TC09596 - [2025] UKFTT 00895 (TC)

Returning to the legal relationship and the contractual documentation, a supply of services is effected “for consideration” only if there is a “legal relationship” between the provider of the service and the recipient - pursuant to which there is reciprocal performance - and the remuneration received by the provider of the service constitutes the value actually given in return for the service supplied to the recipient. Furthermore, where the person who pays the supplier is not entitled under the contractual documentation to receive any services from the supplier, then unless the documentation does not reflect the economic reality, the payer has no right to reclaim, by way of input tax, the VAT in respect of the payment to the supplier. As regards the importance of ‘contractual terms’ in categorising a transaction as a taxable transaction, it is necessary to bear in mind the case law according to which consideration of “economic and commercial realities” is a fundamental criterion for the application of the common system of VAT.

The contractual arrangements will usually provide the starting point and are likely to be conclusive, unless shown to be inconsistent with underlying economic and commercial realities: WHA Ltd, at [27] (per Lord Reed JSC). In Airtours, at [47], Lord Neuberger PSC said this:

“47.

This approach appears to me to reflect the approach of the Supreme Court in the subsequent case of WHA Ltd v Revenue and Customs Comrs [2013] UKSC 24; [2013] STC 943 where at para 27, Lord Reed said that “[t]he contractual position is not conclusive of the taxable supplies being made as between the various participants in these arrangements, but it is the most useful starting point”. He then went on in paras 30 to 38 to analyse the series of transactions, and in para 39, he explained that the tribunal had concluded that “the reality is quite different” from that which the contractual documentation suggested. Effectively, Lord Reed agreed with this, and assessed the VAT consequences by reference to the reality. In other words, as I said in Secret Hotels2 Ltd v Revenue and Customs Comrs [2014] STC 937, para 35, when assessing the VAT consequences of a particular contractual arrangement, the court should, at least normally, characterise the relationships by reference to the contracts and then consider whether that characterisation is vitiated by [any relevant] facts.”

Lord Neuberger also said this, at [58]:

“58.

When this court has discussed third party consideration in what is now article 73 of the Principal VAT Directive it has similarly not restricted it to consideration provided alongside, or in performance of, a legal obligation of the recipient - see WHA Ltd, para 56 per Lord Reed, in which the garage provided a service to the insured car driver but the insurer alone was responsible for remunerating the garage, and Loyalty Management UK Ltd, para 67 per Lord Reed.”

The same approach was adopted by the Loyalty Management (CJEU), at [39] and [40], where the court stated, citing previous judgments, that:

“consideration of economic realities is a fundamental criterion for the application of the common system of VAT.”

The court added that that issue involved consideration of “the nature of the transactions carried out” in the particular case.

In Newey (CJEU), one of the questions referred to the CJEU was:

“In circumstances such as those in the present case, what weight should a national court give to contracts in determining the question of which person made a supply of services for the purposes of VAT? In particular, is the contractual position decisive in determining the VAT supply position?”

The answer to that question was given at [42] to [45] of the CJEU’s judgment, as follows:

“42.

As regards in particular the importance of contractual terms in categorising a transaction as a taxable transaction, it is necessary to bear in mind the case-law of the Court according to which consideration of economic and commercial realities is a fundamental criterion for the application of the common system of VAT (see, to that effect, Joined Cases C-53/09 and C-55/09 Loyalty Management UK and Baxi Group [2010] ECR I-9187, paragraphs 39 and 40 and the case-law cited).

43.

Given that the contractual position normally reflects the economic and commercial reality of the transactions and in order to satisfy the requirements of legal certainty, the relevant contractual terms constitute a factor to be taken into consideration when the supplier and the recipient in a ‘supply of services’ transaction within the meaning of Articles 2(1) and 6(1) of the Sixth Directive have to be identified.

44.

It may, however, become apparent that, sometimes, certain contractual terms do not wholly reflect the economic and commercial reality of the transactions.

45.

That is the case in particular if it becomes apparent that those contractual terms constitute a purely artificial arrangement which does not correspond with the economic and commercial reality of the transactions.”

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