Airtours Holidays Transport Limited v HMRC [2016] UKSC 21

Airtours are a large UK based company that provide travel agent services on the internet.  The company suffered financial difficulties in the year 2002 which caused concerns for some of their 80 creditors in the lending sector.  Airtours engaged PwC to independently audit their financial statements on behalf of their creditors, a service which Airtours paid upwards of £200,000 for.

The question arising in this appeal to the Supreme Court is whether or not Airtours were entitled to claim input tax credits for the transaction (which would be deducted from their VAT bill).

Section 24(1) of the Value Added Tax Act 1994 provides:

"Subject to the following provisions of this section, "input tax", in relation to a taxable person, means the following tax, that is to say–

(a) VAT on the supply to him of any goods or services."

Previous cases before the Supreme Court establish that where a third party pays for a supply made to another entity, input tax credits are not claimable by the first (paying) entity.  For example in WHA Limited¹ an insurance company that paid for the car repairs of an insured customer was not entitled to claim input tax credits from the repair invoice.  The reason being that WHA received no supply of services, it was the insured customer who received those services.  Thus the requirements of s.24(1)(a) were not satisfied.

The present dispute arose because the HMRC contended that PwCs auditing service was provided to Airtours' creditors as opposed to Airtours itself, thus the HMRC disallowed the claim for input tax credits. 

Airtours claimed that it did receive the service, either in full or in part and thus was entitled to claim input tax credits on the VAT charged to it by PwC.  This is summarised by p22 of the judgement:

"The first question, then, is whether, on the true construction of the Contract, PwC contracted to supply services to Airtours. There is no doubt that the Contract imposes an obligation on PwC to supply services to the Institutions. The issue is whether PwC agreed, in addition, with Airtours that they would supply those services. Thus, it is enough for Airtours’ purposes if it can establish that PwC were under a contractual obligation to Airtours to supply services, such as providing the Report, to the Institutions. Airtours does not have to show that PwC were under a contractual obligation to supply any services directly to Airtours."

The majority of the Supreme Court found in favour of the HMRC, finding that:

"From these domestic and Court of Justice judgments, it appears clear that, where the person who pays the supplier is not entitled under the contractual documentation to receive any services from the supplier, then, unless the documentation does not reflect the economic reality, the payer has no right to reclaim by way of input tax the VAT in respect of the payment to the supplier."²

"It is true that Airtours benefitted from the Contract, but the benefit which it was getting was not so much the Services from PwC, but the enhanced possibility of funding from the Institutions for its restructuring (a possibility which eventuated into reality thanks, to a substantial extent, to the Report). And it was to improve the prospects of such refinancing that Airtours was prepared to pay for the provision of the Report."³

The full Supreme Court agree on all the general tax principles at issue in this case.  Particularly that in order to claim input tax credits an entity must have actually received services from a supplier, which are proportionate to the amount paid.  The Supreme Court were split 3-2 on this issue, with the two dissenting justices disagreeing with the application of the facts of the present case to the established VAT principles, finding that:

"The first payment by Airtours, a retainer of £200,000, had to be made on commencement. It is legitimate to ask what would have happened if, having paid its £200,000 on 2 November in the expectation of receiving a draft PwC report 13 days later, Airtours had been faced with a failure by PwC to do anything. On Lord Neuberger’s interpretation of the contract it would have had no enforceable right of any kind. I find that impossible to accept, either as a matter of ordinary contractual construction, or still less of economic reality. The timetable in clause 19 was part of the obligations undertaken by PwC under the contract. There is nothing in the contract to suggest that the obligation was not enforceable by Airtours as a party to the contract. Commercial sense clearly dictates that it should be so.

For these reasons, in addition to those given by Lord Clarke, I would have allowed the appeal."⁴

Notes

Case [2016] UKSC 21:  http://www.bailii.org/uk/cases/UKSC/2016/21.html

1.  [2013] UKSC 24
2.  p50
3.  p51
4.  p83&84

Legislation

Value Added Tax Act 1994