New Judgment: Airtours Holidays Transport Ltd v Commissioners for Her Majesty’s Revenue and Customs  UKSC 21
11 Wednesday May 2016
On appeal from:  EWCA Civ 1033
The Supreme Court has dismissed the appeal of Airtours Holiday Transport Ltd by a majority of 3 to 2, in a case concerning the recovery of input tax.
The case considered whether Airtours was entitled to recover input tax on payments it made to certain advisers under a triparte agreement between it, the advisers, PwC, and certain banks. Airtours had entered into the agreement as a result of financial difficulties in 2002, in order to assess its financial viability and satisfy banks and other financial institutions from which it had borrowed money. PwC was required to produce a report under this contract. Airtours paid all of PwC’s fees, and the PwC Vat in the form out output tax on those payments.
Airtours sought to deduct that VAT as input tax in its VAT returns, but HMRC disputed whether this was possible. While it accepted that the contract entered into had been of commercial benefit to Airtours, it did not accept that PwC’s services under the contract were “supplied to” Airtours.
Lord Neuberger gave the leading judgment, with which Lord Mance and Lord Hodge agreed. He found that PwC’s commitment had been to provide services to the “Engaging Institutions”, and not Airtours, for various reasons, including the manner in which the letter had been addressed to the “Engaging Institutions”, the fact that the financial institutions, as opposed to Airtours, had retained PwC and the fact that a duty of care was explicitly owed only to the institutions.
It was clear from domestic and EU case law that a person who pays a supplier has no right to reclaim input tax where it did not receive any services from the supplier. It dismissed the argument that the substantial commercial interest in the service provision meant that it was possible to consider the services to be “supplied” to it.
In dissent, Lord Clarke and Lord Carnwarth both analysed the commercial reality of the relationship. Lord Clarke concluded that PwC had indeed provided a distinct service to Airtours (and another to the financial institutions). Lord Carnwarth considered it was inappropriate to resolve the appeal on a narrow legalistic construction of contract approach, given that in reality there was unlikely to have been any distinction between the services supplied to the different parties. The economic reality or the construction of contract ought to have provided Airtours with an enforceable right.