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No-show and VAT: to be or not to be a VATable transaction?

No-show and VAT: to be or not to be a VATable transaction?
16 Apr 2015

By applying the direct link requirement, a no-show could not be characterised as a VATable transaction. In some specific sectors, the local tax authorities still try to identify a specific service, and the ECJ should still settle the debate.

In the Société Thermale d'Eugenie-Les-Bains case, the ECJ was called upon to rule on the complex issue of how to handle VAT on deposits paid for hotel services and retained by the hotel in the event of cancellation by the client. In practice, such amounts could be classified as compensation outside the scope of VAT or as remuneration for a booking, subject to VAT.

The advocate general considered that the “deposits” paid by a customer to a hotel constituted remuneration for an identifiable booking service, providing a benefit to the customer (the guarantee of having a room) and generating costs for the hotel (client file, refraining from doing business with another client), and should be subject to VAT. 

In its judgement, the ECJ stressed that the payment of deposits was not a constituent element of a contract for accommodation, but rather an optional element within the parties’ freedom of contract. It therefore considered that the deposits received and retained by a hotel did not constitute consideration for the supply of an independent and identifiable service to a client, but rather flat-rate compensation for the loss suffered by the hotel as a result of the client’s cancellation.

Despite the seemingly clear case law, the French Conseil d'État referred a matter to the ECJ to rule on the question of whether the issuance of a ticket for air travel could be considered effective performance of the travel service and whether the amounts retained by an airline when the ticket holder did not use his or her plane ticket and the ticket then expired, should be subject to VAT.

According to the French Tax Authorities, an air travel service results from two contractual agreements.

The first of these agreements is a contract for travel in the form of an issued ticket by which the airline undertakes to transport the passenger on a specific itinerary during a specific period in exchange for full payment of the fare at the time the ticket is issued. 

The second contractual agreement is more surprising, since it is the booking contract by which the airline and the passenger determine by mutual agreement the date and flight on which the air travel will occur. However, the booking obligation, both for air travel and hotels, results from the contract for travel or the contract for accommodation and not from a separate contractual obligation.

In France, in our opinion, by applying the direct link requirement, when an issued ticket has not been used before it expires, no service is directly provided by the airline to a given beneficiary and there is no event triggering VAT.

Therefore, such amounts retained by the airline should be placed outside the scope of VAT. 

In the UK, taxpayers have made similar arguments about the VAT liability of cancellation charges.  The UK adopted the decision in the Société Thermale d'Eugenie-Les-Bains case, recognising that cancellation charges and retained deposits are outside the scope of VAT – except where a hotel guarantees a room will be kept available for a fixed period of time.

Another case on similar lines was heard by the UK Court of Appeal in 2014.  In Esporta Ltd, the taxpayer provided members with access to its gyms in return for monthly charges under a 12-month contract.  If the member failed to pay, the taxpayer prevented the member from accessing the gym and pursued the member for remaining payments due under the contract.  The taxpayer argued that VAT was not due on the remaining payments because no service was provided to the member.  However the Court of Appeal rejected this view, ruling that the payments received after the contract terms had been breached were not compensation or damages and that VAT was due.

The main factor that led to the Court of Appeal’s conclusion in Esporta Ltd was that the taxpayer agreed to provide services to the member, irrespective of whether the member attended the gym or breached the contract terms.  Any payments received by the taxpayer were directly and immediately linked to accessing the gym.  

In the frame of other transactions different than hotel bookings the Spanish Tax Authorities have been applying the criterion underlying in Société Thermale d'Eugenie-Les-Bains, for instance, to payments in advance made for the subsequent acquisition of immovable property where the acquisition has finally not taken place but the supplier retains the anticipated amount (VAT excluded) as indemnification.  We are not aware however of any express criterion in relation to air ticket bookings.

In Belgium a no-show fee paid by the customer to the supplier of the service is (only) to be considered as an indemnity outside the scope of Belgian VAT, to the extent the payment of an indemnity arises from the rectification of an error committed by the customer. 
In the new case referred to the ECJ, there is no real rectification of an error, but rather a clearly identifiable and upfront service (i.e. a travel service), which eventually seems not to be consumed by the customer without any other financial consequences or indemnities for the customer. 

In our view, the sale of the airplane ticket is to be considered as a single purpose voucher (SPV) whereby VAT already becomes due at the moment of the sale of the ticket, and remains due regardless whether the voucher is eventually redeemed. Another example of such SPV can e.g. be a cinema ticket you buy upfront. 

We are therefore uncertain that only the fact of non-consumption of a fully upfront clearly identifiable service will alter the qualification of the payment of the customer from the payment for a service subject to VAT into an indemnity outside the scope is VAT . 

In summary, taxable persons should keep in mind that when the payment in question has no connection with the services provided or the receipt of the services it does not constitute as the consideration relating to the commercial transaction. In 1982 the ECJ already ruled in the case of BAZ Bausystem AG, that such payment on the contrary “simply represents the reimbursement of expenses, that is to say compensation for the taxable person”. 

In the Netherlands, an outside scope of VAT treatment may very well be possible. According to Taxand Netherlands, taxable persons established in France, the UK, Belgium or elsewhere in the EU need to consider carefully whether a customer’s non-attendance means that no service has been provided to the customer, such that payments received are outside the scope of VAT. As the above has made clear, the outcome of a discussion in this field may be uncertain and difficult to predict. It also means that tax payers should not simply accept VAT assessments without considering their potential upside. 

Your Taxand contacts for further queries are:

Koen Dewilde
T. +32 3 238 92 91

Delphine Bouchet 
T. +33 1 70 38 88 33

Martijn Jaegers
T. +31 20 43 56 414

Carlos Gomez Barrero
T. +34 91 514 52 00

Taxand's Take

The criteria to determine whether or not a no show should be characterised as an indemnity outside the scope of VAT or as a VAT transaction are not clearly defined. As a consequence, the outcome of a discussion in this field may be uncertain and difficult to predict.

Tax payers should not simply accept VAT assessments without considering their potential upside.

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