HMRC V Airtours Holiday Transport Limited [2010]

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07 December 2010
1Background:
1.1The dispute related to a deduction of input tax on the fees of PwC paid by Airtours under a tripartite agreement (the "Agreement"), between Airtours, PwC and a number of financial institutions in connection with Airtours' financial position in September 2002.  There was a critical period between October and November 2002 when it was not clear whether Airtours would survive.  PwC were approached by the financial institutions that had lent money to Airtours to provide advisory work required to give an insight into what was happening at the business.  
1.2The Agreement was in the form of a letter of 5 November 2002 from PwC addressed "To the Engaging Institutions" (ie. the banks in this case).
1.3The First-tier tribunal had previously ruled that Airtours was a party to the engagement letter (an important indicator of this were the frequent references to "you" which were held to contractually include Airtours) and Airtours had a role in deciding which advisor to appoint. Since Airtours paid the advisor's fees, the First–tier tribunal held (applying the House of Lords 1999 decision in Redrow) that it had received a service from PwC, and therefore has incurred the VAT charged.
2Upper tier tribunal judgement:
2.1On 8 November 2010, the Upper tribunal overturned that First-tier tribunal's decision, holding 'in substance' that PwC was providing its service to the banks so that they could decide whether they should continue to support Airtours.  Whilst Airtours was regarded as a party to the engagement letter it did "not obtain any service from [the advisor] for use in its business but contracted to pay [the advisor] for supplying [its] reports to the [banks]".
2.2Therefore the First-tier tribunal's application of the Redrow decision was an error in law in finding that Airtours had received a service from the advisor.  Rather, the banks initiated the requirement for the report and the benefit to the company was that the "report might lead to continued finance from [the banks] which [the company] was willing (or was forced) to pay for".  This was not a supply to Airtours.  
2.3Additional factors which led to this ruling were: the banks first approached the advisor, contracted for the work and authorised it; the drafting of the engagement letter was not always clear, (for example, references to "you" did not always include the company); the company received a copy of the report (although not of those sections "prepared exclusively and confidentially" for the banks) more as a "courtesy" than as a supply of services to the company from the advisor.
2.4Importantly, due in part to the lack of clarity in the engagement letter terms, the Upper tribunal chose to apply a "substance over form interpretation" of the relationship between the parties.  
3Analysis:
3.1The focus of the Upper tribunal's decision on the "substance" of the relationship is key.  It was the banks that first approached PwC to carry out the report and authorised the work.  The Upper tribunal also commented that the terms of the Agreement indicated that the banks wanted PwC's report for the purposes of their own business.
3.2It was therefore judged that the Agreement should be construed as one in which the banks contracted with PwC to supply services which they needed for the purposes of their own businesses, and Airtours contracted with PwC to pay its fees; rather than one in which Airtours received something of value from PwC to be used for the purposes of its business in return for payment.  To put this in colloquial Redrow terms, Airtours received nothing at all from PwC.
3.3There is always a commercial tension when professional advisors are engaged between the real terms of their engagement and what is reflected in the paperwork (at VAT recovery).  Whilst professional advisors will usually organise their VAT recovery from clients in their invoices, the overriding concern is that the terms reflect the reality of the services actually supplied to the person.  

If you require further guidance, please contact John Barnett or Nigel Popplewell.

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