On 8 November 2010 the Upper Tribunal released its decision in respect of HM Revenue & Customs v Airtours Holiday Transport Limited [2010] UKUT 404 (TCC). The Tribunal upheld HM Revenue & Customs' (HMRC) appeal from the First-tier Tribunal. Airtours was denied recovery of VAT on professional services fees paid for by it, where those services had been supplied to several banks.


A VAT-registered business can recover the VAT it has incurred (input tax) if it is the recipient of a supply, and (broadly) if that the supply has been used for a taxable business purpose.

Generally, where a third party pays for goods or services supplied to another person, the third party does not have a right to recover the VAT it has paid. More than one person may, however, benefit from a supply. The fact that the third party receives a benefit from a supply should not deny the payer from recovering the VAT incurred, provided that the payer is also a recipient of a supply.

A leading authority on this subject is the House of Lords' decision in Customs & Excise v Redrow Group plc [1999] UKHL 4. While Redrow was a victory for the taxpayer, HMRC points out that the decision "should not be used to justify input tax claims simply because the parties in question paid the fees".


In Redrow, as part of a sales incentive scheme, a house builder had agreed to pay the estate agent's fees for the sale of a prospective house buyer's existing home. Redrow chose the estate agent, instructed it and had a contractual right to have the house buyer's home valued and marketed, to monitor the agent's performance and to maintain pressure for a quick sale.

HMRC challenged Redrow's recovery of input tax on the agent's fees. HMRC considered that the recipient of the estate agent's supply was the house buyer only, and not Redrow. Accordingly, in its view, Redrow was not entitled to recover the VAT paid by it.

The House of Lords held that the only question to be addressed was whether the supplies on which the taxable person (Redrow) sought to recover VAT had been used, or were to be used, for the purposes of the business. It was irrelevant that someone else (the house buyer) had also received a service as part of the transaction. In return for the payment, Redrow did not merely derive a benefit from the services which the estate agent supplied to the house buyer. Redrow actually chose and instructed the estate agent and obtained contractual rights. Redrow did receive a supply from the estate agent, albeit a different supply from that received by the house buyer.


The dispute related to a tripartite agreement, between Airtours, PricewaterhouseCoopers (PwC) and several banks, and Airtours' right to recover VAT incurred by it on fees paid to PwC.

The facts and background

Airtours was in financial difficulties and was due to renew its credit facilities with several banks. The banks had approached PwC to submit proposals for advisory work to provide an insight into what was happening at Airtours.

PwC issued an engagement letter to Airtours confirming: that it had been retained by the banks; details of the professional services to be provided by it; and that Airtours would be responsible for paying its fees. PwC provided information to the banks and assumed a duty of care to each of them. Copies of the information were also provided to Airtours.

Airtours sought to recover the VAT paid by it on PwC's fees. HMRC denied Airtours' recovery of the VAT, asserting that PwC's services had been provided only to the banks. The First-tier Tribunal upheld Airtours' appeal, finding that Airtours had been involved in choosing PwC, it was a party to the appointment and would also derive some benefit from PwC's services. HMRC appealed.

The decision

While the Upper Tribunal considered Redrow to be the most important authority, it also considered the Court of Appeal's decision in WHA Limited v Customs and Excise Commissioners [2004] STC 1081 and the VAT and Duties Tribunal's decision in Telent plc v HMRC (2007) VAT Decision 19967.

In WHA, the Court of Appeal held that an insurance claims handling company (WHA) was entitled to recover VAT paid by it on fees to garages carrying out repairs to vehicles where the driver's insurer reimbursed, and paid a fee to, WHA. The court decided that WHA was a recipient of a supply by the garages because the repairs that the garages carried out satisfied WHA's obligation to the vehicle insurers. The fact that there was another beneficiary of the work, namely the vehicle's owner, did not prevent there being a supply to WHA.

In both WHA and Redrow the person seeking to recover VAT had contracted, and paid for, the service (as the Upper Tribunal observed in Airtours, payment was necessary for there to be a supply of services for VAT purposes). In contrast, in Telent the payer of the VAT and the person seeking to recover VAT did not have a contract with the person making the supply.

In Telent, several banks lending to Marconi plc had instructed a law firm to advise them on corporate restructuring. Separately, Marconi agreed with the banks to pay the legal fees. Unlike Airtours, no contract existed between Marconi and the lawyers. The Tribunal denied Marconi's input tax recovery claim, identifying that, absent any contract, no counter-consideration passed from the lawyers to Marconi. The analysis was no different from the position where Marconi had paid the banks, which then paid the lawyers.

In contrast to Telent, a contract did exist between PwC and Airtours. The Tribunal considered that the crucial factor was (as in Redrow and WHA) whether Airtours received something from PwC in exchange for payment. The Tribunal emphasised that Airtours needed to receive something from PwC. It was clear that Airtours received a commercial benefit by entering into the tripartite agreement - Airtours hoped that PwC's advice would result in the banks providing finance. This did not mean, however, that Airtours was receiving something (directly or indirectly) from PwC in exchange for payment.

The Upper Tribunal, unlike the First-tier Tribunal, preferred not to place too much emphasis on the wording of PwC's engagement letter (the tripartite agreement) for the purposes of deciding to whom PwC provided its service. Instead, it preferred to consider the substance of what was agreed between the parties. It concluded that PwC was doing something for the banks and that Airtours was a party to the tripartite agreement, not to obtain services from PwC but to pay PwC for its services to the banks.

The Tribunal did not consider that (unlike in Redrow or WHA), by PwC providing its services to the banks, Airtours had been discharged of a business obligation. The Tribunal decided that the banks contracted with PwC for services to themselves on terms that Airtours pay PwC without receiving any benefit from PwC to be used for the purposes of its business.

The Upper Tribunal upheld HMRC's appeal and Airtours was denied recovery of VAT on PwC's fees.


The recovery of VAT where a third party pays another party's fees is a complex area. Provided that the third party payer contracts with, and pays, the supplier, and also receives something from the supplier for the purposes of its taxable business, the VAT incurred should be recoverable.

A fatal flaw in Telent was that no contract existed between Marconi (the payer) and the lawyers (the supplier). It is clear from Airtours that a contract alone is not sufficient. The payer must be a party to the contract, not merely so that it has an obligation to pay, but so that it receives something (a service) from the supplier for the benefit of its business.