On 24 July 2014 the Court of Appeal held6 (by majority decision) that a borrower is not entitled to recover input VAT on accountants’ fees it paid in connection with a report prepared for the borrower’s lenders.

In the context of Airtours’ financial difficulties, PwC were engaged, amongst other things, to liaise with the group’s creditors. PwC signed an engagement letter with the banks being asked to extend their facilities to Airtours. Although Airtours signed the engagement letter, it was clear from the face of the letter that PwC were being retained by the banks, that PwC assumed a duty of care towards the banks, and that PwC’s reports were to be for the sole use of the banks. Airtours, however, were responsible for PwC’s fees.

The majority decision of the Court was that PwC’s services were supplied solely to the banks. Although Airtours paid the fees, it was not therefore able to recover the VAT it had incurred.

The correct approach to take, according to the majority decision, was to ascertain (objectively) the true nature of the arrangement and what, if anything, Airtours received for its payment. The crucial question was not, therefore, whether Airtours ‘needed’ PwC to perform the services (and therefore benefited from them) but rather whether Airtours had selected and instructed PwC. This necessitated close inspection of the engagement letter and, on this basis, it was held that Airtours was party to the letter solely in order to pay the fees (and not so that PwC would have any liability to Airtours).

To view the decision, click here.