Customs & Excise v First Choice Holidays Plc

This appeal concerns a claim for the repayment of VAT brought by First Choice Holidays Plc, here the respondent (“First Choice”), against the Commissioners of Customs and Excise. The Commissioners are here the appellants because both the Value Added Tax and Duties Tribunal and, on appeal from it, Neuberger J, found in favour of First Choice’s claim for repayment.

The essential issue between the parties is how to assess the cost of a package holiday for VAT. A special scheme operates in favour of tour operators whereby VAT is charged only on the difference between the various costs of supplying the holiday and the price of the holiday. Unfortunately, the concept of the price of a holiday is more elusive than one might think, and the various legislative texts, both European and domestic, under which the scheme is defined and operated are no masterpieces of elucidation. Hence this litigation, which has encompassed a reference to the European Court of Justice.

The governing EU legislation is the Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of the member states relating to turnover taxes – common system of value added tax: uniform basis of assessment (77/388/EEC) (the “Sixth Directive”). The “Special Scheme for travel agents” – or what we in the UK would think of as tour operators – is dealt with in article 26. However, two other articles also need to be set out. Thus article 11 sets out general principles and article 22 concerns accounting for VAT. These three articles read –

“11A(1). The taxable amount shall be

(a)

in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies…”

“22(3)(a). Every taxable person shall issue an invoice or other document serving as an invoice, in respect of goods and services which he has supplied or rendered…

(b)

The invoice shall state clearly the price exclusive of tax and the relevant tax at each rate…”

“26(2). All transactions performed by the travel agent in respect of a journey shall be treated as a single service supplied by the travel agent to the traveller. It shall be taxable in the Member State in which the travel agent has established his business or has a fixed establishment from which the travel agent has supplied the services. The taxable amount and the price exclusive of tax, within the meaning of Article 22(3)(b), in respect of this service shall be the travel agent’s margin, that is to say, the difference between the total amount to be paid by the traveller, exclusive of value added tax, and the actual cost to the travel agent of supplies and services provided by other taxable persons where those transactions are for the direct benefit of the traveller.”

I have emphasised in italics here and below those parts of the texts of particular relevance to the current dispute.

The domestic legislation in implementation of article 26(2) is to be found in section 53 of the VAT Act 1994, articles 3 and 7 of the VAT (Tour Operators) Order 1987 and VAT Leaflet 709/5/88.

Section 53 of the VAT Act 1994 provides:

“(1)

The Treasury may by order modify the application of this Act in relation to supplies of goods or services by tour operators…

(2)

Without prejudice to the generality of subsection (1) above, an order under this section may make provision –

(a)

for two or more supplies of goods or services to be treated as a single supply of services;

(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.”

Articles 3 and 7 of the 1987 Order provides –

“3(1). Subject to paragraphs (2), (3) and (4) of this article, a “designated travel service” is a supply of goods or services –

(a)

acquired for the purpose of his business; and

(b)

supplied for the benefit of a traveller without material alteration or further processing;

by a tour operator in a member State of the European Community in which he has established his business or has a fixed establishment.”

“7.

Subject to articles 8 and 9 of this Order, the value of a designated travel service shall be determined by the difference between sums paid and 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.”

The VAT Leaflet sets out the provisions of the Tour Operators Margin Scheme (“TOMS”) for the purposes of article 7 of the 1987 Order. Paragraph 16 of the Leaflet is headed “Working out your selling price” and says –

“The total selling price of your supplies under the scheme is your total charge to your customers…

Do not include any:

● group/child discounts that you allow

● amount collected from the customer for a supply of insurance direct to the customer from an authorised insurance company – even if you include it in the quoted tour price

● forfeited deposits and cancellation fees received from customers who cancel a booking

You may reduce your total receipts by compensation that you pay to the dissatisfied customer but only up to the amount that the customer had paid you.

Remember:

● if you sell through an agent you must not deduct any agent’s commission charged to you. This applies even if the agent deducts his commission from the sum collected from the customer and remits the balance only…”

First Choice is a tour operator which sells package holidays to the public through intermediary travel agents. Under the arrangements between First Choice and its agents, the latter are permitted to sell First Choice’s package holidays at less than brochure price on condition that the discount allowed to the customer is made up by the travel agent. Thus where a £1000 holiday is sold by the travel agent for £950, First Choice will issue an invoice and expect to receive £1000, however the travel agent will bill the customer for only £950, the customer will pay £950, and the travel agent will make up the additional £50 by taking a deduction against the 10% agreed commission due to him of £100. The customer would not know that the travel agent is making up the difference between the £1000 brochure price and the £950 agreed with him, nor does the travel agent tell the customer that he is contributing £50 on his behalf towards the price of the holiday. Similarly, First Choice frequently did not know the amount of any discount and therefore did not know the amount actually paid by the customer.

First Choice would draw up a “customer invoice” which it sent to the agent. The copy intended for the customer indicated the price of the holiday appearing in the brochure and said nothing about any discount or commission. When the agent forwarded the invoice to the customer, he either sent a statement showing the actual holiday cost after deduction of the discount, or made a manual adjustment to the invoice to show that price.

In the past First Choice has paid VAT on the basis that its taxable margin is the difference between the full £1000 received by it for the holiday and the cost to First Choice of providing the services of direct benefit to the traveller/customer. It is common ground that those costs do not include the cost of the travel agent’s commission, because his service is not “of direct benefit to the traveller” (to pick up the language of article 26 of the Sixth Directive, reflected in article 3(1)(b) of the domestic 1987 Order). However, First Choice has now claimed a refund of VAT on the basis that the margin between receipts and costs, on the example given as an illustration above, should not be premised on the figure of £1000 as “the total amount to be paid by the traveller” (under article 26(2) of the Sixth Directive) or as “your total charge to your customers” (under the domestic VAT leaflet) but only on the figure of £950. It would follow that the taxable margin would be £50 less than it might otherwise be. The same £50 would then fall to be treated, so First Choice submits, as the (separate) consideration payable by the travel agent for the right to sell the package holiday at less than brochure price and that as such it too, like the travel agent’s commission, would be taxable at standard rates outside the special scheme as being part of the (separate) arrangements between tour operator and travel agent.

First Choice’s claim for repayment came before the VAT & Duties Tribunal (the “Tribunal”) which decided in favour of First Choice. It adopted an English law approach to an analysis of the relationship between First Choice and its customers, in which the travel agents performed the role of agent. If there had been no agent and the transaction had been concluded directly between First Choice and its customer, as between principal and principal, the sum payable and the sum charged would have been the same, viz, in the above example, £950. That was the sum “paid or payable to” the tour operator (article 7 of the 1987 Order) and the “sum charged to the customer” (the leaflet). The interposition of the travel agent made no difference. The fact that under the separate arrangements made between First Choice as principal and the travel agent as agent the latter provides another £50 to the former is an irrelevant matter governed by the separate agency contract. The sum charged to and paid by the customer remained the same, viz £950. That was also the “total amount to be paid by the traveller” under article 26(2) of the First Directive. There was therefore no disparity between the European and the domestic legislation.

On appeal from the Tribunal, Neuberger J came to the same conclusion as a matter of law. He regarded the Tribunal as finding that the £50 paid by the travel agent to First Choice was paid as the consideration for First Choice permitting its agent to sell the holiday at less than brochure price. He said that the Tribunal’s view amounted to a finding of fact which it was entitled to reach as a finding of fact.

When the matter first came on appeal to this court, First Choice submitted that the contract between First Choice and the customer was for a holiday at £950, not £1000. First Choice could not sue the customer for £1000, only for £950. The £50 which the travel agent had to pay to First Choice was purely a matter of arrangement between them and had no part to play as between customer and travel agent or as between customer and First Choice. Moreover, on the facts found and agreed there was no question of the travel agent simply contributing to the payment of the price payable by the customer as a form of third party consideration. The Tribunal and Neuberger J had been correct to say that the £50 paid by the travel agent lay under the separate contractual arrangements between First Choice and agent and thus was not part of the “total amount to be paid by the traveller” within article 26(2). This had been correctly reflected in the language of the domestic provision in the VAT leaflet that “the selling price…is your total charge to your customers”. It was a fundamental principle of VAT law that –

“it is intended to tax only the final consumer. Consequently the taxable amount serving as a basis for the VAT to be collected by the tax authorities cannot exceed the consideration actually paid by the final consumer which is the basis for calculating the VAT ultimately borne by him” (Elida Gibbs Ltd v. Customs and Excise Commissioners (Case C-317/94) [1996] STC 1387 at 1402, para 19).

First Choice also submitted that, as held by Neuberger J, the analysis or categorisation of the transaction or transactions was a question of fact for the domestic Tribunal and not for the courts on appeal, let alone for the European Court of Justice. Thus, because it was a possible view of the facts that, on the example under discussion, the £50 paid by the travel agent was paid in consideration of the service provided by First Choice in permitting its travel agents to sell at less than brochure price, rather than in consideration of any service provided to the customer, therefore Neuberger J was correct to say that it was a conclusion of fact that the Tribunal was entitled to reach and one with which an appeal court dealing with an appeal on a point of law should not interfere.

On behalf of the Commissioners, on the other hand, it was submitted that, in the example given, the £50 is paid by the travel agent for or on behalf of or for the direct benefit of the traveller; that third party consideration is well recognised as part of the total consideration to be taken into account in such circumstances; that it is an equally fundamental principle of VAT law that the taxable amount is the “consideration actually received” for the supply (see Argos Distributors Ltd v. Customs and Excise Commissioners (Case C-288/94) [1996] STC 1359 at 1372, para 16); that the language of article 26(2) has to be given a purposive construction in the interests of reality and simplicity (see, for example, Customs and Excise Commissioners v. Madgett and Baldwin (trading as Howden Court Hotel) (Joined cases C-308/96 and C-94/97) [1998] STC 1189); that First Choice has not in practice known (and could not know, at any rate without requiring their travel agents to tell them) of any discount allowed by the travel agent; that in practice the £50 has been paid by the travel agent to First Choice as part of the £1000 price required and invoiced by First Choice for the holiday and that treatment of the £50 paid by the travel agent to First Choice as a separate item reflecting the consideration for permission to discount the brochure price of the holiday was unrealistic; that in such circumstances the factual analysis or characterisation of the transaction or transactions adopted by the Tribunal was not open to it as a matter of law upon the true construction of article 26(2); and that the domestic legislation was to be and could be construed in accordance with article 26(2).

When these arguments were presented to this court in early 2001, we concluded that the issues debated by the parties were not acte clair and that it was therefore appropriate to grant a reference to the European Court of Justice for a preliminary ruling, since without that Court’s guidance it would not be possible to rule on the issues on appeal, where those issues were of importance to the travel industry as a whole: see the judgments of this court dated 7 March 2001, [2001] EWCA Civ 308.

The reference was in these terms, which I take from the judgment of the European Court of Justice of 19 June 2003 in Case C-149/01:

“Where a tour operator within the meaning of Article 26 of Council Directive 77/388/EEC

a)

supplies package holidays to customers through the disclosed agency of a travel agent;

b)

permits the agent to arrange the supply of package holidays at a discount from the price published in the tour operator’s brochure (the customer being liable to pay only the discounted price for the holiday);

c)

requires the agent who arranges the supply of a package holiday at a discount not only to pass on to the tour operator the price actually charged to the customer but also to pay to the tour operator an additional sum equal to the discount given to the customer (who is unaware of the financial arrangements between the tour operator and the agent), so that the agent accounts to the tour operator for the full price of the holiday;

d)

agrees to pay the agent a commission based on the brochure price of the holiday, which in practice is paid by set-off against the sums due from the agent as mentioned in (c) above;

e)

does not know whether or not the agent has arranged the sale of a particular holiday at a discounted price, or the amount of the discount;

f)

as between itself and the agent, accounts for the sale of the holiday on the basis that it has been paid the full brochure price of the holiday;

(1)

Having established the above facts, how should the additional sum (referred to in (c) above) paid by the travel agent to the tour operator be characterised for the purposes of Article 26(2)?

(2)

Does “the total amount to be paid by the traveller” within Article 26(2) include the additional sum referred to in (c) above?”

The Court concluded that, as an exception to the general rules of the Sixth Directive, the special scheme adumbrated in article 26 had to be applied only to the extent necessary to achieve its objective. That objective was to take account of the special needs of tour operators whose business consisted in providing multiple services both within and without the member state in which it had established itself. A simplified method was therefore devised to meet their needs. However, that did not mean that there was any necessary derogation from the primary rule which was that, for the purposes of determining the taxable amount, reference was to “the consideration which has been or is to be obtained by the supplier from the…customer or a third party”. That “consideration” was the same concept, the same economic element, as was to be found in article 26(2)’s language of “the total amount to be paid by the traveller”. Therefore, the identical concept “must have the same definition under both schemes” (at para 27). It followed that the words in article 26(2) “cannot be interpreted literally” as excluding part of that consideration obtained from a third party within the meaning of article 11A(1)(a): and that consideration was “the subjective value, that is to say the value actually received in each specific case” (at paras 28/29, citing Elida Gibbs). Reference was then made to Case 230/87 Naturally Yours Cosmetics [1988] ECR 6365, para 11, for the proposition that the taxable amount for a service is everything which makes up the consideration for the service provided there is a direct link between the service and the consideration received.

Turning to the particular facts of this case, the judgment of the Court continued as follows:

“32.

In circumstances such as those described by the national court, the additional amount paid by the travel agent to the tour operator constitutes a condition of the supply by the tour operator of his services, and the commission due to the travel agent is calculated on the full price of the holiday stated in the brochure.

“33.

There is therefore a direct link between that additional amount paid by a third party and the supply of the services provided to the traveller. It follows that it is included in the consideration for that supply received by the tour operator and so in the “total amount to be paid by the traveller” within the meaning of Article 26(2) of the Sixth Directive. It cannot be regarded as the consideration for a service supplied by the tour operator to the travel agent, consisting in providing him with a facility of selling the holiday at a reduced price.”

Finally, the Court answered the questions posed to it in the following terms:

“34.

The reply to the questions referred for a preliminary ruling must therefore be that Article 26(2) of the Sixth Directive must be interpreted as meaning that the “total amount to be paid by the traveller” within the meaning of that provision includes the additional amount that a travel agent, acting as an intermediary on behalf of a tour operator, must, in circumstances such as those described in the order for reference, pay to the tour operator on top of the price paid by the traveller and which corresponds in amount to the discount given by the travel agent to the traveller on the price of the holiday stated in the tour operator’s brochure.”

Now that the European Court of Justice has ruled on this dispute as a matter of EU law, the only question remaining is whether it is open to this court, as First Choice submits it is, to find that, as a matter of English law, the domestic material has failed to incorporate provisions which can be given the same meaning and effect as the Sixth Directive.

On behalf of the Commissioners, who in form remain the appellants, Mr Philip Sales submits that it is not open. He relies of course on the principle that domestic provisions should be construed, so far as possible, with the governing EU law: see Marleasing SA v. La Comercial International de Alimentacion SA [1990] ECR I-4135. A domestic case which illustrates how far this principle can be taken is Litster v. Forth Dry Dock & Engineering Co Ltd [1990] 1 AC 546, where in the speech of Lord Oliver of Aylmerton at 576D/577D, both the principle and the width of its application are revealed. In that case Lord Keith of Kinkel said (at 554H) –

“In these circumstances it is the duty of the court to give to regulation 5 a construction which accords with the decisions of the European Court upon the corresponding provisions of the Directive to which the regulation was intended by Parliament to give effect. The precedent established by Pickstone v. Freemans Plc. [[1989] AC 66] indicates that this is to be done by implying the words necessary to achieve that result.”

Lord Oliver also said (at 559E) –

“If the legislation can reasonably be construed so as to conform with those obligations – obligations which are to be ascertained not only from the wording of the relevant Directive but from the interpretation placed upon it by the European Court of Justice at Luxembourg – such a purposive construction will be applied even though, perhaps, it may involve some departure from the strict and literal application of the words which the legislature has elected to use.”

The principle is not unlike the obligation under section 3(1) of the Human Rights Act 1998 to read down domestic legislation, “[s]o far as it is possible to do so”, so that it is compatible with the European Convention for the Protection of Human Rights and Fundamental Freedoms: see Ghaidan v. Godin-Mendoza [2004] UKHL 30, [2004] 3 WLR 113. Ambiguity in the domestic provision was not a necessary condition for the application of this interpretative technique. The requirement of uniformity, particularly in a Europe-wide tax statute, was particularly strong.

So, in this case, the language of the domestic VAT leaflet “your total charge to your customers” should be viewed as a reference to the full consideration that the tour operator receives, namely the £1,000. This was supported by the language of article 7 of the 1987 Order pursuant to which the leaflet was issued, viz “sums paid and payable to” the tour operator, again a reference to the £1,000. If, in these circumstances, it was necessary to spell out a Litster-type implication into the wording of the leaflet to reflect the purpose of the Directive as demonstrated by the ECJ judgment, it could be done by interpreting the leaflet to cover any payment on behalf of, or for the benefit of, a traveller.

On behalf of First Choice, on the other hand, Mr Kevin Prosser QC submitted that no manner of proper interpretation could manipulate the VAT leaflet into conformity with the ECJ’s judgment on the application of the Sixth Directive to the facts of this case. The detailed terms of the leaflet demonstrated that the contribution made by the travel agent was as irrelevant to the charge to customers as the commission paid to the agent, which also had to be left out of account. Just as “group/child discounts” were not to form part of “your selling price”, so the discount given to the tour operator’s customer through the travel agent was not to do so either. The concentration of the whole leaflet was on the customer and what he paid, in our example the £950, and on nothing else. Hence the leaflet said that compensation paid to a dissatisfied customer went to reduce the selling price “but only up to the amount the customer had paid you”. What was in issue was the contract between tour operator and customer and not the separate arrangements between tour operator and travel agent. Moreover, the background of article 7 of the 1987 Order was irrelevant, for the detailed calculations were to be “calculated in such a manner as the Commissioners of Customs and Excise shall specify”, viz in the VAT leaflet.

Mr Prosser recognised the Marleasing principle, but submitted that it had to be remembered that the VAT leaflet was part of a taxing statute and was directed at businessmen. This situation was unlike the human rights context, where, on the basis that a Convention right had been breached, the domestic legislation had to be read down in favour of the victim of that breach. In taxing matters, however, the presumption was quite in the opposite direction. In English law, the basic principle is that a person is not to be subject to tax other than by clear words: for a recent example of the application of that principle, see Greenalls Management Limited v. Customs and Excise Commissioners [2003] EWCA Civ 896, [2003] 1 WLR 2609 at para 53. A similar principle operated in European law, see EC Commission v. Netherlands Case 326185 [1987] ECR 509 at para 24:

“Moreover, as the court has repeatedly held, community legislation must be certain and its application foreseeable by those subject to it. The requirement of legal certainty must be observed all the more strictly in the case of rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which they impose on them.”

This principle had been applied to the interpretation of the Sixth Directive itself in EC Commission v. France Case C-30/89 [1990] ECR 1-00691 at paras 23/24. Thus what is “possible” for the purposes of the Marleasing principle must be considered in the light of the principle of legal certainty.

Litster was a case where the interpretation of the domestic legislation was compelled by the acceptance that otherwise a “coach and four” (at 554E) would have been driven through the provisions of the legislation, both European and domestic, whose purpose was clear. That did not apply here, however, where the language of the VAT leaflet was itself clearly in First Choice’s favour, but at worst unclear, while the facts, viz that the £50 was paid under a separate contract, were clear and in First Choice’s favour. As Lord Keith said in Webb v. Emo Air Cargo UK Ltd [1990] 1 WLR 49 at 59F –

“it is for a United Kingdom court to construe domestic legislation in any field covered by a Community Directive so as to accord with the interpretation of the Directive as laid down by the European Court of Justice, if that can be done without distorting the meaning of the domestic legislation”.

However, as Mummery LJ said in Civil Service Motoring Association v. Commissioners of Customs and Excise [1997] STC 111 at 115j –

“If the words [of the domestic legislation] are so clear and unambiguous that they are capable of only one meaning and that meaning fails to give effect to the provisions of the Sixth Directive it is not open to the commissioners to rely on the provisions of the Directive, since to do so would allow the state to rely on its own failure to fulfil its obligations under the Directive.”

There are perhaps as many as four themes running through these submissions. I would describe them as the contract theme, the taxation theme, the language theme and the legal presumption theme.

The contract theme is emphasised by First Choice: it is to the effect that the contractual relationships between tour operator, travel agent and the customer of both of them have to be unravelled and analysed according to the English law of contract and agency. So analysed, says First Choice, it is clear that there are separate contracts between tour operator and travel agent and between tour operator and customer. Of such contracts, which have to be kept entirely separate, the relevant one is the contract between First Choice and its customer and under that contract the price to the customer is only £950. That remains so whether one considers the matter in terms of any of the phrases which appear in the domestic legislation, such as “your selling price”, “your total charge to your customers”, or “the amount that the customer has paid you”.

The taxation theme is emphasised by the European Court of Justice in its judgment in this case, and by the Commissioners. There is no contractual analysis in the ECJ judgment, but the matter is approached as a matter of taxation and its purposes. A community wide taxation directive contains both its broad rules and its exceptions, the latter of which have to be limited by reference to those broad rules. The dominant concept is that of “consideration”, with the emphasis put on what is received by the supplier, rather than what is paid by the customer. This is so, even though in parts of the directive the language may not be entirely apposite (or one might say complete), eg in speaking only of what is “paid by the traveller”. Thus consideration may be paid by the customer/traveller or by a third party. If paid by the third party there has nevertheless to be a “direct link”, but that existed in the present case. The factual case, therefore, is analysed not by reference to contract law but by reference to a categorisation required by the purposes of the taxation statute. On this adjourned appeal, the Commissioners ask this court to apply the same process, the same theme, to the domestic statute. It is submitted that any issue as to how the facts are to be properly categorised was dealt with as part of the reference and has now been concluded by the ECJ judgment.

The language theme has been addressed by both parties and is at the heart of this appeal. Can the domestic provisions be interpreted in a manner consistent with the judgment of the European Court of Justice as to the meaning of the Sixth Directive? Mr Prosser says it cannot, submitting that the VAT leaflet is written entirely from the point of view of what the customer pays (the £950). Mr Sales says it can and therefore should, in effect saying that the process of interpretation of the VAT leaflet against the background of the legislation as a whole, both domestic and European, follows very much the same lines as those dictated by the ECJ judgment. Mr Prosser emphasises the language itself, Mr Sales emphasises the need to give that language a purposive rather than literal construction.

Finally, the legal presumption theme is used by Mr Prosser to guide the process of interpretation. In effect he says that a taxing statute, if unclear, should be read down on its own terms, not read up to meet some harsher standard set by EU law. The problem is different where domestic law encroaches on a matter of human rights. To that Mr Sales ripostes that the ECJ judgment is itself the best guide as to how the European principle of legal certainty operates in this field, and how it and any equivalent domestic principle should affect what remains the primary obligation upon all member states to comply with the requirements of EU law.

It is not entirely clear to me to what extent this theme is open to First Choice. At one stage of this adjourned appeal, Mr Prosser prepared a skeleton argument in which he sought to argue that the ECJ judgment did not change or affect the Tribunal’s and Neuberger J’s decision as a matter of fact that the £50 in issue was not consideration under First Choice’s contract with the customer but only under a separate contract with the travel agent. However, by the time of the oral hearing this point had been abandoned. It had been recognised that the issue of the correct categorisation of the facts for the purposes of the Sixth Directive had been put to the European Court of Justice for their decision.

I will assume, nevertheless, that the point remains in some form as an issue of law, albeit controlled by the ECJ judgment. There are, however, two reasons why First Choice’s approach to such an issue is, in my judgment, mistaken or at any rate non-determinative of the current appeal. The first is that, even as a matter of English law, I am simply unsure that the matter is to be analysed quite in the way First Choice would suggest. This is because, in the example given, although the customer thinks he is buying the tour operator’s services at £950, the tour operator thinks he is selling those services at £1,000. It may be that, either because First Choice might be said to authorise the selling at a discount on terms that the travel agent makes up the difference himself (a case of actual authority), or because First Choice is bound by the travel agent’s usual authority (another case of actual authority), or because First Choice is bound by the travel agent’s apparent authority (a case of apparent authority), the contract between First Choice and the customer is a contract at £950. Or it may possibly be that the right analysis is that the contract is a more complicated tri-partite arrangement, whereby First Choice is prepared to supply the holiday only on terms that it will receive £1,000, leaving it to its agent to make up any discount allowed to the customer. That, at any rate is what the paper-work suggests, for First Choice invoiced only at £1,000 and not separately to the customer at £950 and to the travel agent at £50. That, in a sense, is the best evidence of how the matter was regarded from First Choice’s point of view.

However, and this is the second point, I do not think that the domestic contractual analysis is what ultimately matters. The contractual analysis may well differ from member state to member state, whereas the purpose of the Sixth Directive is to ensure, as far as possible, that provision of the same services should be taxed in the same way throughout the community. That is demonstrated by the fact that the ECJ judgment in this case categorises the matter in accordance with the purposes and principles applicable to the directive and in no way by reference to the law of contract or agency. Since the question of categorisation was itself referred to the European Court of Justice (under question 1, see para 18 above), it seems to me that it is not open to First Choice to argue the Marleasing question of interpretation by reference to a different categorisation dependent on a different (and domestic) analysis.

I refer to para 33 above. The ECJ judgment proceeds on the basis that, for the purposes of the Sixth Directive, the question is how the £50 is to be viewed as a matter of “consideration”. Is it part of “the consideration” for the purposes of article 11A(1)(a)? Provided the link is a direct one, the fact that part of the consideration has been or is to be obtained from a third party, does not mean that it is not part of the consideration. For these purposes, the evidence of the invoice is a critical matter – see article 22(3). There is no contractual analysis. It may be that article 26(2) refers to “the total amount to be paid by the traveller”, but the purely linguistic interpretation of those words all by themselves is not determinative, for they have to be construed against the background of the directive as a whole. Viewed against that background, the words “to be paid by the traveller” are less important (for they are within an exception) than the words in article 11A(1)(a) “to be obtained by the supplier”. Indeed, it may be said that “the total amount to be paid by the traveller” is a gloss, or shortened form of the underlying and basic rule written in terms of “everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies”. That in effect was what the European Court of Justice decided.

Any payment for services can be looked at both from the point of view of the seller or provider and from the point of view of the customer or receiver. They are essentially two sides of the same coin, but in peculiar circumstances such as those which affect this case, it may be important to know whether to look at the problem from the one side or the other. Ultimately the European Court of Justice decided that the former was more important than the latter, and that the wording that stressed the former took precedence over the wording which appeared to refer to the latter. Seeing that it is the seller or supplier who renders the invoice, that is entirely understandable.

I have just said that in the context of the Sixth Directive the words “paid by the traveller” were considered by the European Court of Justice to be themselves controlled by the longer and more fundamental expression found in article 11A(1)(a). Exactly the same process of interpretation arises on the language of the domestic legislation. The VAT leaflet may appear in places, emphasised by Mr Prosser, to be written from the point of view of the customer, but that is subject to interpretation of the legislation as a whole. In truth, even taking the leaflet by itself, First Choice’s point is an equivocal one. The leaflet talks about “your selling price”. There are certain matters, however, which you are expressly told not to include in such a price, such as group/child discounts, insurance payments, forfeited deposits and cancellation fees, and compensation. Subject to these detailed provisions the leaflet defines “your selling price” as “your total charge to your customers”. It is true that the word “customers” may reflect one end of the bargain, but that is balanced within the phrase itself by the words “your total charge”. That is redolent of the other end of the seller/customer relationship: “your charge” is focusing on what you charge, rather than what the customer pays - even if in general the two ought to be the same.

Turning to the domestic legislation as a whole, I consider that it is appropriate to interpret the leaflet against the background of that legislation and its purposes in just the same way as the European Court of Justice said was to be done with the Sixth Directive. Thus, I note that section 53(2)(b) of the VAT Act 1994 refers to “the value of that supply” and “sums paid or payable to…the tour operator”; and that article 7 of the 1987 Order refers to “the value of a designated travel service” and to “sums paid and payable to…the tour operator”. All those phrases seem to me to emphasise what the tour operator provides and receives by way of return, rather than what the customer pays.

For these reasons I consider that, adopting the same purposive construction to this legislation as the European Court of Justice applied to the Sixth Directive, and with the added advantage of the ruling of that Court and, still further, in the light of the Marleasing obligation to interpret domestic legislation, so far as possible, in line with EU legislation, it is possible to arrive at the conclusion that the words of the VAT leaflet are to be construed by reference to the “charge” of £1,000, rather than the sum paid by the traveller himself of £950. Alternatively, and in effect, the phrase “your total charge to your customers” can be interpreted as meaning, by implication, “your total charge to be paid by or for the account of your customer”.

This is a very broad theme. It is, as it seems to me, a matter of real concern that, both in the European Court of Justice and in our domestic courts, for somewhat different reasons, in the former case for the sake of giving to community-wide directives the ability to fulfil their purposes, in the latter case for the sake of fulfilling this country’s obligation to meet its community commitments, the language of directives and of the domestic legislation which re-enacts them may in theory be stretched quite far. In this case the European Court of Justice has itself said (at para 28) that the words “to be paid by the traveller” found in article 26(2) “cannot be interpreted literally”. There is also force in Mr Prosser’s submission that reasons for pushing at the limits of interpretation of domestic statutes which might otherwise fall to be incompatible with the ECHR (a form of interpretation which is in any event directly enjoined on our courts by section 3 of the Human Rights Act 1998) are not replicated in the case of taxation statutes, even those emanating from EU legislation.

However, in the present case, the interpretation of the VAT leaflet has to be performed not only in the context of the Sixth Directive and the Marleasing principle of our domestic jurisprudence, but also pursuant to a specific reference to the European Court of Justice relating to the very issue (at any rate as it arises under the Sixth Directive) which arises on this appeal. First Choice was a party to the reference to the European Court of Justice and was there able to raise, if it wished, the relevance of the principle of legal certainty and in that connection cases of ECJ jurisprudence such as EC Commission v. Netherlands and EC Commission v. France. In any event, particularly in the context of community-wide taxation statutes, a purposive rather than over-literal approach to the problem of interpretation is not unfamiliar: see Lord Oliver in Litster at 559E (cited at para 23 above). In effect, the European Court of Justice has ruled that the interpretation of article 26(2) in the overall scheme of the Sixth Directive is quite certain enough not to require the principle of legal certainty to demand another conclusion.

Moreover, I agree with Mr Sales’ submission that once the proper construction of article 26(2) has been authoritatively determined by the European Court of Justice, the obligation to produce, if possible, an interpretation of the domestic legislation which complies with the relevant provision of EU legislation applies with its full force as an aspect and consequence of the general obligation to comply with binding obligations imposed on member states under article 10 (ex 5) of the EU Treaty. Thus in Greenalls Management, if the point in that case, which turned on pure domestic law not derived from EU law, had turned on a different aspect of the legislation, which was covered by an EU directive and an ECJ ruling, the Marleasing rather than the domestic approach would have been followed (see Greenalls Management at paras 39/42). In the event, the interpretation of the domestic legislation in the instant appeal has been able to follow a path of reasoning, on that legislation’s own wording, which is very similar to that applied by the European Court of Justice.

Finally, in connection with Mr Prosser’s submission that the VAT leaflet was designed to be read and applied by businessmen: this is true, but it nevertheless has ultimately to be read in the context of the domestic legislation, and indeed the Sixth Directive, as a whole. In any event, the submission comes somewhat hollowly from First Choice, who after all had structured its VAT payments in accordance with a view of its liabilities which it now seeks to say, through its claim for repayment, was mistaken.

For these reasons, I would allow this appeal.

I agree.

I also agree.