United Kingdom VAT & Duties Tribunals Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Atlantic Holidays Ltd v Revenue & Customs [2007] UKVAT V20011 (08 February 2007)
URL: http://www.bailii.org/uk/cases/UKVAT/2007/V20011.html
Cite as: [2007] UKVAT V20011

[New search] [Printable RTF version] [Help]

Atlantic Holidays Ltd v Revenue & Customs [2007] UKVAT V20011 (08 February 2007)

20011

TOUR OPERATORS – calculation of margin – whether charges for credit card transactions should be included in calculation – no – assessment in respect of underdeclared output tax confirmed – VAT (Tour Operators) Order 1987 S1 1987/1806 arts 3(1) and (7); Article 26 EC Sixth Council Directive 77/388/EEC.

LONDON TRIBUNAL CENTRE

ATLANTIC HOLIDAYS LIMITED	Appellant
and
THE COMMISSIONERS OF HER MAJESTY'S REVENUE AND CUSTOMS	Respondents

Tribunal: Rodney P Huggins FCIArb (Chairman)

John Brown CBE FCA ATII

Sitting in public in Birmingham on 23 January 2007

Mr Julian Millinchamp, VAT Manager, for the Appellant.

Mr Paul Key, Counsel, for the Respondents.

... CROWN COPYRIGHT 2007

5

10

15

20

25

30

35

40

45

50 DECISION

The appeal

1. Atlantic Holidays Limited (the Appellant) appeals against an assessment dated 25 November 2005 in the sum of £14,780 and interest of £1,513 making a total of £16,293. The assessment relating to accounting periods ending on 31 March 2003, 31 March 2004 and 31 March 2005. It was raised because the Commissioners were of the view that, when making its annual calculation and adjustment under the Tour Operator's Margin Scheme (TOMS) the Appellant sought to reduce its taxable margin by deducting surcharges which it paid to financial institutions on credit card transactions involving it customers.

The issue

2. The Appellant is a tour operator. It therefore has to apply under TOMS. The Appellant incurs mainly 1.51% charges on credit card transactions. (referred to as "surcharges" during the proceedings) The charges are payable by the Appellant to the financial institutions who provide ultimate cash payments to the Appellant. In turn, the Appellant levies 2% surcharge on its customers who pay by credit card.

3. The principal issue before the tribunal is whether this surcharge payable by the Appellant to the financial institutions is part of the purchase price of the designated travel services supplied by the Appellant within the end-of-year calculation under paragraph 8 of Public Notice 709/5/05 and its predecessor.

4. The Appellant argued at the hearing that the charge made by the credit card company for processing a customer's payment by this method should be regarded either as part of the purchase price of margin scheme supplies or as a direct cost for that purpose.

5. It was the Commissioners' case that (i) the Appellant was making a supply only of "designated travel services" and (ii) the surcharge payable by the Appellant to the financial institutions was not a part of these "designated travel services". Therefore, they contended the Appellant had underdeclared its output tax for the relevant periods on an annual basis.

The evidence

6. An agreed bundle of evidence was produced by the parties who did not call any witnesses.

The facts

7. From the evidence before us, we find the following facts.

8. The trading activity of the Appellant is the sale of holidays to the general

5

10

15

20

25

30

35

40

45

50

public. It was registered with VAT with effect from 2 August 1991. Its VAT returns were prepared under TOMS which by law the Appellant is required to do.

9. The Appellant organises holidays principally in the Algarve, Portugal, the Azores and Madeira. In 2001 it had a turnover of £13.2 millions.

10. Most of the Appellant's customers paid for their holidays by credit cards. Mastercard and VISA cards were normally used for this purpose and Barclaycard Merchant Services of Northampton (Barclaycard) processed the transactions charging the Appellant various amounts for this service. The majority of customers used personal credit cards for which the charge was 1.51%. Bookings involving corporate and business clients attracted a 1.775% surcharge.

11. Where a credit card was used, the Appellant would add a 2% levy to each customer's booking invoice.

12. This arrangement was in force during the years, 2003/2004/2005 and Barclaycard Merchant Services would send accounts to the Appellant monthly; included would be other charges such as terminal rentals.

13. On 7 November, Mr John Booth an officer of HM Revenue and Customs (Customs) carried out a routine audit visit to the Appellant's premises at 25 Brunswick Road, Gloucester. He examined the year end TOMS calculations for the years 2003, 2004 and 2005. He was satisfied that all sales were put through TOMS.

14. Mr Booth noticed that there had been an increase in VAT net payments over the three years and was told that it was due mainly to increased commission charges or there had been an increase in sales due to an internet campaign. One of the specific areas discovered by Mr Booth related to the Appellant charging customers the sum of 2% in respect of credit card transactions when this method of settlement was chosen. It was apparent that the Appellant had included the 1.51% or 1.775% charged by Barclaycard in its TOMS calculations of making in-house supplies.

15. As a result of this disclosure, Mr Booth took advice from the appropriate Customs expert and as a result recalculated the figures for the three years in question. This entailed converting the figures under the existing statutory rules which had changed from 1996. The Appellant had been using the pre-1996 rules for calculations.

16. On 9 November 2005, Mr Booth wrote to the Appellant stating that the credit card surcharges were a general overhead and should not have been included in the TOMS calculations as a direct cost of making an in-house supply and should be included in the full selling price. The officer attached revised calculations showing an additional amount as being due for each of

5

10

15

20

25

30

35

40

45

50

the three years examined. The Appellant was notified that a notice of assessment would be issued in respect of the additional amounts.

17. The Appellants' Accountants, Hazelwoods LLP of Cheltenham replied in a letter of 18 November 2005. They disputed the basis of assessment stating :

"You state that credit card charges should be treated as general
overheads and not included in costs for the purpose of the margin
scheme calculations, even thought the 2% surcharge for clients paying
by credit card should be included n the selling price. Presumably the
authority for this is derived from Notice 709/5/04 which includes
'financial services including bank and foreign exchange charges as
examples of the items to be included amongst indirect costs'.

We have to observe that this appears to be inequitable, particularly given the guidance which appears in Volume V1-23, Chapter 12, Section 56(g) of your Guidance Manuals…"

Hazelwoods then set out the relevant guidance note.

18. A Notice of Assessment was issued by Customs on 25 November 2005 in the sum of £16,293.52 inclusive of interest.

19. Mr Booth replied to the letter from Hazelwoods on 17 December 2005. He said that he had consulted with Customs internal experts who dealt with tour operators and travel agents and they confirmed his understanding of the correct way to deal with credit card charges. He added :

"I think we are all agreed that the 2% surcharge for clients paying by
credit cards should be included in the selling price however it is the
treatment of the cost to your clients which you are questioning.

Customs consider this to be an indirect cost in much the same way as
brochures, advertising or any other overhead. To be included as a direct
cost it has to be bought in from another person and resupplied without
material alteration or further processing for the direct benefit of the
traveller. It is our interpretation that the charges by the credit card
company to Atlantic Holidays Ltd are a cost of finance and are not for
the direct benefit of the traveller."

20. Hazelwoods responded on 6 January 2006 asking for a reconsideration of the assessment by the Bristol independent team. They re-iterated their earlier arguments and said that when studying the relevant definition "it seems clear to us that the charge levied by the credit card company to our client for facilitating the payment by one of our client's customers is clearly a cost which arises as a direct result of providing a holiday package to that customer, and is therefore correctly regarded as a direct cost, which cannot be viewed in the same way as costs involved in the general financing of the business."

5

10

15

20

25

30

35

40

45

50

21. On 10 February 2006 the Commissioners gave the result of their reconsideration. After setting out their reasons, Mr L Bingham a Higher Officer of Customs, confirmed that it remained the view of the Commissioners that the credit card surcharges should be treated as an indirect cost, and the assessment maintained.

22. The notice of the appeal was lodged on 8 March 2006 with the following ground of appeal as set out in capital letters:

"WE BELIEVE THAT THE CHARGE

About BAILII - FAQ - Copyright Policy - Disclaimers - Privacy Policy amended on 25/11/2010

5 10 15 20 25 30 35 40 45 50	DECISION The appeal 1. Atlantic Holidays Limited (the Appellant) appeals against an assessment dated 25 November 2005 in the sum of £14,780 and interest of £1,513 making a total of £16,293. The assessment relating to accounting periods ending on 31 March 2003, 31 March 2004 and 31 March 2005. It was raised because the Commissioners were of the view that, when making its annual calculation and adjustment under the Tour Operator's Margin Scheme (TOMS) the Appellant sought to reduce its taxable margin by deducting surcharges which it paid to financial institutions on credit card transactions involving it customers. The issue 2. The Appellant is a tour operator. It therefore has to apply under TOMS. The Appellant incurs mainly 1.51% charges on credit card transactions. (referred to as "surcharges" during the proceedings) The charges are payable by the Appellant to the financial institutions who provide ultimate cash payments to the Appellant. In turn, the Appellant levies 2% surcharge on its customers who pay by credit card. 3. The principal issue before the tribunal is whether this surcharge payable by the Appellant to the financial institutions is part of the purchase price of the designated travel services supplied by the Appellant within the end-of-year calculation under paragraph 8 of Public Notice 709/5/05 and its predecessor. 4. The Appellant argued at the hearing that the charge made by the credit card company for processing a customer's payment by this method should be regarded either as part of the purchase price of margin scheme supplies or as a direct cost for that purpose. 5. It was the Commissioners' case that (i) the Appellant was making a supply only of "designated travel services" and (ii) the surcharge payable by the Appellant to the financial institutions was not a part of these "designated travel services". Therefore, they contended the Appellant had underdeclared its output tax for the relevant periods on an annual basis. The evidence 6. An agreed bundle of evidence was produced by the parties who did not call any witnesses. The facts 7. From the evidence before us, we find the following facts. 8. The trading activity of the Appellant is the sale of holidays to the general
5 10 15 20 25 30 35 40 45 50	public. It was registered with VAT with effect from 2 August 1991. Its VAT returns were prepared under TOMS which by law the Appellant is required to do. 9. The Appellant organises holidays principally in the Algarve, Portugal, the Azores and Madeira. In 2001 it had a turnover of £13.2 millions. 10. Most of the Appellant's customers paid for their holidays by credit cards. Mastercard and VISA cards were normally used for this purpose and Barclaycard Merchant Services of Northampton (Barclaycard) processed the transactions charging the Appellant various amounts for this service. The majority of customers used personal credit cards for which the charge was 1.51%. Bookings involving corporate and business clients attracted a 1.775% surcharge. 11. Where a credit card was used, the Appellant would add a 2% levy to each customer's booking invoice. 12. This arrangement was in force during the years, 2003/2004/2005 and Barclaycard Merchant Services would send accounts to the Appellant monthly; included would be other charges such as terminal rentals. 13. On 7 November, Mr John Booth an officer of HM Revenue and Customs (Customs) carried out a routine audit visit to the Appellant's premises at 25 Brunswick Road, Gloucester. He examined the year end TOMS calculations for the years 2003, 2004 and 2005. He was satisfied that all sales were put through TOMS. 14. Mr Booth noticed that there had been an increase in VAT net payments over the three years and was told that it was due mainly to increased commission charges or there had been an increase in sales due to an internet campaign. One of the specific areas discovered by Mr Booth related to the Appellant charging customers the sum of 2% in respect of credit card transactions when this method of settlement was chosen. It was apparent that the Appellant had included the 1.51% or 1.775% charged by Barclaycard in its TOMS calculations of making in-house supplies. 15. As a result of this disclosure, Mr Booth took advice from the appropriate Customs expert and as a result recalculated the figures for the three years in question. This entailed converting the figures under the existing statutory rules which had changed from 1996. The Appellant had been using the pre-1996 rules for calculations. 16. On 9 November 2005, Mr Booth wrote to the Appellant stating that the credit card surcharges were a general overhead and should not have been included in the TOMS calculations as a direct cost of making an in-house supply and should be included in the full selling price. The officer attached revised calculations showing an additional amount as being due for each of
5 10 15 20 25 30 35 40 45 50	the three years examined. The Appellant was notified that a notice of assessment would be issued in respect of the additional amounts. 17. The Appellants' Accountants, Hazelwoods LLP of Cheltenham replied in a letter of 18 November 2005. They disputed the basis of assessment stating : "You state that credit card charges should be treated as general overheads and not included in costs for the purpose of the margin scheme calculations, even thought the 2% surcharge for clients paying by credit card should be included n the selling price. Presumably the authority for this is derived from Notice 709/5/04 which includes 'financial services including bank and foreign exchange charges as examples of the items to be included amongst indirect costs'. We have to observe that this appears to be inequitable, particularly given the guidance which appears in Volume V1-23, Chapter 12, Section 56(g) of your Guidance Manuals…" Hazelwoods then set out the relevant guidance note. 18. A Notice of Assessment was issued by Customs on 25 November 2005 in the sum of £16,293.52 inclusive of interest. 19. Mr Booth replied to the letter from Hazelwoods on 17 December 2005. He said that he had consulted with Customs internal experts who dealt with tour operators and travel agents and they confirmed his understanding of the correct way to deal with credit card charges. He added : "I think we are all agreed that the 2% surcharge for clients paying by credit cards should be included in the selling price however it is the treatment of the cost to your clients which you are questioning. Customs consider this to be an indirect cost in much the same way as brochures, advertising or any other overhead. To be included as a direct cost it has to be bought in from another person and resupplied without material alteration or further processing for the direct benefit of the traveller. It is our interpretation that the charges by the credit card company to Atlantic Holidays Ltd are a cost of finance and are not for the direct benefit of the traveller." 20. Hazelwoods responded on 6 January 2006 asking for a reconsideration of the assessment by the Bristol independent team. They re-iterated their earlier arguments and said that when studying the relevant definition "it seems clear to us that the charge levied by the credit card company to our client for facilitating the payment by one of our client's customers is clearly a cost which arises as a direct result of providing a holiday package to that customer, and is therefore correctly regarded as a direct cost, which cannot be viewed in the same way as costs involved in the general financing of the business."
5 10 15 20 25 30 35 40 45 50	21. On 10 February 2006 the Commissioners gave the result of their reconsideration. After setting out their reasons, Mr L Bingham a Higher Officer of Customs, confirmed that it remained the view of the Commissioners that the credit card surcharges should be treated as an indirect cost, and the assessment maintained. 22. The notice of the appeal was lodged on 8 March 2006 with the following ground of appeal as set out in capital letters: "WE BELIEVE THAT THE CHARGE