The Court of Appeal has ruled that travel company Airtours cannot recover the VAT paid to PwC for providing a report to the company’s lenders as part of a refinancing deal under the terms of the letter of engagement signed at the time.
The case, Airtours Holidays Transport Ltd and Commissioners for Her Majesty’s Revenue and Customs, [2014] EWCA Civ 1033 A3/2011/0251, centres on events in 2002 when Airtours was in financial crisis with its banks.
In order for a refinancing of its debts to go ahead PWC was appointed to report to Airtours' lenders on its financial situation. The banks and Airtours signed an engagement letter with PwC, obliging PwC to provide the report to the banks, at Airtours' expense. Airtours tried to recover the VAT it had paid on the fees but HMRC denied the claim on the basis that the supplies were made by PwC to the banks and not to the company itself.
A First Tier Tribunal (FTT) in 2009 held that Airtours had received supplies from PwC that were used for the purposes of its business and so it could deduct the input tax. However, that decision was overturned by the Upper Tribunal (UT), and Airtours’ subsequent appeal has now also found in favour of HMRC.
Eloise Walker, partner with law firm Pinsent Masons, said: ‘Whilst very much decided on its own facts, this latest decision has to be of concern to any business trying to recover VAT costs in the restructuring, or any other, context on the basis of the ruling in the Redrow case. If you have a claim held in limbo awaiting this decision, expect HMRC to come knocking on the door very soon.’
In considering the earlier FTT and UT decisions, Lord Vos, one of the three Court of Appeal judges, said the contract signed by Airtours with PwC provided quite clearly for the services of PwC to be supplied to the banks, and that the FTT was wrong to use the evidence of Airtours' need for the report to override the clear meaning of the contract.
Lord Vos dismissed the appeal stating: ‘The banks did not provide anything (even the copy report) to be used in Airtours' own business, so that the substance and economic reality was that PwC was supplying its services to the banks in exchange for Airtours' payments. It was a case of PwC obtaining third party consideration as envisaged by article 73 of the Principal VAT Directive.’
A second judge, Lord Justice Moore-Bick, agreed that the appeal should be dismissed, saying: ‘The language of the letter of engagement is not in my view consistent with the conclusion that PwC undertook an obligation to the Group to provide the services to the banks.
'The Group's participation in the contract was limited to incurring an obligation to pay for the services provided by PwC to the banks and to indemnify PwC against any liabilities they might incur in carrying out their task.’
However, the third judge, Lady Justice Glover, took a different view, concluding that ‘there were two distinct supplies provided by PwC - and, so far as the appellant was concerned, the relevant supply of a service consisted of the right to have the services (as defined) rendered by PwC to the engaging institutions’.
With two of the three judges in agreement, the appeal was dismissed.
This latest Court of Appeal judgement is similar to a case in 2013 where the judges found that VAT incurred by a holding company on a takeover was not recoverable in a case concerning UK airport operator BAA. [BAA Ltd and Commissioners for Her Majesty’s Revenue and Customs 2013 EWCA Civ 112 Case A3/2011/2237].
Walker said: ‘The real problem with both these cases is that it leaves everyone wondering what the correct position in law really is.
'Would Airtours be successful if they'd been a bit more careful about how they drafted PwC's engagement letter?
'Would BAA if there had been better evidence of intention to make taxable supplies of management services?
'It is to be hoped that Airtours will seek leave to appeal, and that we get a bit more clarity next time around.’
Details of the Airtours case are here: http://www.bailii.org/ew/cases/EWCA/Civ/2014/1033.html
