The Supreme Court handed down its judgement in the Airtours case last week. This case is the latest in an ever increasing line of case law relating to tripartite VAT recovery.
HMRC were successful in denying Airtours recovery of VAT on the costs incurred on the basis that Airtours was not receiving services under the contract, nor did it contract with PwC to have services provided to a third party. Further, the Court held that the economic reality was reflected in the contract and therefore Airtours could not be seen as receiving a supply on those grounds.
What’s the case about?
Airtours was in financial difficulty and in 2002 it decided to appoint PwC to produce a report for various lending institutions. This report was to be used by the lending institutions to assist with their decision making on whether to extend Airtours’ credit facilities. Airtours was party to the agreement and a beneficiary of the outcome as it would benefit by being able to continue to trade if the lending institutions agreed to support the business. Airtours contracted to pay PwC the costs of producing the report, but it was only entitled to a copy of the report in redacted form. The engagement contemplated that the report was being prepared for the lending institutions.
Airtours recovered the VAT on the invoices it received from PwC. HMRC disagreed with this VAT recovery as its opinion was that Airtours had not received a supply of services from PwC. Only the lending institutions had received a supply.
Following defeat in the Court of Appeal which found for HMRC (2 judges to 1) Airtours appealed to the Supreme Court. The Supreme Court was equally split on the outcome with three judges finding for HMRC and two against.
So does this apply in all tripartite scenarios?
Whilst this means that HMRC were successful in this case and that Airtours will not receive the VAT paid as input tax, the situation where three parties are involved in a supply remains unclear. The Supreme Court has followed the line of thought from various cases that a small difference in fact can alter the outcome of a case. Whilst there is a lack of certainty from this decision it does still give businesses that have assessments from HMRC, or ongoing disputes with HMRC, an opportunity to consider whether, following the Supreme Court’s decision, their fact pattern is distinguishable from Airtours.
We would recommend the following points are considered:
- In addition to paying for the services (assuming the paying party is trying to recover the VAT), is the contractual position clear that the supplier is under a contractual obligation to the business reclaiming the VAT to provide services to that party? The decision in Airtours indicates that the services do not need to be provided directly to the business recovering the VAT – no doubt this point needs to be carefully considered and hopefully HMRC will express a view on what they think this part of the decision means; and
- Does the contract reflect the economic reality of what is happening? If not, then the wider economic and commercial reality should be considered to identify whether services have been received.
Is this just relevant to professional costs?
Clearly, the area of legal and other professional costs remains the highest profile tripartite scenario. However, this remains a complex area of VAT law and the ongoing appeals, due to be heard by the Upper Tier Tax Tribunal later this year, in the cases of Associated Newspapers (input tax on vouchers purchased for a business promotion scheme), and U-Drive (input tax on costs of repairing 3rd party vehicles and property damaged by a van and car hire business) indicate that tripartite scenarios can arise in a range of businesses.
Please contact Sean McGinness on 01962 735 350 should you wish to discuss the above in more detail.