The issue in this case is whether Airtours was entitled to recover VAT as input tax that it had paid on the supply of professional services. The issue seems quite a simple one but the matter has taken many years to resolve. The Supreme Court has decided by a majority of 3 to 2 that the professional services were not supplied to Airtours but were supplied to the financial institutions that commissioned the work. The fact that Airtours paid for the services under the terms of an agreement it had signed with the institutions did not mean that it was entitled to reclaim the VAT charged as input tax.

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Summary
The issue in this case is whether
Airtours was entitled to recover
VAT as input tax that it had paid on
the supply of professional services.
The issue seems quite a simple one
but the matter has taken many years
to resolve.
The Supreme Court has decided by
a majority of 3 to 2 that the
professional services were not
supplied to Airtours but were
supplied to the financial institutions
that commissioned the work.
The fact that Airtours paid for the
services under the terms of an
agreement it had signed with the
institutions did not mean that it was
entitled to reclaim the VAT charged
as input tax.
11 May 2016
Supreme Court
The Supreme Court has today handed down its judgment in the long-running case of
Airtours Holidays Transport Ltd (Airtours). In a majority verdict the Court has ruled that
Airtours was not entitled to reclaim the VAT charged on fees for professional services
because, the economic reality of the situation was that the services had not been supplied to
it but to the financial institutions that commissioned the work.
Airtours was in major financial difficulty and owed money to a consortium of some 70 or so
banks (the financial institutions). In an attempt to resolve the financial issues, the financial
institutions commissioned PriceWaterhouseCoopers (PWC) to undertake a financial review
of the Airtours business. As part of that process, PWC engaged with the financial
institutions by way of an engagement letter. Under the terms of that agreement, Airtours
agreed to pay PWC's fees. Airtours argued that it was a party to the agreement and that it
received a benefit from the PWC services. As such, following the earlier judgment of the
House of Lords in the case of Redrow, it argued that it was, therefore, entitled to recover
the VAT charged by PWC as input tax. HMRC disagreed with that view.
The case has gone through all of the tiers of the UK court system and, ultimately, the
Supreme Court has decided by a narrow margin of 3 to 2 that the supply of professional
services by PWC was made to the financial institutions and not to Airtours. The fact that
Airtours was a party to the engagement was purely to ensure that it was contractually obliged
to pay for the services. However, this did not mean that it had a right to deduct the VAT
paid as input tax. The economic reality was that the financial institutions commissioned the
work because they needed it in order to make an informed decision on the future viability of
the Airtours business.
Comment – the fact that the decision of the Supreme court was a split decision with
two dissenting judgments shows how difficult this case has been to decide. That
said it is now the final word on the matter and will come as a blow to Airtours. From
a practical perspective, the judgment now provides clear guidance going forward.
Business in a similar position to Airtours should take advice on establishing
appropriate structures to maximise VAT recovery in the future.
Airtours loses VAT case at Supreme Court
Case Alert
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556