The case concerns the input VAT recovery on services provided by PwC and paid for by Airtours Holiday Transport Ltd (Airtours). Airtours faced financial difficulties and it wanted to refinance and restructure its business. To help satisfy its existing lenders that the plans were viable, it was agreed that a report would be produced by PwC. The engagement letter was addressed to the lenders, referred to in the Judgment as the ‘engaging institutions’. The letter provided that Airtours would pay PwC’s fees. The taxpayer sought to recover the VAT on the fees but HMRC was of the view that the taxpayer was not entitled to deduct the input tax claimed, on the basis that the services were supplied to the banks. The Supreme Court has concluded that Airtours was not entitled to input tax recovery by a majority of three to two.
Lord Neuberger was the lead Supreme Court Judge and noted the issue was whether the supply of the services was to Airtours. In answering this, he considered two questions.
Was there a contractual obligation to supply services to Airtours?
Lord Neuberger concluded that PwC’s commitment to provide services was to the engaging institutions and not Airtours. This was supported by the fact that the engagement letter was not addressed to Airtours, the reports were for the sole use of the institutions and that PwC’s duty of care was to the institutions and specifically excluded any other party. He noted that Airtours did countersign the letter, but this was only in order to be bound by certain provisions such as the payment of the fees.
Even if there was not a contractual requirement to provide the services to Airtours, were the services still supplied to Airtours?
The taxpayer argued that given the substantial commercial interest it had in the services and the fact that it paid for the services, this meant that the services were supplied to Airtours and the institutions. The taxpayer used Lord Millet’s statement in Redrow Group Plc House of Lords decision  (Redrow) to support its case. However, Lord Neuberger observed that this has to be read in the light of later cases, which have clarified that that statement should be interpreted consistently with the established approach of focusing on economic realities as the fundamental criterion for the application of VAT. He added that subsequent domestic and Court of Justice of the European Union (CJEU) Judgments have made it clear that where a person pays for services which he is not entitled to receive under the terms of the contractual document, there is no right to input tax unless the documentation does not reflect economic reality. Applying this test to the current situation Lord Neuberger was of the view that the contract did reflect the economic reality and was not in any way an artificial arrangement. He noted that Airtours did benefit from the contract, but the benefit was not so much from the services by PwC, but the enhanced possibility of obtaining funding from the Institutions for its restructuring.
Two Lords disagreed. They broadly agreed with the dissenting judgment at the Court of Appeal. There, Lady Justice Gloster, in applying Redrow, considered that the contract involved two supplies, one made to Airtours and one made to the banks. However, the taxpayer’s appeal was dismissed by a majority of three to two. To access the Supreme Court Judgment click here, and to read the press release click here.
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