Airtours Holidays Transport Limited v Commissioners for Her Majesty’s Revenue and Customs

A person who pays VAT on services supplied to another cannot deduct it as input tax merely because the services confer a substantial business benefit on the payer. Where the payer has no contractual entitlement to receive the services, or to require their performance for another, the VAT is irrecoverable unless the contractual documentation fails to reflect the economic and commercial reality.

Third-party payment may nevertheless constitute consideration for a taxable supply. Reciprocal performance requires a direct link between the service and the supplier’s remuneration. It does not require the recipient itself to bear legal responsibility for payment.

Airtours commissioned and paid for work by PricewaterhouseCoopers LLP concerning its financial position and proposed restructuring. The resulting report was required by Airtours’ lending institutions and was prepared principally for their use. Airtours sought to deduct the VAT charged on PwC’s fees as input tax.

The First-tier Tribunal allowed the claim: [2009] UKFTT 256 (TC). The Upper Tribunal reversed that decision: [2010] UKUT 404 (TCC). A majority of the Court of Appeal dismissed Airtours’ appeal: [2014] EWCA Civ 1033; [2015] STC 61.

The Supreme Court had to decide whether PwC was contractually obliged to Airtours to perform the services and, if not, whether the services were nevertheless supplied to Airtours for VAT purposes.

1. Appeal dismissed by a majority of three to two. Lord Neuberger, with whom Lord Mance and Lord Hodge agreed, held that PwC supplied its services to the lending institutions, not to Airtours. Airtours therefore could not deduct the VAT on PwC’s fees as input tax.

2. The contract imposed on PwC an obligation to provide the services to the institutions alone. Airtours was a party principally to undertake payment and indemnity obligations and to accept the limitation of PwC’s liability. Its participation in selecting PwC, its need for the report and the commercial importance of the work did not create an express obligation owed by PwC to Airtours. Nor was such an obligation necessary for business efficacy or so obvious that it went without saying.

3. For VAT purposes, the contractual position is normally the most useful starting point and usually reflects economic and commercial reality. It is not conclusive where the terms form a purely artificial arrangement or otherwise fail to reflect that reality. Here the contract accurately represented the transaction. Airtours obtained an important commercial benefit, but that benefit was the enhanced prospect of refinancing, rather than receipt of PwC’s services.

4. The question in Customs and Excise Comrs v Redrow Group plc—whether the payer obtained anything at all for business use—could not be read literally. It required a realistic appreciation of the transaction. A benefit resulting from payment for a supply to another does not itself make the payer a recipient. Fiscal neutrality likewise cannot create a supply where none exists.

5. A taxable supply may nevertheless be funded by third-party consideration. The requirement of reciprocal performance concerns the supplier’s receipt of remuneration directly linked to its service. The recipient need not itself be legally responsible for payment.

6. Lord Clarke and Lord Carnwath dissented. They considered that the tripartite contract and its economic reality gave Airtours an enforceable right to require PwC’s performance. In their view, PwC made distinct supplies both to Airtours and to the institutions, and the appeal should have been allowed.

1. Supreme Court: By a majority of three to two, dismissed Airtours’ appeal and affirmed the Court of Appeal’s conclusion.
2. Court of Appeal: By a majority, dismissed Airtours’ appeal: [2014] EWCA Civ 1033 ; [2015] STC 61.
3. Upper Tribunal: Allowed HMRC’s appeal, holding that Airtours contracted to pay PwC’s fees but did not receive PwC’s services: [2010] UKUT 404 (TCC).
4. First-tier Tribunal: Allowed Airtours’ claim on the basis that it had obtained something used for its business and that a service could comprise a right to have services supplied to another: [2009] UKFTT 256 (TC).