In Airtours Holiday Transport Ltd v HM Revenue & Customs (HMRC) , the tax chamber of the first-tier tribunal decided that Airtours Holiday Transport Ltd (Airtours) was entitled to a credit for input VAT on fees that it had paid to PricewaterhouseCoopers (PwC). HMRC argued that Airtours was merely a third-party payer and that PwC’s services had been provided to financial institutions, not to Airtours. The tribunal applied the ratio of the decision of the House of Lords in Commissioners of Customs & Excise v Redrow Group Plc  and determined on the facts that the supply of accountancy services was made both to Airtours and the banks. Accordingly, Airtours was entitled to an input tax credit as it had been a recipient of a supply of services.
The decision in Airtours is an important one in the current economic climate because it is not unusual for businesses, along with their creditors, to seek the services of professionals, such as accountants, in an attempt to rescue their businesses.
In 2002 Airtours (then known as MyTravel) faced a severe financial crisis that threatened its survival. The crisis was caused because Airtours’ share price had collapsed as a result of an announcement by Airtours of certain accounting difficulties it had encountered. As a result of this, some of its creditor banks refused to allow it to drawdown funds. At the time, Airtours was heavily indebted to banks, and other financial institutions and creditors. Airtours had issued unsubordinated bonds to holders that amounted to finance of over £2bn. It was imperative, therefore, that a rescue package involving the banks and other creditors was entered into if Airtours was to survive.
The banks formed a steering committee and PwC was engaged to provide professional services comprising:
- liaising with and making representations to banks and other creditors or bondholders of Airtours;
- carrying out a strategic review of Airtours’ business and restructuring proposals; and
- liaising with the Civil Aviation Authority and creating an entity priority model.
PwC entered into five engagement letters, each one addressed to ‘the engaging institutions’, which were accepted by these institutions and Airtours. The relevant provisions were that:
- PwC had been engaged by the engaging institutions who had counter-signed the engagement letter (the engaging institutions);
- the reports and letters prepared by PwC were for the sole use of the engaging institutions;
- PwC had been requested to assist in providing information to the institutions providing facilities to Airtours to enable them to develop views on Airtours’ financial position and financing needs;
- information and advice arising from the engagement was to be addressed to the engaging institutions, with a copy to the directors of Airtours, with the exception of any part of the report prepared exclusively or confidentially for the engaging institutions;
- PwC had a duty of care to the engaging institutions and also to specific institutions where Airtours had requested an extension to its existing financing facilities that required specific advice to be given to those institutions;
- PwC limited its aggregate liability for any breach of contract, tort or negligence in respect of Airtours, or the engaging institutions, or any other party to whom PwC later agreed to assume a duty of care;
- Airtours was responsible for PwC’s fees, expenses and disbursements, and original invoices would be sent to Airtours with a copy to a representative of the engaging institutions; and
- Airtours would indemnify PwC against claims brought by any third party.
PwC’s terms and conditions of service included the following:
‘These terms and conditions apply to the services that we will provide to you pursuant to the attached letter of engagement. The letter of engagement and the terms and conditions are together referred to as “the contract”. The contract forms the entire agreement between us relating to the services. It replaces and supersedes any previous proposals, correspondence, understanding, or other communication whether written or oral.
For the avoidance of doubt, “we” and “our” refers to PwC, a UK partnership… and “you” and “your” refers to the entity or entities on whose behalf the attached letter of engagement was acknowledged and accepted.’
Both the engaging institutions and Airtours signed the letters of engagement, thereby agreeing to PwC’s terms and conditions. Clause 10 of the terms and conditions provided:
‘You agree to indemnify us to the fullest extent permitted by law against all liabilities, losses, claims, demands and expenses, arising out of or in connection with your breach of any terms of the contract.’
The letter of engagement (clause 26.1) confirmed that the reference to ‘you’ in clause 10 of PwC’s terms and conditions and ‘only in that clause’ referred to Airtours and not the engaging institutions.
Airtours’ company secretary, Greg McMahon, gave evidence that the tribunal accepted as entirely truthful. In his evidence McMahon stated:
‘MyTravel were keen to have an adviser reviewing the plans for the business and to provide confirmation to the steering committee that, based on the information available at the time, the agreed actions were reasonable. When determining who to appoint to provide this assistance it was necessary to appoint an adviser that was acceptable to the steering committee and MyTravel and I note that MyTravel had a role in the decision-making process as to who was going to be appointed.’
Airtours argued that it had received a supply or supplies consisting of the services provided by PwC and had paid for those supplies, and that they were received for the purposes of its business.
HMRC accepted that Airtours paid for the services and was a party to the agreements with PwC but argued that the supply was only to the banks and other institutions, and not to Airtours.
The first-tier tribunal upheld Airtours’ appeal. HMRC had argued that the reference to ‘you’ in the engagement letters only referred to the engaging institutions and not to Airtours except in the one provision where ‘you’ was stated in the letter of engagement (clause 26.1) to refer to Airtours alone. The tribunal did not agree with this analysis and was of the view that clause 26.1 of the letter of engagement indicated that in all other places ‘you’ included both Airtours and the engaging institutions apart from the one clause (clause 10) where it only referred to Airtours. From this conclusion it followed that elsewhere in the letter of engagement references to ‘you’, in particular those clauses where the ‘you’ referred to those who had requested work from PwC and those who were owed a duty of care by PwC, included Airtours.
There was no dispute between HMRC and Airtours as to whether Airtours was a taxable person, and whether it was conducting a business. What was in dispute was whether there was any supply to Airtours at all. HMRC accepted that if there was a supply then it was in the course of Airtours’ business. In reaching its conclusion that there was a supply of services by PwC to Airtours the tribunal derived the following propositions drawn from Redrow, Loyalty Management UK Ltd v HM Revenue & Customs  and WHA Ltd & anor v Customs & Excise :
- If a service has been provided there is no need to define it. Indeed to do so might lead to error.
- If a supply is made for a consideration and it is not a supply of goods then it is a supply of services.
- A supply of a service may consist of a right to have the service supplied to a third party.
- The correct approach is to look at the question from the point of view of the paying party. The person claiming the right to deduct input tax must identify the payment they claim to have made and by which they claim to have obtained something for the purposes of their business, which they therefore claim gave rise to the deduction.
- Provided they obtained anything at all that was used for the purpose of their business the right to deduct input tax will arise.
- The fact that someone else also received a service as part of the same transaction as that received by the party making the deduction does not prevent deduction.
- Questions such as who pays, who receives the invoice and who authorises the work will be relevant.
The tribunal commented that proposition 6) was drawn from Lord Hope’s judgment in Redrow, but the fact that Lord Hope had referred to ‘a’ service rather than ‘the’ service did not mean that the third party had to receive a different service, and Chadwick LJ in Loyalty Management and WHA accepted that the service received by the two parties could be the same. The tribunal concluded that Airtours was a party to the contract and that Airtours, as well as the engaging institutions, had requested PwC’s services. Airtours needed the work done by PwC. This conclusion was supported by Airtours’ company secretary’s evidence. The fact that copies of reports and advice given by PwC were to be copied to the directors of Airtours was also indicative of a supply being made to Airtours by PwC. The tribunal was satisfied that PwC’s services were not obtained solely for the purposes of Airtours’ creditors.
This tribunal decision is a useful one for businesses. It is noteworthy, however, that HMRC is still challenging taxpayers on the facts of individual cases as to whether or not a supply has been made to the person seeking an input tax deduction, where tripartite contracts are involved.
The decision in Redrow turned very much on the particular facts. If one party to a contract is bearing all the costs it is important that the documentation can support a contention that a service is being supplied to that party. HMRC will look closely at the documentation and if the documentation cannot support a taxpayer’s contention, then it is likely that an input deduction will be disallowed, with the prospect of litigation for the taxpayer to get their deduction.