VAT on no shows - airlines must account for VAT if customers do not show up at the airport

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Summary
The supply of 'domestic' passenger
transport within France is liable to
French TVA.
Based on earlier case law, Air
France / KLM considered that the
retention of a fare paid by a 'no-
show' passenger was compensation
for the loss of revenue. As such, the
airline argued that the income from
such retained fares was outside the
scope of VAT.
The French tax authority argued
that the fare was not compensation
and, as a result, was subject to
French VAT.
The CJEU has sided with the tax
authority and has ruled that the
amount retained is consideration for
the reciprocal performance of the
airline's contractual obligations and
is, thus, subject to VAT.
04 January 2016
Court of Justice (CJEU)
The CJEU has issued its judgment in a VAT case relating to whether or not VAT is due
in circumstances where passengers pay for flights but do not show up for a flight.
Air France / KLM contended that, in such circumstances, VAT was not due on the sale
of the ticket. Following an earlier judgment of the CJEU - which ruled that the
retention of deposits by a hotel in the case of 'no shows' was compensatory – (Société
thermale d’Eugénie-les-Bains - Case C-277/05), the airline argued that the income
retained from the ticket sale should be treated as compensation and not as
consideration for a supply of passenger transport. However, the French tax authority
considered that VAT was due and Air France / KLM appealed to the French Courts
which, in turn, referred the issues to the CJEU for a preliminary ruling.
In essence, the CJEU was asked to determine whether the issue of the ticket should be
regarded as the 'effective performance of air transport services' even in cases where the
passenger does not use the ticket.
According to settled case law, the Court considers that a supply of services is effected
for consideration only if there is a legal relationship between the supplier and the
customer which involves the reciprocal performance of contractual obligations. In this
case, the performance of the airline's obligations can only be performed if the passenger
actually shows up at the airport at the agreed date and time – the passenger's
contractual rights being guaranteed by the airline until the time of boarding. Crucially,
the court held that the payment of the ticket price by the passenger constitutes full
consideration for the passenger's right to benefit from the airline's contractual
obligations regardless of whether the passenger exercises that right. As such, the
consideration is subject to VAT and is not compensatory in nature.
Comment – a blow for the airlines – the CJEU distinguished the earlier hotel
deposits case on the basis that a passenger pays the full price at the time of
purchase. This was not a case where the fare retained by the airline could
properly be regarded as a contractual indemnity.
Air France / KLM – VAT on 'no-shows'
Case Alert
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