Case Preview: Airtours Holidays Transport Ltd v Commissioners for HMRC
25 Friday Mar 2016
Dave Johns, Olswang LLP Case Previews
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Introduction
On the 25 February 2016 the UKSC heard Airtours’ appeal of the decision in Airtours Holidays Transport Ltd v Commissioners for HMRC [2014] EWCA Civ 1033.
Brief Summary of background facts of case
Airtours faced severe financial difficulties in 2002. Airtours had loans with banks and other creditors and had issued over £2 billion of unsubordinated bonds. Airtours entered into a tripartite contract with PwC and the relevant banks to engage PwC to assess the financial viability of Airtours. Under the tripartite contract Airtours would pay all of PwC’s fees and indemnify them against any third party claims. Airtours argued that it had received a supply of services from PwC and had paid for those services. Airtours further believed that they had incurred the costs of the services provided by PwC for the purposes of its business. Airtours therefore believed that it was entitled to an input VAT credit. HMRC agreed that Airtours had paid for the services and was a party to the contract with PwC but disputed Airtours’ proposition that the services had been supplied to Airtours. HMRC argued that the services had actually been supplied to only the banks and therefore Airtours should not be entitled an input VAT credit.
First-Tier Tribunal decision
The First-Tier Tribunal applied the principals set out in the House of Lords decision in Customs and Excise Commissioners v Redrow Group plc [1999] UKHL 4. In doing so the First-Tier Tribunal made it abundantly clear that, subject to the commercial reality, a tripartite contract must not expressly or impliedly restrict the supply of services to one party of the tripartite contract. Based on the facts of this case the First-Tier Tribunal decided that PwC’s services were provided to both Airtours and the banks involved. Therefore Airtours should be entitled an input VAT credit.
Upper Tribunal decision
The Upper Tribunal reversed the decision of the First-Tier Tribunal, determining that Airtours was not entitled to an input VAT credit. The Upper Tribunal stated that, although Redrow is the leading authority on concurrent supplies of services and tripartite contracts, Airtours still had to receive something in return for the consideration it paid PwC in order to be able to claim an input VAT credit. The Upper Tribunal’s decision shows the importance of clear drafting as it was the poor drafting of the tripartite contract which meant that the Upper Tribunal could not decipher what Airtours had received in return for the consideration it paid PwC and ultimately lead to the Upper Tribunal rejecting Airtours’ claim to an input VAT credit.
Court of Appeal decision
The Court of Appeal upheld the Upper Tribunal’s decision by a majority of two to one. The Court of Appeal stated that when determining if a party could claim an input VAT credit one has to look at the commercial and economic realities of the tripartite contract and in particular what Airtours received in return for the consideration it paid PwC. Ultimately, the Court of Appeal had to determine whether PwC was obliged to provide services to just the banks or to both the banks and Airtours. It was noted that, when looking at the commercial and economic realities of the tripartite contract, the actual contractual terms played an integral part in determining such realties. The fact that, despite agreeing on the law, the Court of Appeal judges could not agree on the commercial and economic realities of the Airtours tripartite contract further shows that clear drafting is imperative to being able to claim an input VAT credit.
Appeal to the Supreme Court
The UKSC is being asked to determine whether Airtours is entitled to recover input VAT on payments it made to PwC under a tripartite agreement between itself, PwC, and certain banks. With the ever growing number of recent high profile cases involving tripartite contracts (including Loyalty Management, Baxi, WHA, Adecco and U-Drive) the UKSC’s decision will hopefully provide some much needed clarity in this increasingly confusing area of law and provide a definitive summary to the VAT implications of tripartite contracts.