First Choice, the Sussex-based holiday giant, has won an important test case against Customs and Excise in the High Court.

A ruling by the court will mean a £20 million windfall to the country's holiday operators.

The court, in a case involving the Crawley firm which was advised by KPMG, has upheld a previous VAT tribunal ruling that package holiday discounts granted to customers by travel agents, often without the knowledge of the tour operator, can be deducted from the operator's turnover for VAT purposes.

Customs' position was VAT should be calculated according to the holiday price advertised in the brochure and that the actual price payable by the customer should be disregarded.

The court ruled against that view and Customs and Excise has now announced it intends to take the matter to the Court of Appeal.

Anant Suchak, director of VAT at KPMG's Crawley office, said: "This is a decisive judgement which should clear the way for tour operators to receive refunds for the VAT they have overpaid.

"Moreover, the ruling will not affect the VAT position of travel. Subject to the outcome of the appeal action by Customs and Excise, operators which have lodged retrospective refund claims should now be able to look forward to a repayment of the VAT involved."

The challenge to Customs' policy was mounted by First Choice Holidays with the support of rival tour operators Airtours, Thomas Cook and Thomson Travel.

Mr Suchak added: "Operators may need to agree a formula with Customs to determine the extent of discounts historically allowed by agents before any repayment is made.

"Going forward, operators will need to make changes to their accounting systems to ensure the final selling price payable by their customers is factored into their VAT calculations.

"Changes may also need to be made to the billing arrangements between operators and agents to reflect the revised VAT treatment of transactions."