TC09595 - [2025] UKFTT 00894 (TC)

A “CTC VAT Report” by Deloitte, dated 29 November 2007, records that the document:

“… was produced as a result of our meeting on 20 August 2007. During 2002, McAlpine Aviation Training (‘MAT’) and CTC Aviation Group plc (“Group”) were contemplating setting up a JV to run what is today known as the CTC Wings Programme (“the Wings programme”). In anticipation of the introduction of the Wings programme, in August 2002 MAT sought and obtained a ruling from HM Revenue & Customs (“HMRC”) on the VAT treatment of the Wings programme. Subsequent to receiving that ruling from HMRC, in May 2004 Group bought MAT out of its share of the business and progressed with the Wings programme of its own accord.

However, now that the Wings programme is up and running Group (including its subsidiary companies) has decided that it needs more certainty regarding the VAT treatment of various payments made to or held by Group or its subsidiaries. In particular, the retention of certain elements of bonds by Group/ its subsidiaries was not covered in the original ruling given by HMRC. Consequently, you have asked us to comment on the VAT treatment of the Wings Programme, any practical measures that may support any such analysis, and any possible alternatives or recommendations for the appropriate next steps for seeking further certainty on the VAT treatment.

Please find below a summary of our findings and conclusions. Please note that we have only commented on the VAT aspects of the agreements we have been provided with and have not considered any other potential implications.”

The Deloitte Report also referred to the requirement, mentioned above (at paragraph 33), on a cadet to deposit a bond with APL which, on completion of the cadet’s training, was transferred by APL to the cadet’s Sponsoring Airline when it paid a placement fee (in the same amount as the deposit) plus VAT to APL for the provision of the fully trained cadet. The Report continued, stating that the cadet may receive a reduced salary to take account of the placement fee the airline has paid to APL.

This was incorporated into a letter prepared by Deloitte in relation to the STP to be sent to HMRC and which included the following paragraph:

“During their employment with the sponsor airline, the cadet may receive a reduced salary to take account of the fact that the sponsor airline has paid a placement fee to APL for the provision of the cadet. However, these arrangements are made between the sponsor airline and the cadet without APL being party to the agreement.”

However, before the letter was sent to HMRC it was reviewed by the Finance Director of CTC who commented:

“… we would like to remove this paragraph as it might indicate that the Cadet is paying for the training they received from CTC by way of taking a reduced salary once employed and therefore in effect the Cadet is paying for their training.”

The paragraph was not included in the letter of 4 March 2009 and/or final report from Deloitte which was sent to HMRC requesting non-statutory clearance for the VAT treatment of the STP. On 17 July 2009 HMRC issued a letter (the “Clearance Letter”) which, as Constable J noted at [34] of the Judicial Review Judgment:

“… confirmed that HMRC was in agreement with APL’s proposed VAT treatment, in that the payment of the bond by successful cadets is not consideration for any supply by APL to the cadets, and that retention of the bond by APL upon early termination of the agreement between the parties is not consideration for any supply by APL to the cadets. The Clearance Letter explained the basis for this conclusion. It pointed out that the clearance was based upon the information provided, including the Programme brochure and the information on the CTC Wings website.”

However, on 10 November 2016 HMRC wrote to CTC to “open an enquiry into the VAT treatment of the supplies … in relation to the CTC Wings Programme”. That enquiry and associated correspondence continued for a number of years culminating on 26 January 2021 with the issue of the decision letter and, on 16 August 2021, the assessment, the subject matter of this appeal.

Notwithstanding APL had appealed to the Tribunal on 20 May 2022, in early 2023 the parties entered into negotiations to agree that such part of the amounts paid by the cadets as related to training that took place outside the UK should be excluded from the assessment to VAT. Following an unsuccessful ADR meeting on 27 February 2023, HMRC invited APL to provide its written representations on the ‘place of supply’ of services, ie the training of cadets to enable these to be considered by HMRC’s policy team.

These were sent to HMRC by APL’s solicitors, Macfarlanes, on 2 May 2023 as an attachment to an email. Insofar as material, the representations state:

“1 Introduction

1.1

This paper is provided following discussions at the ADR held on 27 February 2003. At the meeting it was agreed that Airline Placement Limited (“APL”) would provide further representations in relation to the alternative argument they have put forward on place of supply, and HMRC would ensure that these representations are considered by the appropriate policy holder.

…

1.3

For the avoidance of doubt, APL does not consider that there has been any supply of training to the Cadets. This paper is presented on the alternative basis (which is denied) that APL’s primary position is incorrect and APL supplies training to the Cadets. In these circumstances, for the reasons set out below, each supply of training services to a Cadet will have been outside the scope of UK VAT to the extent that the training was performed outside the UK. 1.5 The question is where the activities undertaken by the relevant group companies are performed. As is clear from the details set out in the body of this paper, these activities are split between the UK and outside of the UK (primarily New Zealand). In such circumstances, the logical way forward is to carry out an apportionment between the activities performed in the UK and outside of the UK. The alternative – and the implication in HMRC’s current position – is that UK VAT could be avoided entirely by setting up the same type of shell company outside of the UK to supply services performed within the UK.

The representations continue noting, at sub-paragraph 10.4 that it is necessary to consider the activities of L3 UK and L3 NZ to whom the training and organisation of training was subcontracted. Sub-paragraph 10.5 explains how both companies have similar infrastructure and carry out significant part of the training stating that, “[t]here is no basis for concluding that either L3 NZ or L3 UK is carrying out the essential activities, rather, the training is split between activities in the UK and activities outside the UK.”

The material parts of sub-paragraph 11 provide:

“11 Proposed basis for apportionment

11.1

… As explained further below, we consider an apportionment based on the cost of delivering training to Cadets in the various locations to be the most rationale and accurate option.

…

11.4

Using an apportionment based on cost where it is not possible to use values, accords with HMRC’s recent guidance on the apportionment of consideration …

11.5

On that basis we propose an apportionment based on the cost of delivering training in the UK to Cadets on the bonded programme throughout the assessment period versus the cost of delivering training outside the UK to the same Cadets in the same period.

…

11.7

Apportioning the bond payments received during the assessment period in the manner described above would give the following result:

Cost of training delivered outside the UK during the assessment period	£17,285,114
Cost of training delivered in the UK during the assessment period	£30,136,520
Percentage of bond payments treated as consideration for supplies outside the scope of UK VAT	34%

The representations conclude at paragraph 12, “Next steps”, stating at sub-paragraph 12.2:

“If HMRC agree in principle with the basis of apportionment that has been proposed, we would be happy to discuss the calculations further.”

By email of 3 May 2023, HMRC (Officer Miranda Widger) confirmed receipt of the representations stating that these would be forwarded to “specialist colleagues”. On 26 September 2023 Officer Widger and Officer Peter Rowe, of HMRC’s Policy Team, in a call discussed the representations following which Officer Rowe emailed Officer Widger with a summary explaining that the view of HMRC’s Policy Team was:

Officer Widger had a further call with Officer Rowe and the wider case team later in the afternoon of 26 September 2023. After discussing the view received from HMRC’s Policy Team, it was agreed that a new decision should be made in relation to the place of supply of services with the assessments amended accordingly.

A letter, dated 31 October 2023, from Macfarlanes, records, inter alia, that on 27 September 2023 a call had been received from a Mr Ian Painter, of HMRC’s Solicitor’s Office to confirm that HMRC agreed with APL’s proposal and that the next step would be to confirm the figures so that the assessments could then be amended on that basis. This is not disputed by HMRC neither is the fact that Mr Painter informed Macfarlanes that HMRC would shortly provide them with a letter confirming the additional information that was required to verify the calculations. He also noted that he would draft an application to the Tribunal that explained the situation and sought a further extension to the directions.

On 28 September 2023, HMRC (Mr Painter) made an application to the Tribunal for further amended directions to:

“… extend the upcoming deadline for the exchange of lists of documents by 16 weeks in order to allow the Respondents to implement a change in its view re ‘place of supply’ and the resulting amendments to the assessments necessitated by the aforementioned change of view.”

On 13 October 2023, HMRC (Officer Widger) wrote to Macfarlanes “in response to your email dated 2 May 2023 and the place of supply representations provided.” The letter set out HMRC’s original view that the STP was a business to consumer supply wholly supplied in the UK. It continued:

“HMRC’s revised view

After due consideration of your representations on the operations of APL and the L3 group, HMRC has revised its view on APL’s place of supply for the training that takes place in locations outside of the UK.

…

It is [now] HMRC’s view that:

However, on 20 October 2023 HMRC (Officer Widger) wrote to Macfarlanes in the following terms:

“I write in relation to my letter to you dated 13 October 2023.

I apologise but I must withdraw the ruling set out in that letter.

HMRC has now completed further analysis of its position. During this analysis HMRC has been considering its legal position.

For this reason I must withdraw my letter dated 13 October 2023 until I can provide a comprehensive explanation of HMRC’s view on the place of supply of APL’s services.”

Macfarlanes responded on 31 October 2023 explaining that it was “not open to HMRC to withdraw from their clear agreement on place of supply”. Essentially, Macfarlanes contended that HMRC’s letter of 13 October 2023 amounted to an agreement under s 85 VATA.