TC09595 - [2025] UKFTT 00894 (TC)

The law on this issue is well established and not in dispute. It is common ground that we should adopt the two step approach set out by the Supreme Court in Secret Hotels2 Ltd (formerly Med Hotels Ltd) v HMRC [2014] 2 All ER 685 (“Secret Hotels2”) in which Lord Neuberger said, at [34]:

In taking such an approach it is necessary, in a case such as the present, where the question at issue involves more than one contractual arrangement between different parties, to consider the “whole” of the relationship between the various parties when assessing the issue of who supplies what services to whom for VAT purposes (see Secret Hotels2 at [30]). In doing so, we remind ourselves that, where there is a written agreement, the labels which the parties have used to describe their relationship “cannot be conclusive and may often be of little weight” (see Secret Hotels2 at [32]) and that, although contractual terms constitute a factor to be taken into account they sometimes do not wholly reflect the economic and commercial reality of the transactions (see HMRC v Newy (trading as Ocean Finance) [2013] STC 2432 at [52]).

It is common ground that, under the contractual documentation, there is a legal relationship between APL and the cadet which is one of sponsor and spondee and that the payment from the cadet to APL is characterised as a “security bond”. However, the parties disagree as to whether the contractual documentation reflects the economic and commercial reality of the relationship between APL and the cadet in this case. It is therefore this issue, step two as described in Secret Hotels2 with which we are concerned.

In essence, Ms Shaw contends that the contractual documentation does reflect the economic and commercial reality. She says that the security bond paid by the cadet is not consideration for the supply of training as that training is paid for by the Sponsor Airline via a placement fee. Ms Shaw accepts that there is a legal relationship between the cadet and APL but submits that the relationship is one of sponsorship under which the cadet is required to deposit a security bond, not pay for training.

She also contends, relying on the decision of the Tribunal (Judge Raghavan and Mr Nicholas Dee) in Cabvision v HMRC [2013] UKFTT 721 (TC) at [171] (“Cabvision”), that the bond cannot be properly regarded as consideration for the supply of training as the bond monies are subject to a restriction and not freely at the disposal of APL as it was repayable to the cadet and transferred on their instruction to their Sponsor Airline. Additionally, Ms Shaw contends, that even if the Sponsor Airline did seek to have the cost of the placement fee reflected in the cadet’s salary, as APL is not a party to such an arrangement this is a matter between the Sponsor Airline and cadet.

Although the Tribunal in Cabvision observed, at [171], that it was “clear from the authorities that consideration is the amount which is actually received” and that, “in looking at what is actually received … it is necessary to look at whether there are restrictions on what is received such that the amounts are not at a person’s free disposal”, it continued, stating at [177] that:

“… whether the purported restrictions in this case are such that the appellant cannot be said to have received the full amount, is something we think must be determined on the basis of the particular facts of this case.”

As such, given the issue of any restriction on the use of the bond monies is a question to be answered on the facts, we do not consider that APL can derive any assistance from Cabvision. If, as a matter of fact, the “security bond” is a bond it cannot be consideration but if it is not, it will be consideration.

Although Mr Watkinson referred to what he described as “wrinkles” in APL’s case at step one, where the bond is described in the sponsorship agreements as “consideration” (see eg clause 4.8.3 of the BA MPL Sponsorship Agreement at paragraph 40 of the Appendix; clause 1.9 of the Integrated Contact Security Bond Addendum at paragraph 48 of the Appendix; clause 1.1 of the Integrated Contact Security Bond Addendum at see paragraph 48 of the Appendix; and clause 2.1 of the Virgin Sponsorship Contract see paragraph 45 of the Appendix) he contends that the best approach is to take these features, which Ms Shaw put down to “loose language”, as confirmation that the label, “security bond”, in any of the contracts is merely that, ie a label, and to take that feature into account in assessing the overall commercial and economic reality.

As noted above, the parties agree that there is a legal relationship between APL and the cadets. However, they part company on whether there is any reciprocal performance pursuant to that legal relationship as required for there to be a supply of services effected by consideration (see Tolsma v Inspecteur der Omzetbelasting Case C016/96 [1994] STC 509 at [14]).

Ms Shaw contends that under the sponsorship agreements there is simply an obligation on the cadet to deposit a security bond. However, we agree with Mr Watkinson that there is reciprocity under the sponsorship agreements. For example, clause 1.1 of the easyJet MPL Sponsorship Contract requires APL to “sponsor and procure” the cadet’s training; and the cadet, under clause 2.1 of that contract, is required to make payments to APL (see paragraph 44 of the Appendix). There is, therefore, a clear direct link. If the payments are not made by the cadet APL can cancel to the agreement (under clause 3.3.8, see paragraph 44 of the Appendix) and the training will not be provided.

However, as Ms Shaw contends, it does not necessarily follow that payment by the cadet is of itself, as a matter of commercial and economic reality, consideration for training. As is the case with any bond arrangement goods or services will not be provided in the absence of the security of a bond. That said, and contrary to Ms Shaw’s submission that this indicates the Sponsor Airlines rather than the cadets are paying for training, we consider that payment by the cadets of that part of the training that exceeded the placement fee indicates a direct link between the bond and the reciprocal provision of training given that had the cost of training continued to increase, the cadets would be required to pay directly for it.

In order to determine whether, as Mr Watkins submits the term “security bond” is merely a label which, as we have noted above (at paragraph 93), was not always applied, it is necessary to consider how it actually operated.

Before doing so, however, it is necessary to address an issue arising out of Ms Shaw’s closing submissions in which she contended that, despite the various agreements, and APL’s witnesses, referring to a singular “security bond” to be paid to APL and subsequently transferred to a Sponsor Airline, there were in fact two bonds.

The first from the cadet to APL, the proceeds of which was returned to the cadet and, on the cadet’s direction, transferred to the Sponsor Airline to fund the second bond. This was between the cadet and Sponsor Airline for the purposes of securing the Sponsor Airline against the risk of the cadet leaving its employment before it had seen a return on its investment in the cadet in the form of the placement fee.

Although Mr Watkinson referred to specific clauses that referred to the “Security Bond” in the singular (see eg clause 4.6 of the BA MPL Sponsorship Contract at paragraph 40 of the Appendix and clause 1.6 of the Integrated Contract Security Bond Addendum at paragraph 48 of the Appendix) and passages from the witness statements made by APL’s witnesses that referred to “the bond” being transferred to the Sponsor Airline, we agree with Ms Shaw that it is not possible as a matter of legal and economic reality to conflate the two bonds and treat them as having been simply assigned to the Sponsor Airline.

First, there are different terms governing the bond between APL and the cadets and the bond between the cadets and Sponsor Airlines (see eg the easyJet Sponsorship Contract at paragraph 44 of the Appendix and easyJet Loan Agreement at paragraph 49 of the Appendix). Secondly, if the bond had been assigned to the Sponsor Airline by the cadet it would not have been necessary for APL to obtain the consent of the cadet to transfer the funds to the Sponsor Airline rendering clauses 4.6 of the BA MPL Sponsorship Contract, clause 2.4.1 of the easyJet MPL Sponsorship Contract and clause 3.3 of the Virgin MPL Contract (at paragraphs 40, 44 and 45 respectively of the Appendix) otiose.

As such, we find that the references in the various agreements to “the bond” should properly be construed as being references to the proceeds of the bond rather than the bond itself. However, such a conclusion does not resolve the issue of whether as a matter of economic and commercial reality those proceeds were returned to the cadet.

Ms Shaw submits the proceeds were returned to the cadet on the completion of training when the funds were transferred to the Sponsor Airline on the cadet’s instruction in accordance with the sponsorship agreements (eg clause 4.6 of the BA MPL Sponsorship Contract, at clause 2.4.1 of the easy Jet MPL Sponsorship Contract and clause 3.3 of the Virgin MPL Sponsorship Contract at paragraphs 40, 44 and 45 respectively of the Appendix).

However, we agree with Mr Watkinson who contends that even if there is scrupulous compliance with the obligations by the cadet (eg with clause 8 of the easyJet MPL Sponsorship Contract at paragraph 44 of the Appendix) and all of the training is completed, the bond or rather, as we have concluded, its proceeds are in reality never actually returned to the cadet. This is because these are transferred by APL to the Sponsor Airline which then pays the cadet a reduced salary to reflect in whole, or in large part, the sum of the placement fee. As such, and as a matter of economic and commercial reality, it is the cadet that has borne the costs of training.

It therefore follows that the bond does not function as a security bond at all and the description of it as such is merely a label which, as we have noted above (at paragraph 87), cannot be conclusive.

We find support for this conclusion not only from the contractual references to the bond (ie its proceeds) being referred to as “consideration” (see paragraph 93, above) but also from sub-clauses 6.4 and 6.5 of Appendix A and 2.1 of Appendix B of the updated BA Placement Contract (see paragraphs 15 and 17 of the Appendix) from which it is clear that “on transfer” of the proceeds of the bond by APL to BA, BA will pay the same amount to APL (clause 6.5 of Appendix A) and that “in return” for payment of the placement fee APL will transfer the proceeds of the bond to BA (clause 2.1 of Appendix B).

Additionally, and perhaps of greater significance, is that our conclusion mirrors that of Constable J in the Judicial Review Judgment particularly at [55] where he said that it was “abundantly clear” that the cadet “in fact pays for their own training through a salary sacrifice and no part of the bond is, in reality paid to it” (see paragraph 81, above).

Although Constable J did not determine the issue that is before us, ie whether the bond was consideration for training, as this is a matter for this Tribunal, he did, in determining the issue before him, ie whether there was a breach of APL’s legitimate expectation (see paragraph 78, above), reach conclusions on the reality of what happened. This is because he had to determine whether the information provided to HMRC by APL was materially misleading or inaccurate when compared with what actually occurred.

Like Constable J, at [59] of the Judicial Review Judgment (see paragraph 82, above), we also find it “entirely understandable” for the Finance Director of CTC to want to remove the paragraph to which we have referred in paragraph 62, above, regarding the reduction in the cadet’s salary which “might indicate that the cadet is paying for the training received”, in what was to become the non-statutory clearance request letter.

As Constable J noted at [59(3)]:

“… APL cannot distance themselves from the importance of the salary sacrifice arrangement as part of the overall arrangement in circumstances when it was CTC itself that provided the predecessor scheme (which APL correctly asserts is materially similar to the 2009 Programme) and which, as set out in the 2003 easyJet contract, is stated as having been ‘devised by CTC comprising all of the following elements’:

‘The transfer of the bond to the airline on completion of pilot training

The payment by the airline of a reduced salary scale

The repayment by the airline of the bond to the pilot over a period of employment’”

In reaching our conclusion, having taken into account the whole of the relationship between the various parties, that as a matter of commercial and economic reality it is the cadet paying APL with that payment being consideration for their training we reject Ms Shaw’s submission that, if the cadet is paying anyone for their training it is the Sponsor Airlines. This is because there is no legal relationship under which the Sponsor Airlines are required to provide training to the cadets and no training was provided or procured by the Sponsor Airlines.