This case concerns the input VAT recovery on services provided by PwC and paid for by Airtours Holidays Transport Ltd. In late 2002, Airtours, which was in serious financial difficulties, was advised to commission an accountant’s report to satisfy its lenders that their restructuring and refinancing proposals were financially viable. PwC produced a report addressed to the Jayne_Owens_ph[1]lenders, setting out the original terms of its appointment alongside the applicable terms and conditions. The report detailed that Airtours would pay for the production of the report and any related work. Airtours paid PwC the output tax on the payments and subsequently sought to recover this VAT as input tax. HMRC challenged Airtours’ capacity to do this, asserting that while Airtours had benefitted from the commercial contract, the service supplied was to the lenders, not Airtours.

Legal issues

Airtours appealed to the First-Tier Tribunal who found for Airtours on the basis that Airtours:

  • was party to the agreement;
  • authorised PwC to do the work; and
  • required the services from PwC for their own business purposes.

The Upper Tribunal then granted HMRC’s appeal, holding that:

  • PwC’s services were supplied to the lenders;
  • The lenders had instructed the supply of service for the purposes of their business; and
  • Airtours was only party to the contract insofar as it was obliged to meet the costs.

The Court of Appeal dismissed Airtours’ appeal, by a majority of two to one. The court held (as in Redrow) that the sole relevant consideration was not whether Airtours benefited from the contract, but whether it had selected the service provider and instructed them to carry out the service. It also held that Airtours was a party to the contract to the extent that it carried the liability for fees.

Airtours subsequently appealed to the Supreme Court.


On 11 May 2016, the Supreme Court considered the issues of whether PwC contracted to supply the services to Airtours and to whom there was a definite supply of services.

Lord Neuberger concluded that PwC’s provision of services was to the lenders rather than Airtours for the following reasons:

  • It was addressed to the lenders, not Airtours.
  • It provided that the lenders had retained PwC’s services; there was no mention of Airtours.
  • It provided that any reports were for the “sole use” of the lenders.
  • It stated the report was to be provided to the lenders, Airtours was only to be provided with a copy which could be redacted.
  • The duty of care on the part of PwC was to the lenders, it does not acknowledge one to Airtours, and further it excluded a duty of care or liability to any other “party“.

Although, Airtours had paid for the service it was not enough to raise a prima facie expectation that PwC owed it any duty of care. There was no indication that they would have paid in the absence of a request for a report from the lenders.

Airtours contested that consideration should be given to the facts that they had received a service, their substantial commercial interest and their subsequent payment for the service (including a £200,000 retainer). Airtours sought to rely on Commissioners of Customs and Excise v Redrow Group PLC, that the question to be asked is if the taxpayer received “anything – anything at all – used or to be used for the purposed of his business“. Lord Neuberger observed that Redrow must be also construed in light of more recent case law, that it should be interpreted consistently with the established approach of both European and domestic law of focusing on economic realities as the fundamental criterion for the application of VAT. Where a supplier is not contractually entitled to the receipt of services, the economic reality of the situation is imperative, the payer has no right to reclaim by way of income the VAT in respect of the payment to the supplier.  Lord Neuberger found that the contract with PwC did reflect economic reality and it was not an artificial arrangement. Airtours benefitted from the contract in that it enhanced the possibility of obtaining funds from the lenders.

The appeal was granted by a majority of three to two. The dissenting Justices expressed support for Lady Glover’s dissenting Court of Appeal judgment in which she considered that the contract involved two separate supplies, one to Airtours and another to the lenders.


The Supreme Court’s decision highlights that the courts continue to find difficulties in ascertaining the recipient of supplies made under tripartite contracts, for businesses trying to recover VAT costs on fees incurred on professional services. It confirms that reliance on Redrow is not enough and that the economic reality should be considered.  It clarifies that the service provider must be instructed and engaged by the company wishing to recover the input tax and that the contract should expressly convey to whom the services are to be provided to or on behalf of.

This decision will be of interest to employers with defined benefit schemes and their advisers. In March 2015, HMRC published a list of terms that should be evidenced in a tripartite agreement before they would accept a supply was made to employers. Extra care will need to be taken when drafting contracts to ensure input tax recovery whilst avoiding infringements under relevant pension law provisions.