By a majority of 3-2, the UK Supreme Court has held that a taxpayer cannot recover input tax where it pays for services supplied to another party but is owed no obligation by the service-provider to perform those services.


In 2002 Airtours (the taxpayer) was in serious financial difficulties. It wished to refinance its debts in order to restructure its business. It was suggested to Airtours that it should commission a report to satisfy its lenders that its restructuring proposals were viable. The lenders agreed to this, and they and Airtours decided to appoint PwC to produce a report.

The services were provided in accordance with PwC's standard terms of business, and the engagement letter was signed by PwC, Airtours and the lenders for whose benefit the report was to be prepared. Airtours was responsible for paying PwC's fees.

Airtours sought to deduct as input tax the VAT paid on the fees. HMRC objected, arguing that PwC's services were not supplied to Airtours under the contract, and Airtours was therefore not entitled to the deduction. HMRC did, however, concede that if PwC was under a contractual obligation to Airtours to supply services, Airtours would be entitled to the deduction.


Essentially, the Supreme Court had to decide whether PwC had contracted to supply services to Airtours. Airtours argued that it had.

However, the majority found that PwC's contractual commitment was to the lenders, not to Airtours. They held that, under the contract, PwC had no obligation to Airtours to provide services either to the lenders or to Airtours itself. The fact that Airtours had signed the engagement letter did not impose on PwC any such obligation; this merely bound Airtours to pay PwC's fees and to indemnify PwC.

In contrast, the minority held that the contract did give Airtours the right to require that PwC's services were rendered to the lenders, and that such a right was a supply in itself. The minority noted that Airtours had paid PwC GBP200,000 in advance of signing the engagement letter, and they were unwilling to accept that Airtours could not have had any recourse against PwC if it had then refused to produce its report.

Airtours also raised a second argument, claiming that even if it was not contractually entitled to have PwC's services provided to the lenders, it was nevertheless liable to pay PwC's fees and received something of commercial benefit (i.e. the opportunity to refinance as a result of the report being provided to the lenders). However, the majority held that these facts were insufficient to conclude that Airtours had received a supply from PwC. They sought to move away from Lord Millett's assertion in Redrow (1999) that the test of whether a taxpayer receives a supply is to be determined by considering whether the taxpayer receives "anything - anything at all - used or to be used for the purposes of his business in return for… payment". Instead, the majority reiterated that, as Airtours was not entitled to receive any services from PwC under the contract, and as the contract reflected the economic reality, Airtours had not received a supply.

Having already decided that PwC owed to Airtours an obligation to provide services to the lenders, the minority did not consider Airtours' second argument.

The majority also dismissed a fiscal neutrality argument put forward by Airtours on the basis that VAT paid as output tax will not always be reclaimable as input tax by the taxpayer. Again, the fiscal neutrality point was not addressed by the minority.


Where a taxpayer is contractually obliged to pay the fees of a service-provider, but the services are being provided to another party, it is likely that the taxpayer will only be able to deduct the VAT on those fees where the service-provider is contractually obliged to the taxpayer to provide the services.

Parties to tripartite agreements will have to consider the wording of their contracts carefully to ensure that the service-provider has a contractual obligation to the taxpayer to supply services. Otherwise, the taxpayer is likely to be unable to recover as input tax the VAT paid on the service-provider's fees.

It is also unlikely that taxpayers will in future be able to rely on Lord Millett's assertion in Redrow that they need only show they have received "anything at all" in return for payment in order to be able to deduct the VAT charged on that payment.