The issue was the apportionment of the Tour Operators’ Margin Scheme (TOMS) price between standard-rated in-house supplies and bought-in zero-rated transport.

This case had been litigated since 1992. The tribunal had found that the appellants were not tour operators (No. 13,009; [1996] BVC 2,159). On appeal by the commissioners, the High Court referred the matter to the European Court of Justice, but the ruling by the court did not resolve the dispute. However, in the European Court's findings, the appellants accepted that they were covered by TOMS, the transport provided not being purely ancillary. Subsequently, the European Court ruled in MyTravel Group plc (formerly Airtours plc) v R & C Commrs (Case-291/03), which was similarly concerned with art. 26 of the sixth directive as regards the apportionment by a tour operator of inclusive prices covering both in-house and bought-in supplies. The appellants, in the light of this judgment, made further submissions, since it appeared from that case that UK legislation and, in particular, the TOMS Notice 709/5, did not correctly implement art. 26. The appellants submitted that, when the European Court considered art. 26 in their case, the words of the court's reply were not prescriptive, but gave the option to the tour operator of apportioning using market value. The commissioners argued that the effect of the court's findings was that the option of departing from the cost basis was available only when it was both simpler and not distortive.

The tribunal decided that the court's decision was that art. 26 authorised member states to require cost apportionment only where it was not possible to determine market value. This view was supported by the finding of the European Court in My Travel Group plc that the in-house element must be based on the market value of corresponding in-house services where that value can be established, unless the tour operator proves that a cost apportionment accurately reflects the actual structure of the package.

The next issue for the tribunal was whether, in prescribing the compulsory use of the cost method when apportioning part of the package consideration to the in-house supply, Notice 709/5/1988 was ultra vires the powers conferred on the commissioners by art. 7 of the Value Added Tax (Tour Operators) Order 1987 (SI 1987/1806).

The commissioners submitted that Notice 709/5 was within art. 7 of the Order without the need to refer to art. 26. The appellants had made a mixed supply for a single consideration so that apportionment was necessary, and the consideration could only be properly apportioned using market value if art. 26, as interpreted by the European Court of Justice, permitted it. The court had, in fact, held that a unit of reference was necessary to identify the consideration for the in-house services and had authorised a requirement for a cost-based apportionment in the generality of cases in order to determine the in-house element. Accordingly, argued the commissioners, art. 7 of the Order should be interpreted consistently with European law as permitting them to specify the method of valuing in-house services.

The appellant maintained that there was nothing in the court's ruling that stopped apportionment using market value. In the appellant's view, the cost basis of apportionment in the TOMS notice, with different costs for in-house and bought-in supplies, was not rational since there should be the same basis for both elements. Whilst the UK may have been authorised to use a cost basis of apportionment, it was not required to do so by art. 26. This basis should be used only where use of a market-value basis was not possible. The tribunal allowed the taxpayers’ appeal.

1. In view of the interpretation of art. 26 by the European Court of Justice, the UK was not entitled to require tour operators to apportion package prices between in-house and bought-in supplies on a cost basis. Such basis may only be required or used where the market value of in-house supplies was not ascertainable and where a cost apportionment accurately reflected the structure of the package.
2. In requiring a cost apportionment in the TOMS notice, the commissioners had failed to comply with the directive and had overstepped their powers under domestic law.
3. There was no challenge to the validity of the appellants’ returns based on market-value apportionment other than on the ground that the commissioners required the returns to be based on a cost apportionment. Since such requirement was invalid, the returns were correct.
4. Even if the commissioners had been entitled to require a cost apportionment, a substantial reduction in their assessments would have been necessary under a correct interpretation of the TOMS notice. No.19,719