This case concerns the availability of a VAT deduction on fees paid by Airtours to PwC under a tripartite agreement between Airtours, PwC and a number of financial institutions. The case was brought to the Upper Tribunal on appeal by HMRC against the decision of the First-tier Tribunal which had previously allowed the appeal by Airtours against HMRC's refusal to allow a deduction of input tax.

Airtours was in financial difficulty at the time, owing approx £2 billion to about 80 banks and was due to renew its revolving credit facility in December 2002. PwC was engaged to provide an insight to the institutions into what was happening at Airtours.

The terms of the Agreement stated that PwC had been retained by the institutions to provide the services outlined in the Letter of Engagement. PwC's role was to obtain and comment on the financial position of Airtours. Information produced was addressed to the institutions with a copy to the director of Airtours. Airtours was responsible for PwC's fees, expenses and disbursements incurred in carrying out the work.

The Law

The availability of a VAT deduction for fees paid by Airtours to PwC was within by section 24 VAT Act 1994. That section provided that “subject to following provisions “input tax”... means the following-VAT on the supply to him of any goods or services... being goods or services used or to be used for the purpose of any business carried on or to be carried on by him”.

The issue for the Courts was to determine whether Airtours received the services of PWC for the purpose of its own business.

Arguments

HMRC contended that the Agreement provided that PwC supplied services to the institutions and not Airtours, while Airtours disagreed and maintained that the Agreement included Airtours who approved the scope and authorised the work. Airtours argued that receipt of the copy of PwC's report was for their benefit and it was required by them to place before the institutions.

First-tier Tribunal

The first-tier Tribunal held that the terms of the Engagement Letter and Agreement provided that Airtours wanted PwC's services for the purpose of obtaining a report to present to the institutions and so that it could obtain finance for its own business. Airtours was a recipient of PwC's services and the fact that the institutions were also a recipient was irrelevant.

Upper Tribunal

The Upper Tribunal noted the case of Customs and Excise Commissioners v Redrow. In this case, the judge pointed out that the supply to a person “may well consist of the right to have goods delivered or services rendered to a third party. The grant of such a right is itself a supply of services”. The main concern derived from the questions addressed in that case was “whether the payer received something to be used for the purpose of its own business even though the main service was supplied for the benefit of a third party”.

Following this, the Upper Tribunal considered that the crucial factor was whether Airtours received something from PwC in exchange for the payment. The fact that it was a tripartite agreement meant it was more difficult to determine who was contracting with whom and for what. The Upper Tribunal considered that the Letter of Engagement should be construed in a legalistic fashion in the context of a tripartite agreement. The substance of what was agreed was examined and the Upper Tribunal concluded that PwC was providing a service that the institutions wanted for the purpose of their own business in order to decide whether to continue to support Airtours. In substance, it was noted that the institutions contracted with PwC for their services and Airtours was a party to the agreement.

Decision

The Upper Tribunal held that the arrangement should be construed as one in which the institutions 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 which Airtours received something of value from PwC to be used for the purpose of its business in return for payment.

The Upper Tribunal reversed the decision of the First-tier Tribunal and allowed HMRC's appeal.

The full judgment of the Upper Tribunal is available at: http://www.tribunals.gov.uk/tribunals/upper/upper.htm