The document summarizes three indirect tax cases: 1) The Court of Justice ruled that airlines must pay VAT on fares retained from passengers who do not board flights ("no-shows"), as the fares are consideration for the transport contract and not a compensation payment. 2) The First-tier Tribunal ruled that motor dealers' demonstrator cars are not capital goods for VAT purposes, meaning the value of their sales must be included in partial exemption calculations, potentially reducing dealers' historic VAT refund claims. 3) The Upper Tribunal ruled that bingo operators do not owe bingo duty on fees charged for electronic bingo devices, as the fees are for device rental rather than participation in bingo games.

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ITU
Summary
Welcome to the 1st edition of our
Indirect Tax Update for 2016.
Happy new year to all.
The Court of Justice judgment in
Air France / KLM is our lead
this week. The case considers
whether fares retained by the
airline when a passenger does not
board a flight are subject to VAT
or are outside the scope of VAT
being compensatory in nature.
In Cleckheaton Holdings Ltd, the
First-tier Tribunal has issued its
decision in respect of whether
the sale of demonstrator cars by
motor dealers are supplies of
'capital' goods. The outcome
affects partial exemption
calculations.
Finally, the Upper Tribunal has
issued its decision in the Carlton
Clubs case relating to whether
Bingo Duty is due on the fees
charged to customers for the hire
of a hand-held electronic device
which allows the customer to
play bingo.
13 January 2016
Air France / KLM – Court of Justice
The Court of Justice dealt a blow to Air France / KLM just before Christmas when it
issued a judgment in relation to the VAT liability of passenger 'no shows' (where a
passenger fails to board a flight despite having purchased a ticket). Domestic flights
within France are liable to VAT.
Following earlier case law of the Court of Justice relating to 'no-shows' at hotels, Air
France argued that, in a passenger situation, where the passenger has paid but fails to
board the flight, retention of the ticket price was not consideration for a supply of
passenger transport but was compensatory in nature and, thus, was outside the scope
of VAT. Not surprisingly, the French tax authority argued that the fare retained by the
airline was not compensation for any damage but was consideration and VAT was due.
The French courts decided to refer the issue to the Court of Justice.
In its judgment, the Court of Justice held that a supply of services is effected ‘for
consideration’ only if there is a legal relationship between the provider of the service
and the recipient pursuant to which there is reciprocal performance. In other words,
the remuneration received by the provider of the service constitutes the actual
consideration for the service supplied to the recipient. The consideration for the price
paid when the ticket was purchased consists of the passenger’s right to benefit from
the performance of obligations arising from the transport contract, regardless of
whether the passenger exercises that right, since the airline company fulfils the service
by enabling the passenger to benefit from those services. As a consequence, the airline
cannot claim that the price paid by the ‘no-show’ passenger constitutes a contractual
indemnity which is not subject to VAT.
The Court concluded that the VAT Directive must be interpreted as meaning that the
issue by an airline company of tickets is subject to VAT where the tickets issued have
not been used by passengers and the passengers are unable to obtain a refund for those
tickets.
Comment – The court in this case distinguished its earlier judgment in the hotel
deposits case. Essentially, this was on the basis that the full consideration was paid by
the passenger at the time of booking, was non-refundable and the airline had the
opportunity to re-sell the seat to a different passenger. There was no contractual
indemnity and VAT was due. Passenger transport in the UK is generally zero-rated so
this judgment will have little impact on UK airlines.
Issue01/2016
VAT due on passenger 'no-shows'!
Indirect Tax Update

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GRT100456
First-tier Tax Tribunal
Cleckheaton Holdings Ltd
The First-tier Tribunal has issued its decision in this case which concerned, as a preliminary issue,
whether demonstrator vehicles acquired by motor dealers from manufacturers should be regarded for
VAT purposes as 'capital' goods for VAT purposes. The issue is important in the context of historic
VAT claims by motor dealers for VAT overpaid on the sale of demonstrators. Cleckheaton Holdings
Ltd is a lead case behind which many motor dealers are stayed.
In simple terms, the reason that the issue is important is because the sale of demonstrator cars is
exempt from VAT. However, for partial exemption purposes, VAT law states that the sale of capital
goods is to be left out of account. As a consequence, if the Tribunal finds that the demonstrator cars
are 'capital' goods, the value of their sale can be excluded from the partial exemption formula and, as
a result, more VAT on overheads can be reclaimed. By contrast, if the Tribunal rules that
demonstrator cars are not 'capital' goods, the value must be included in the partial exemption formula
and the amount of input VAT claimable as a result will fall and this is likely to lead to a negative
impact on the overall value of the historic claim. The Tribunal concluded that demonstrator cars are
not 'capital' goods. The purchase and sale of a demonstrator is just as much a part of the trading
activity of the Appellant as the purchase and sale of new and used cars and, thus, it would be
distortive to exclude such turnover from the partial exemption calculation. The second ground of
appeal – whether HMRC's methodology is fair and reasonable – will be heard at a later hearing.
Comment
This is a blow to motor
dealers as the value of
their historic VAT
claims may be reduced
to take account of any
additional input tax
disallowance. Given that
this is a lead case, behind
which a large number of
claims are stayed, it is
possible that the matter
will be appealed further.
It is possible that the
issue may even need to
be referred to the Court
of Justice for a definitive
ruling on what
constitutes capital goods
in the context of
demonstrator cars.Upper Tribunal
Comment
Entitlement to
participate in a game of
bingo is obtained by
the purchase of a ticket
for that game, and it
matters not whether
the ticket is purchased
in the form of paper or
in the form of data
loaded on to an EHD.
This is a sensible and
pragmatic judgment. As
a result of this decision,
operators of bingo
clubs will be entitled to
a refund of any
overpaid Bingo Duty
and should submit
claims if not already
done so.
Eyes down – look in! – Bingo Duty not due on EHD's
The Commissioners for Revenue & Customs considered in this case that Bingo Duty was due on
income received by the taxpayer (Carlton Clubs Ltd) for the supply of EHD's – a device used by
bingo players which allows them to participate in the game of bingo electronically rather than
through the medium of a paper ticket. The question to be determined in the case was whether the
charge for the hire of an EHD is a payment 'in respect of entitlement to participate in bingo' bringing
it within the scope of Bingo Duty.
Carlton Clubs argued that the separate participation fee was the consideration for the entitlement to
participate. This fee was payable by all players irrespective of the means of playing (ie paper ticket or
EHD). The charge for the hire of the EHD was consideration for the hire of the device and not a
participation fee.
The Upper Tribunal agreed with Carlton Clubs. The Judge considered that the charge falls clearly
outside the scope of Bingo Duty. The fact that use of the EHD is essential in order for a customer to
play electronically does not lead to the conclusion that the charge for hire is a payment for
entitlement or opportunity to play. Hire of the EHD of itself confers no such entitlement or
opportunity, any more than does admission to the premises or the purchase of a dabber or pen.
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556