Three UK court cases were summarized: 1) The UK Supreme Court ruled in Airtours v HMRC that a company was not entitled to deduct VAT payments on professional services supplied to banks, not the company, even though the company paid the fees. 2) The Court of Appeal dismissed an appeal by the University of Huddersfield relating to a VAT planning arrangement for building works, finding the arrangement was an abusive tax scheme. 3) The Court of Justice ruled that bus fares charged by a local authority were outside the scope of VAT and not an economic activity, since only 3% of costs were covered by parental contributions.

1. © 2016 Grant Thornton UK LLP. All rights reserved.
ITU
Summary
The highlight of this week's ITU
is, undoubtedly, the UK Supreme
Court's judgment in the long-
running issue relating to whether
Airtours was entitled to deduct
VAT it had paid on professional
services.
On a majority decision (3-2), the
Court has ruled that the services
in question were not supplied to
Airtours and, as a consequence, it
was not entitled to make the
claim.
In another long-running case, the
Court of Appeal has dismissed
the University of Huddersfield's
appeal relating to whether a VAT
planning arrangement, designed
to recover VAT on building
works, was an abuse of rights.
The court concluded that, on the
evidence, the arrangement was
abusive.
Finally, bus fares charged by a
local authority have been found
by the Court of Justice to be
outside the scope of VAT.
17 May 2016
Airtours Holiday Transport Ltd (Airtours)
This case has been running for many years. The issue was whether Airtours was
entitled to claim back, as input tax, VAT that it had paid on the supply of professional
services. It claimed that it was a party to the contract for supply and that following
earlier case law, (Redrow), it had received some benefit from the services that had been
supplied. HMRC took a different view. It claimed that the services in question were
supplied to a consortium of financial institutions and that, as such, Airtours was not
entitled to reclaim the VAT paid.
Airtours was in financial difficulties and sought a refinancing arrangement with the 70
or so creditor banks. Understandably, the banks needed to assess whether Airtours was
a viable proposition and appointed PriceWaterhouseCoopers (PWC) to undertake a
comprehensive business review. PWC's engagement was with the banks although
Airtours was a countersignatory to the engagement contract. Airtours considered that,
as a countersignatory, it had, therefore, received the business review services from
PWC and they were entitled to reclaim the VAT paid.
In a majority decision, the Supreme Court has ruled that, on the evidence, the
economic reality was that it was the banks that had appointed PWC as it was they that
required the business review to enable them to decide whether to lend further money.
The fact that Airtours was a countersigning party to the contract for services was not
conclusive that it had received the supply of services from PWC. It was included as a
party to the contract for the purposes of ensuring that it was 'on the hook' for payment
of PWC's fees. The supply of PWC's services was to the banks and Airtours was not
entitled to reclaim the VAT it had paid.
Comment – This case confirms that in order to reclaim VAT it is necessary for
the taxpayer to have received the supply in question. Airtours argument that it
had received some 'Redrow' benefit in return for the payment did not find
favour with the Supreme Court. The payment of PWC's fees was third party
consideration which did not entitle Airtours to make the claim for input tax
deduction.
The case emphasises the importance of ensuring that, for VAT purposes, a
contract for services is struck with the correct parties. An agreement to pay
another party's VAT will not entitle the payer to a VAT input tax deduction.
Issue16/2016
Airtours defeat at Supreme Court
Indirect Tax Update

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GRT100456
University of Huddersfield
Court of Appeal
In another long-running case, the University of Huddersfield has lost its appeal to the Court of
Appeal on whether a VAT planning scheme was 'abusive' in an EU law sense.
The University wished to refurbish an old mill which it intended to use after the refurbishment for
the provision of university education (an exempt from VAT activity). Without more, the
refurbishment works would have carried a substantial VAT cost which, due to the nature of its
exempt educational activities, the university would have been unable to reclaim. It sought advice and,
as a result of that advice, it implemented a lease and leaseback arrangement with a Trust that it had
established for that purpose. By opting to tax, the lease and leaseback arrangement became taxable
which entitled the university to full VAT recovery in relation to the refurbishment costs.
HMRC considered that arrangement to be 'abusive' in an EU VAT law sense. The Court of Appeal –
agreeing with the Upper Tribunal - has ruled that the planning scheme was an arrangement which
provided the university with a tax advantage that was contrary to the purpose of the VAT Directive.
In addition, the tax advantage was the main aim of the planning arrangement. In light of those
findings, the court concluded that the planning arrangement was an abuse of law and that, in
consequence, the planning arrangements had, for VAT purposes, to be re-defined. This should be
done by, effectively, ignoring the steps regarded as 'artificial'.
Comment
The court found that
the object of the
planning scheme was to
obtain a VAT
advantage - by the
interposition of actors
and transactions which
had no other purpose
than to secure that
VAT advantage; and
those transactions had
no commercial effect
other than to secure
that advantage.
In such circumstances,
the Courts are likely to
find an abuse of EU
law.Gemeente Borsele
Comment
This is another case
where the issue was
whether or not
payments that were
received was to be
regarded as
consideration. For
there to be a supply for
VAT purposes,
consideration has to be
present. This is
generally in the form of
money paid but can
also be in non-
monetary form. If there
is no consideration,
there is no supply and
no economic activity
conferring any right to
deduct input tax.
Court of Justice
The issue in this case – a Dutch referral to the Court of Justice – was whether the provision of
transport services to schoolchildren by a local authority constituted an 'economic' activity for VAT
purposes. The Local Authority argued that it was a taxable person undertaking a taxable activity when
it arranged with third party bus operators to transport children to and from local schools. Only one
third of parents made a contribution to the cost of the service (representing approximately 3% of the
total cost). The balance of the cost being provided from public funds.
The Authority argued the 3% paid by parents meant that, under the VAT Directive, it was a taxable
person as the money it received was consideration for the supply of transport services. As such, it
contended that it was, thus, entitled to reclaim the VAT charged to it by the bus contractors. The
Dutch tax authority disagreed and disallowed the claim.
The Court of Justice has ruled that there was no direct or immediate link between the 3%
contribution payments made by the parents and the services that were provided. As such, following
the earlier similar judgment in Commission v Finland (involving legal aid services), in the absence of
there being a supply for consideration, the Local Authority was not acting as a taxable person when it
provided the transport services. There was, therefore, no entitlement to deduct the VAT charged by
the bus contractors.
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