Air France-KLM stopped paying VAT in the sale of its own tickets in 1999. Its subsidiary, now known as Hop! Brit Air operated on a franchise basis and was paid an annual flat-rate sum of 2% of annual turnover, including VAT, from the routes it operated as compensation for unused tickets. Brit Air did not pay VAT on that sum.
The CJEU, Europe's highest court, said that VAT is payable where the sum paid by the customer is directly linked to a service, and where that service is performed. The physical presence of the passenger does not matter, it said, because the passenger still had the right to benefit from the service even if he or she did not exercise that right.
Likewise, VAT is also payable when a third party, such as KLM, sells the ticket for another airline in a franchise agreement, and pays that airline a lump sum to cover tickets that have been issued but are no longer valid, the CJEU said.