supplied by that taxable person as part of a package and, if appropriate, to establish the market value of those flights on the basis of the price of those sold individually.”
12.	The ECJ  broadly adopted the Advocate-General’s approach in paragraphs 31 and 32 of its judgment (page 1640):
“31.	It is apparent from the judgment in Madgett and Baldwin that the market value method may be adopted where it is possible to identify the part of the package corresponding to the in-house service on the basis of the market value of services similar to those which form part of the package.  None the less, that must not result in a taxable person being conceded the right to use that method at its own discretion, according to whether or not the effect of its use is to reduce his tax liability compared with the tax liability which would result from using the actual cost method.
	32.	The grant to taxable persons of such a right could have the consequence of allowing them to increase artificially the taxable amount subject to the lowest rate and of thus creating an inequality in competition between businesses, in favour of those which have established their business or have a fixed establishment in a member state which taxes certain transactions at very low rates or even zero-rates them, as in the United Kingdom in relation to passenger transport.  Such an interpretation could, therefore, run counter to the principle of neutrality of VAT.”
13.	The ECJ then recognised that there may be instances where market value cannot be established for all the in-house services and indicated that in those circumstances “both methods of calculation” should be used, i.e. market value for those services where it can be established, and direct cost where it cannot (paragraph 38).  So far as relevant to the present appeal, the ECJ made the following ruling (at page 1643):
“Article 26 of the Sixth Directive must be interpreted as meaning that a travel agent or tour operator who, in return for a package price, supplies to a traveller services brought in from third parties and in-house services must, in principle, identify the part of the package corresponding to his in-house services on the basis of their market value where that value can be established.  In such a case, a taxable person may use the criterion of actual costs only if he proves that this criterion accurately reflects the actual structure of the package.  Application of the criterion of market value is not subject to the condition that it must be simpler than application of the actual cost method or to the condition that it must produce a VAT liability identical or close to that which would result from using the actual cost method.  Accordingly:
-	a travel agent or tour operator may not use the market value method at his own discretion and 
-	that method is applicable to in-house services whose market value may be established even if, in the same tax period, the value of certain in-house components of the package cannot be established inasmuch as the taxable person does not sell similar services on a non-package basis.”
Submissions
14.	Mr Gibbon, representing Welsh, maintained that within the TOMS Welsh had little opportunity to make a profit on the accommodation it bought in: it was treated as making exactly the same profit on bought-in accommodation as on in-house transport, despite the fact that the supply of accommodation had already been marked-up by the owner on its supply to Welsh.  The TOMS did not therefore compare like with like in apportioning income between in-house and bought-in supplies, and resulted in over taxation of the in-house transport.  Mr Gibbon maintained that the solution to the problem was to allow the in-house transport to be valued at a figure higher than cost – a figure more closely referable to the real cost of the already marked-up bought-in accommodation.  That solution would allow Welsh to use market value as the method of valuing its in-house supplies of transport as ruled by the ECJ in MyTravel plc at page 1643.  In reliance on that ruling, Mr Gibbon submitted that Welsh’s legal right to use established market values was unequivocal.  He observed that the ECJ did not rule out the use of supplies made by a third party as a valid comparator to calculate market values and, whilst the Advocate-General did rule out their use (paragraphs 74 and 75), the EC Commission in its submission supported their use (paragraph 73).
15.	Mr Gibbon claimed that the Advocate-General’s disapproval of a third party comparator stemmed from his view that: 
“The great fluctuation in the prices of flights and the diversity of cost, according to destination, as a result, in particular, of competition in that area from ‘low cost’ airlines might make it difficult and controversial to establish relevant comparators on the basis of transport provided by other taxable persons.” (paragraph 75).
16.	But he maintained that that line of reasoning did not prevent the Advocate-General from approving the use of averages to value MyTravel’s in-house flight seats:
“On the contrary, an average value may be more representative where … there is significant variation in the prices of similar services sold without packages (paragraph 86).
17.	Against the background of the ECJ’s express approval of the Advocate-General’s view of averaging (paragraph 44) but no such approval of third party comparators,  Mr Gibbon submitted that we should approach the instant case on the basis that third party comparators might well be approved by the ECJ.  He contended that “market” had trading connotations involving buying and selling at arms length between third parties and was not normally used purely as an in-house term.  The third party comparators should not be dismissed as guides to calculate a market value: fares for “similar” journeys undertaken by National Express were therefore valid comparators.  He accepted that such comparators could never be strictly accurate, but submitted that since the ECJ had recognised that the use of market values did not produce an accurate result it permitted averaging even though that too did not produce an accurate result.  In the imprecise world of market values a third party comparator should not be dismissed for not producing an accurate result.  Welsh’s use of National Express fares to value the seat element of its coach holidays was fair and reasonable; we should approve their use and allow the appeal.  
18.	In response, in reliance on paragraphs 72 to 74 of the Advocate-General’s opinion in MyTravel, Mr Puzey, counsel for the Commissioners, submitted that the use of figures from another taxable person was not permissible.  The reasoning of the Advocate-General was sound and the instant case provided an illustration of how the use of another trader’s figures could produce fictitious values.  He contended that it was wholly unrealistic to compare single passenger fares on a scheduled, dedicated National Express coach service with a supply as part of a package trip including coach travel by Welsh.  In the latter case, the passengers each purchased a seat on a coach going to a particular destination at a particular time and date.  In Welsh’s case, there was no comprehensive timetable such as that operated by National Express.  Welsh’s pricing structure would be tailored to its own business model.  There could be no fair comparison between Welsh’s pricing structure and that of National Express.  Moreover, there were uncertainties with the comparative fares; for example, the type of fare Welsh quoted for National Express journeys was unknown; in some cases, National Express provided no service to the destination concerned; it was not clear whether the pick-up points or the routes were the same; and Welsh’s coaches might make meal stops, diversions to pick up and set down passengers, and undertake excursions.
19.	Furthermore, Mr Puzey submitted that the method advanced by Welsh showing that it made a profit only on the coach travel element of its packages was a bald attempt to reduce or extinguish the margin on the standard-rated elements of the packages, which the ECJ warned against at paragraph 31 of its judgment in Madgett and Baldwin.  There was no basis for assuming that the ECJ would have approved the use of third party comparative fares.  Just because “market” appeared in the phrase “market-value”, that could not be taken as allowing a taxpayer to rely on the most favourable comparison it could obtain, no matter how different its business might be from that of Welsh.  That was precisely the scenario the Advocate-General and the ECJ warned against.
20.	The purpose of the calculation at section 8 of Notice 709/5 was, in part, to achieve an even and fair apportionment of the trader’s margin between the different elements of the various supplies, (see section 5.2 of the Notice).  Mr Puzey submitted that it was highly unlikely that Welsh would buy-in supplies in the expectation that it would consistently make losses on them.  As Welsh had made no attempt properly to value its in-house supplies on a market value basis, Mr Puzey further submitted that it could not use such basis to value those supplies.
21.	We hold that Welsh is not entitled to use National Express fares as third party comparators to determine the market value of its in-house supplies.  We do so because, in our judgment, for the reasons advanced by Mr Puzey, the services supplied by National Express and hence those fares are not, comparable with the services supplied by Welsh.  In so deciding, we have taken account of the ECJ’s decision in MyTravel not to disapprove of the use of third party comparators.  We accept that the absence of such disapproval may be an indicator that, in certain circumstances, such use can be accepted; but, even if it is, we do not consider the instant case to fall within them.  We prefer to follow the Advocate-General’s opinion, notwithstanding that it is merely a persuasive authority.  In all other respects, we adopt the case advanced on the point by the Commissioners by Mr Puzey.  It follows that we dismiss the appeal.
22.	But, lest we be wrong in so deciding, we now proceed to deal with the second question before us.  In relation thereto, Mr Gibbon submitted that the assessment was excessive in failing to take account of a notional rent and / or hire purchase interest on vehicles, they being allowable “costs” of the in-house supply of passenger transport.  
23.	In scheduling out in-house supplies, to avoid taxing them within the TOMS, Mr Gibbon maintained that it had the effect of removing from taxation within the TOMS supplies which were zero rated in their own right (i.e. passenger transport).  It was therefore important to Welsh that its in-house supplies be valued fairly so that it was not forced to account for VAT where none would be payable apart from the TOMS.  None of Article 26, section 53 or the 1987 Order provided any vires for the Commissioners to specify any means of valuing in-house supplies.  All dealt solely with margin scheme supplies, and Article 7 of the Order supplied the vires for the Commissioners to specify how “designated” travel services should be valued.  Paragraph 2.3 of Notice 709/5 required in-house supplies to be excluded from the TOMS.  That was a statement of the legal position.  Paragraph 5.13 required in-house supplies to be valued by reference to direct cost as did section TL3 of the Notice which purported (on that issue) to be tertiary legislation.  There was no vires for tertiary legislation in relation to in-house supplies, and the requirement to value in-house supplies at cost was held by the ECJ to be invalid in both Madgett and Baldwin and MyTravel.  Accordingly, paragraph 5.13 and Appendix J were no more than a statement of the Commissioners’ policy.  In any event, the list of examples of costs in Appendix J was specifically said not to be exhaustive.
24.	Mr Gibbon observed that Welsh did not pay rent, and he accepted that that was not an actual cost of the business.  However, the absence of an allowance for rent in the valuation of its in-house supplies had the result that a greater proportion of income was subject to VAT within the TOMS than would be the case for another similar business which did pay rent.  Welsh was penalised from a VAT perspective by the absence of rent and (especially bearing in mind the economic reality that it sought to profit from its transport business and not from the sale of accommodation) a notional figure should be included.
25.	Mr Puzey responded by contending that, whether or not the valuation of in-house costs was properly dealt with in Notice 709/5, there could be no basis whatsoever for inventing a notional cost, in this case rent, and inserting it into a TOMS calculation simply because another business might pay rent.  Welsh’s contentions on that subject were entirely unsupported by legislation or case-law, and ran counter to the fundamental principles of VAT.  We entirely agree with that response, and reject Welsh’s claim to be entitled to use a notional rent in calculating the value of its in-house supplies.  
26.	Mr Gibbon rejected a claim by the Commissioners that hire purchase interest was an overhead and thus not allowable maintaining, that it was an actual cost of the business.  He further rejected the contention that its inclusion would result in a double benefit because depreciation had been allowed:  hire purchase interest was a direct cost of in-house supplies because it was paid on the purchase of the vehicles which were exclusively used for making in-house supplies.  The cost was directly attributable to those supplies and it was not an overhead of the business as was, say, interest on the purchase of computers or other equipment. There was also no question of a double benefit.  Hire purchase interest was one cost of the business (paid out in addition to the purchase price) and depreciation another one (as it reduced the sale value).  As depreciation had been allowed as a cost by the Commissioners, so too should be hire purchase interest.
27.	In Mr Puzey’s submission the fact that hire purchase interest was a cost of the business did not mean that it could be included in a TOMS calculation.  It was not a direct cost of in-house supplies, but rather an indirect cost or overhead, as was any other financial charge.  Article 26(2) of the Sixth Directive refered to “the actual cost to the travel agent of supplies and services provided by other taxable persons where these transaction are for the direct benefit of the traveller”.  The facility of hire purchase was not for the direct benefit of the traveller and, as was held in Atlantic Holidays Limited v Commissioners of Revenue and Customs (2007) Decision No. 20011, financial charges represented indirect costs or overheads and should not be included in a TOMS calculation.  Again, we accept Mr Puzey’s submissions, and so reject those of Mr Gibbon.
28.	We dismiss the appeal.
29.	Mr Puzey indicated that he had no instructions to ask for the Commissioners’ costs in the event of the appeal being dismissed.  In those circumstances, we direct that if the Commissioners shall desire to make an application in that behalf, they must do so within 30 days of the release date of our decision.

DAVID DEMACK
CHAIRMAN
Release Date: 5 June 2007
MAN/04/0114