4 August 2014

The Court of Appeal has ruled that Airtours is not entitled to reclaim input VAT on the substantial costs of an Independent Business Review by PwC. One of the three judges would have allowed the claim, and it seems likely the Supreme Court will be asked to consider a further appeal.

The engagement letter with PwC was addressed to the various financial institutions and to Airtours, but stated that the report and letters were for the sole use of the institutions. Airtours was responsible for paying the fees. Following Redrow, a House of Lords judgment in 1999, it was necessary for the Court to find a supply received by Airtours in order for them to be viewed as being eligible to recover the VAT. The lead judgment by Lady Justice Gloster identified a supply to Airtours of having PwC review its accounts and other documents in order to report on the state of the business to the financial institutions. Within Redrow it had been established that the right to have services rendered to a third party is itself a supply of services.
However, the other two judges dissented, suggesting that this did not reflect the economic reality of the situation. There was a lack of reciprocity between the payment by Airtours and anything that it received in return. In essence Airtours received a benefit (enabling it to continue in business, as it turned out at least) but not a supply.

Businesses incurring such costs should take great care in setting out the terms of the engagement, to show – if it is going to be the case – that they are going to receive a service and not simply a benefit for which they have to pay. HMRC may give some written guidance in due course in relation to the dividing line, but since they have yet to issue any guidance following the BAA case it may be that they await a possible appeal in this case.