THE European Court of Justice has finally thrown out
claims that tour operators are owed millions of pounds in overpaid VAT for
holidays discounted by agents.

Last week’s ruling brings to an end a five-year legal
battle by First Choice, which fought the case with the

support of rivals MyTravel, Thomas Cook and TUI on
behalf of the industry. A First Choice spokeswoman said the ruling was
“disappointing”.

Operators argued they were entitled to VAT refunds
under the rules of the much-criticised tour operators’ margin scheme, claiming
tax was due only on the price paid for a holiday by the consumer and not the
brochure price.

VAT director at accountancy giant Deloitte and Touche
David Bennett said the European Court had used a broad interpretation of UK law
to rule in favour of Customs and Excise.

“It seems only fair that VAT is due on what a customer
pays for a product,” he said.

“If an agent wants to give up all or part of their
commission to get a sale, why should VAT be due on the amount discounted?” he added.

Judges ruled that although UK law specifically refers
to VAT being charged only on the price paid for a holiday, any discount was
effectively being paid on their behalf by the agent and was liable to tax.

Ironically, a formula to
calculate the amount owed to each operator was in the process of being agreed
with Customs. Some claims dated back to 1993 and it is thought up to £50
million could have been repaid to the trade if First Choice had won the case.