ECJ finds VAT payable on unused flights

In a decision handed down just before Christmas, the European Court of Justice in Air France – KLM [2015] EUECJ C-250/14 found that Air France was liable to VAT on unused air transport tickets – also described as “no-shows”. The same issue was considered in Australia in 2012 where the High Court in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 found that GST was payable.

The Court approached the question on the basis a supply of services, such as air passenger transport, is subject to VAT where:

  • first, the sum paid by a passenger to an airline company, in the context of the legal relationship constituted by the transport contract, is directly linked with an identifiable service for which it constitutes the remuneration; and
  • secondly, that service is performed.

In respect of the first dot-point, the Court observed that it had previously found that the services provided in performance of obligations arising from a contract to transport passengers by air are the checking-in and the boarding of passengers, the on-board reception of those passengers at the place of take-off agreed in the transport contract, the departure of the aircraft at the scheduled time, the transport of the passengers and their luggage from the place of departure to the place of arrival, the care of passengers during the flight, and, finally, their disembarkation in conditions of safety at the place of landing and at the time scheduled in that contract.

In respect of the second dot-point, the Court observed that it was  possible to perform those services only if the passenger of the airline company turns up on the agreed date and at the agreed place of boarding, the customer’s right to performance of those services being given by the company until the time of boarding, according to the conditions set out in the contract to transport passengers concluded when the ticket was purchased.

Nevertheless, the Court found that the consideration for the ticket consisted 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 fulfilled the service by enabling the passenger to benefit from those services.

The finding of the Court is similar to that of the majority of the High Court in Qantas, where the taxable supply was identified as being “at least a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline”, with the fare being consideration for that supply. In the context of both decisions it did not matter whether the flight was actually taken by the passenger.

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