TC09596 - [2025] UKFTT 00895 (TC)

A recent case is Airtours. The issue in the appeal was whether the appellant, Airtours Holidays Transport Ltd (formerly MyTravel Group plc), was entitled to recover, by way of input tax, VAT charged by PricewaterhouewCoopers (‘PwC’) in respect of services provided by PwC and paid for by Airtours. Airtours borrowed money from 80 or so different lenders and found itself facing collapse. During discussions with its largest creditors, it decided to engage PwC to prepare a report on the company’s proposals to restore its finances and return to profitability. The contractual documentation appeared to be addressed to the “Engaging Institutions” (i.e., the Banks), with Airtours being a signatory to the contract to ensure that it paid PwC’s bills. All parties agreed that Airtours had benefitted from PwC’s work.

Airtours then reclaimed the input tax on PwC’s fees and HMRC challenged this. Airtours argued that:

By a majority, the Court of Appeal dismissed Airtours’ appeal ([2015] STC 61). All members of the Court of Appeal agreed that the issue turned on the interpretation of the contract. In agreement with the UT, Moore-Bick and Vos LJJ held that the effect of the contract was that PwC’s services thereunder were provided to the Engaging Institutions, and not to Airtours. Dissenting, Gloster LJ concluded, at [46], that “as a matter of construction of the contract, and on analysis of the economic realities of the surrounding commercial arrangements, the appellant had a contractual right to require that the services as described in the [Letter]” were provided. Gloster LJ set out the relevant principles, at [37]:

“i)

Consideration of economic realities is a fundamental criterion for the application of the common system of VAT as regards the identification of the person to whom services are supplied.

ii)

Decisions about the application of the VAT system are highly dependent upon the factual situations involved. Thus a small modification of the facts can render the legal solution in one case inapplicable to another.

iii)

The case law of the CJEU indicates that, when determining the relevant supply in which a taxable person engages, regard must be had to all the circumstances in which the transaction or combination of transactions takes place. In cases where a scheme operates through a construct of contractual relationships, it is necessary to look at the matter as a whole in order to determine its economic reality. Thus the relevant contracts have to be understood in the wider context of the totality of the arrangements between the various participants.

iv)

The terms of any contract between the parties, whilst an important factor to be taken into account in deciding whether a supply of services has been made, are not necessarily determinative of whether as a matter of “economic reality” taxable supplies are being made as between any particular participants in the arrangements. That may be particularly so where certain contractual terms do not wholly reflect the economic and commercial reality of the transactions. However, the contractual position is generally the most useful starting point for the VAT analysis.

v)

There may, as a matter of analysis, be two or more distinct supplies within the same transaction. Moreover, a single course of conduct by one party may constitute two or more supplies to different persons...

vi)

However, the mere fact that the taxpayer has paid for the service does not necessarily mean that it has been supplied to him. Consideration of economic realities is a fundamental criterion for the application of VAT. Thus substance and reality remain critical. What is required is a realistic appreciation of the transactions in question. Consideration paid in respect of the provision of a supply of goods or services to a third party may sometimes constitute third party consideration for that supply, either in whole or in part. Economic reality being what it is, commercial businesses do not usually pay suppliers unless they themselves are the recipient of the supply for which they are paying (even if it may involve the provision of goods or services to a third party), but that possibility cannot be excluded a priori. A business may, for example, meet the cost of a supply of which it cannot realistically be regarded as the recipient in order to discharge an obligation owed to the recipient or to a third party. In such a situation, the correct analysis is likely to be that the payment constitutes third party consideration for the supply. A case where the taxpayer pays for a service which consists of the supply of goods or services to a third party requires a more careful and sensitive analysis, having regard to the economic realities of the transaction when looked at as a whole. It may lead to the conclusion that it was solely third party consideration, or it may not.”

At [41] Gloster LJ expressed the view that the case, like Redrow, was a case where two distinct supplies of services were being provided by PwC within the same overall transaction. She noted the caveats articulated by Lord Reed and Lord Hope in Aimia and recognized both that every case has to be approached on its own particular facts, and that it may be dangerous to draw analogies between the facts of two different cases which may appear superficially similar. She concluded, however, that although there are obvious differences between the facts of Redrow, the principles identified in Redrow and confirmed in Aimia support the analysis that PwC was making two distinct supplies “in both directions” (Aimia at [89] per Lord Hope); that is both to the Banks and to Airtours.

When the appeal was before the Supreme Court, Lord Clarke agreed with Gloster LJ in his dissenting judgment (Lord Carnwath agreed). Lord Neuberger found that the contract did not create a supply between PwC and Airtours, and that even though there were some factors in Airtours’ favour, they were insufficient to override the contract. In other words, while Airtours was closely involved in the matter, this did not mean that it was contractually entitled to receive the services from PwC. For that reason, and in the absence of anything else that would serve to override the contract (for example, a finding that the contract was an entirely artificial structure), Airtours did not receive the supply and could not claim the input tax. Lord Neuberger commented on Redrow and said that Lord Millett’s comments “cannot be taken at face value”.