On 11 May 2016, the Supreme Court (by 3-2 majority decision) dismissed the taxpayer’s appeal   in Airtours Holidays Transport Ltd v HMRC4. The Court agreed with the Court of Appeal that the taxpayer was not entitled to recover input VAT on accountants’ fees it paid in connection with a report prepared for the taxpayer’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 Supreme Court held that, properly construed, the contract did not give Airtours the right to require PwC to supply the services in question. In the absence of such right, Airtours could not be the recipient of the supply. Airtours could not, therefore, recover input VAT in respect of the supply. The terms of the contract supported the conclusion that only the banks, and not Airtours, had the right to require the supply of PwC’s services. Such terms included the following (some of which were more persuasive than others):

  • the engagement letter was addressed to the banks
  • PwC’s reports were for the banks’ sole use
  • PwC’s duty of care was acknowledged to the banks only
  • Airtours was only entitled to a redacted copy of the PwC’s reports.

The Court took the view that the fact that Airtours countersigned PwC’s engagement letter was of little significance, as this was required primarily to ensure that Airtours paid PwC’s fees.

The Court, acknowledging that the contractual position is not determinative if not reflective of the “economic reality” of the arrangements, nevertheless held that the contractual position and economic reality in this case were consistent.

Given that, as before the Court of Appeal, this was a majority decision, it is clear that the courts sometimes have difficulty in identifying the correct recipient of a supply under tripartite arrangements. This latest decision does however confirm the importance of playing close attention to contractual terms in tripartite arrangements. A taxpayer looking to recover input tax should ensure that the terms support an argument that it was the recipient of the supply in question, rather than merely an “interested party” to that supply.

To view the decision, click here.