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HMRC internal manual

VAT Transport

Zero-rating of passenger transport: Cruises: Business Brief 14/96 on the VAT treatment of cruises


This Business Brief explains the implications of a recent High Court decisions on the VAT treatment of holiday cruises and a decision by a VAT Tribunal on the Vat treatment of river cruises providing catering and entertainment.

Holiday Cruises

Business Brief 27/95 contained details of the VAT Tribunal’s decision of 14 July 1995 about treatment of holiday cruises and agents’ supplies in the case of Peninsular and Oriental Steam Navigation Co Ltd (LON/94/1146A). The High Court upheld that decisions (ref CO/2473/95) and Customs now accept that a holiday cruise of a kind provided by P&O may be treated as a single supply of passenger transport, and zero-rated (subject to the normal conditions) to the extent that it takes place within the UK. Therefore, the making of arrangements for the supply of such a cruise is also zero-rated.

River Cruise

A recent VAT Tribunal considered the VAT treatment of certain river cruises used for various functions including business entertainment, fashion shows and wedding receptions in the case of Virgin Atlantic Airways Ltd (LON/94/1530A). The Tribunal decided that such cruises were mixed supplies consisting of zero-rated passenger transport and standard-rated catering.

Taken together, the two cases demonstrate the importance of looking closely at the facts of each case, to determine whether there is a single supply or mixed supplies, and the appropriate VAT rates.

Who is affected by these decisions?

These decisions affect the cruise operators whether supplying international and costal holiday cruises or cruises on rivers and canals or other inland waterways, including disco, dinner, wedding reception and similar entertainment cruises. In all cases, the vessel must be designed or adapted to carry 12 or more passengers, including crew, otherwise any supply in the UK will be automatically standard-rated. The decisions are also relevant to businesses making arrangements for such supplies. However, they do not affect cruises bought in and re-supplied under the Tour Operators Margin Scheme.

Practical effects

For VAT liability purposes, a cruise may be treated as a single or multiple supply depending on the facts of the case. Each transaction should be examined objectively and as a matter of common-sense. The following principles should generally be applied.

Single zero-rated supplies. You will be making a single zero-rated supply of passenger transport when: the essential nature of the supply is passenger transport and the normal conditions for the relief are met; all the elements of the cruise are integral to the main supply and it would be neither realistic nor practicable to separate them; and the cruise is held out for sale at a single price with no specific charges or discounts for particular services taken or not taken up.

Mixed supplies. Separate supplies would normally arise when different elements of the cruise are the subject of separate negotiation and customer choice, separately identifiable obligations on the supplier, and separate charges; separate supplies are not integral to the main supply and could be omitted; and, it must be practicable, reasonable and realistic to separate the elements of the cruise.

Single standard-rated supplies. When a cruise contains only a minor transport element which is incidental to a standard-rated supply, you will be regarded as making a single standard-rated supply.

Making arrangements. The making of arrangements for the above supplies will be determined by the liability of the supply being arranged. The making of arrangements for a supply of zero-rated passenger transport may itself be zero-rated whereas the making of arrangements for a standard-rated supply will be standard-rated. If you make arrangements for both zero-rated and standard-rated supplies a reasonable apportionment will be accepted.

When any element of a trip are bought in from a third party and re-supplied to travellers, the provisions of the Tour Operators’ Margin Scheme may apply (see Notice 709/5 Tour operators’ margin scheme).