Court of Appeal denies input tax on accountancy services relating to a refinancing and restructuring process: Airtours Holiday Transport Limited v HMRC5
The appellant company, Airtours, appealed against a decision of the Upper Tribunal (UT) in which it was held that it could not recover input tax charged by a firm of accountants, PwC, in respect of services relating to a refinancing and restructuring process.
In 2002, the appellant faced a serious financial crisis which threatened the continuation of its business. It was indebted to over 80 banks and other financial institutions (the Banks) in respect of a variety of credit facilities. It also had liabilities to another group of financial creditors who were holders of bonds issued by Airtours. As at September 2002, the amounts owed by the appellant to the Banks stood at between £2bn and £2.5bn. Following the announcement of accounting problems which resulted in the collapse of the appellant’s share price, the Banks which had been involved with discussions about a refinancing package became concerned about whether the appellant would have sufficient funds to operate its business beyond 31 December 2002. In order to facilitate the refinancing process, the Banks formed a Steering Committee. Whilst Airtours had investment banking and insolvency advisors, there was a requirement for further advisors to review the refinancing and restructuring strategies, to consider the plans of the business and to provide confirmation to the Steering Committee that, based on the information available at the time, the agreed actions were reasonable.
PwC was engaged in November 2002 pursuant to a contract contained in a letter of engagement. The contract was a tri-partite arrangement between Airtours, the Banks and PwC. PwC invoiced Airtours in respect of its fees for the work carried out and payment was made by Airtours to the accountants. Airtours sought to deduct the VAT which it had been invoiced and had paid in respect of PwC’s fees as input tax in its VAT returns for relevant periods. HMRC argued however that PwC’s services were not supplied to Airtours, with the result that the company was not entitled to the deduction.
The First-tier Tribunal (FTT) rejected HMRC’s conclusion and decided that Airtours had requested the work as well as having authorised it; that Airtours had received supplies from PwC that were used for the purposes of its business; and that the input tax therefore could be deducted.
On appeal, the UT disagreed with the FTT’s approach6. Having considered the nature of the arrangements, the UT concluded that the substance of the transactions was that there was a supply of services by PwC to the Banks; that the contact should be construed as one in which the Banks contracted with PwC to supply services which the Banks needed for the purposes of their own business; and that Airtours contracted with PwC to pay its fees.
The questions for determination by the Court of Appeal were:
- whether the Upper Tribunal had exceeded its appellate jurisdiction and erred in law by overturning the FTT’s decision; and
- in any event whether the UT’s analysis of the arrangements between PwC, the Banks and Airtours as not amounting to a supply of services by PwC, but the provision of third party consideration by the appellant to PwC, was correct as a matter of law.
The majority of the Court of Appeal, (Lord Justice Vos and Lord Justice Moore-Bick with Lady Justice Gloster dissenting) held that the appropriate test to determine whether there was a supply of services to a taxable person for the purposes of section 24(1) Value Added Tax Act 1994 was to ask whether something was “being done for him [the taxable person] for which, in the course or furtherance of a business carried on by him, he has had to pay a consideration which has attracted value added tax” Customs and Excise Commissioners v Redrow Group plc7 applied. Moore-Bick LJ indicated (paragraph 92) that it was apparent from the decision of the ECJ in HMRC v Loyalty Management UK Ltd8 that the critical question was whether, as a matter of economic reality, PwC provided a service to Airtours or to the Banks alone and that to answer that question it was necessary to start by considering the nature of the transaction under which the service was provided. The test was an objective one, see HMRC v Newey9.
The Court of Appeal believed that the main features that governed the FTT decision were its view that Airtours was genuinely involved in selecting PwC and authorising it to do the work; that Airtours was to receive a copy of the accountant’s report; that Airtours was under no legal obligation to provide such a review to the Banks; and, that it needed the review for its own purposes. It was noted that the UT disagreed that these features really existed as a matter of construction of the contract or that they were relevant to the correct legal test. As far as the majority of the Court of Appeal were concerned, the contract provided clearly for the services of PwC to be supplied to the Banks, see paragraph 83 (Vos LJ) and paragraphs 92 to 96 (Moore-Bick LJ).
In the light of this, therefore, the court believed that the FTT was wrong to use evidence of Airtours’ “need” for the report to override the clear meaning of the contract and that the FTT did therefore fall into legal error. The FTT had not stated the correct question clearly and unequivocally and had not considered that question objectively as it should have done, free of consideration of the result that Airtours aimed to achieve and its subjective intentions, among other things. In the circumstances, the UT was entitled to consider the matter afresh as it had done and the majority of the Court of Appeal saw nothing to criticise in the decision of the UT: it had applied the right test and reached sustainable conclusions. The substance and economic reality was that PwC was supplying its services to the Banks in exchange for payments from Airtours.
Bearing in mind the lengthy dissenting judgment and that, as Moore-Bick LJ acknowledged, the point at issue is “one of some difficulty on which it is possible to take different views”, there seems a possibility of further appeal.
Click here to read the judgment.