Airtours Holidays Transport Ltd v Revenue And Customs

For VAT input-tax purposes, payment for a service, a need for the work, or a consequential benefit does not by itself establish that the service was supplied to the payer. The court must identify the transaction objectively by reference to its economic realities, using the contract as the starting point. In a tripartite arrangement, payment may be third-party consideration for services supplied to another. The taxpayer must receive a distinct service or enforceable contractual right in reciprocal exchange for its payment. Here, the engagement supplied PwC’s services to the financing institutions. The appellant’s role was to pay and indemnify PwC, and it received no distinct service or right. The appeal was dismissed by the majority.

The appellant sought to deduct VAT charged by PwC for professional services supplied during a major financial restructuring. The First-tier Tribunal held that PwC had supplied services to the appellant and allowed the input-tax claim. The Upper Tribunal reversed that decision, holding that PwC supplied services to the financing institutions and that the appellant merely paid PwC’s fees.

The appeal concerned whether the Upper Tribunal had exceeded its jurisdiction by interfering with factual evaluation, and whether the arrangements involved a supply of services to the appellant or only third-party consideration. A further issue concerned possible apportionment of the VAT.

Majority decision. Lord Justice Moore-Bick and Lord Justice Vos dismissed the appeal. Lady Justice Gloster dissented.

1. Under section 24(1)(a) of the Value Added Tax Act 1994, the decisive question was whether VAT was charged on services supplied to the taxable person and used or to be used for its business. The inquiry is objective. The court must identify the nature of the transaction and its economic realities, while treating the contract as the proper starting point. Payment, subjective need, or consequential benefit is insufficient without reciprocal performance.
2. The principles in Redrow [1999] 1 WLR 408 had to be applied realistically and in the light of LMUK (SC) [2013] UKSC 15, LMUK (CJEU) Joined Cases C-53/09 and C-55/09, and Newey Case C-653/11. In a tripartite arrangement, a payer may receive a distinct service or a contractual right to require services to be rendered to a third party. But payment may instead be third-party consideration where the payer cannot realistically be regarded as the recipient.
3. The majority concluded that the engagement letters supplied PwC’s defined services to the financing institutions. The appellant’s contractual role was to pay PwC’s fees and indemnify it. It had no contractual right requiring PwC to provide the services to it. The copy reports and the commercial benefits flowing from the restructuring did not constitute a distinct supply to the appellant. The Upper Tribunal therefore reached a sustainable conclusion that the appellant had no input-tax entitlement.
4. The Upper Tribunal was entitled to remake the decision because it had identified material errors of law in the First-tier Tribunal’s construction and application of the statutory test. Its powers under sections 12(2)(b)(ii) and 12(4)(b) of the Tribunals, Courts and Enforcement Act 2007 permitted it to set aside the decision and make appropriate findings. An appeal to the Court of Appeal lay only on a point of law under section 13(1).
5. No question of apportionment arose once the appellant was found not to have received the relevant supply. The majority also considered that, where taxable services are supplied and paid for, the adequacy of the consideration is not ordinarily open to inquiry.

Dissenting judgment

Gloster LJ would have allowed the appeal. She considered that the contract, read with its commercial context, gave the appellant a contractual right to require PwC to review and report on its affairs to the financing institutions. That right was itself a supply of services for which the appellant paid. She therefore identified two distinct supplies within the overall transaction: one to the appellant and one to the institutions. She would have declared the appellant entitled to deduct the input tax and rejected the proposed apportionment.

• Court of Appeal (Civil Division) dismissed the appellant’s appeal by a majority of Moore-Bick LJ and Vos LJ; Gloster LJ would have allowed it.
• Upper Tribunal Tax and Chancery Chamber allowed HMRC’s appeal from the First-tier Tribunal and held that PwC’s services were supplied to the financing institutions, not to the appellant.
• First-tier Tribunal accepted the appellant’s argument that PwC had supplied services to it and allowed deduction of the input tax.