VAT not recoverable on fees for accountants' report to banks on a refinancing, says Court of Appeal

The Court said that the VAT was not recoverable because PwC had supplied its services to the banks and not to Airtours.

Tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-law.com, said: "Whilst very much decided on its own facts, this latest decision has to be of concern to any business trying to recover VAT costs in the restructuring, or any other, context on the basis of the ruling in the Redrow case. If you have a claim held in limbo awaiting this decision, expect HMRC to come knocking on the door very soon."

In 2002 Airtours was in severe financial difficulties. In order for a refinancing of its debts to go ahead PWC was appointed to report to Airtours' lenders on its financial situation. The banks and Airtours signed an engagement letter with PwC, obliging PwC to provide the report to the banks, at Airtours' expense. Airtours tried to recover the VAT it had paid on the fees but HM Revenue and Customs (HMRC) denied the recovery on the basis that the supplies were made by PwC to the banks and not to Airtours.

VAT is recoverable if it constitutes ' input tax' - which is VAT on a supply to the person claiming VAT recovery of any goods or services used or to be used for the purpose of any business carried on or to be carried on by him.

In 2009 the First Tier Tribunal held that Airtours had received supplies from PwC that were used for the purposes of its business and so it could deduct the input tax. HMRC appealed and in 2010 the Upper Tribunal found in favour of HMRC and denied the input tax recovery.

The Upper Tribunal said that there was a supply of services by PwC to the banks and the engagement letter should be construed as a contract in which the banks agreed with PwC to supply services which the banks needed for the purposes of their own businesses. It said that Airtours contracted with PwC to pay the fees, rather than to receive something of value from PwC to be used for the purpose of its business.

Two out of the three judges in the Court of Appeal said that the Upper Tribunal was right to overturn the decision of the First Tier Tribunal.  Lord Justice Moore-Bick said "The language of the letter of engagement is not in my view consistent with the conclusion that PwC undertook an obligation to the Group to provide the services to the banks. The Group's participation in the contract was limited to incurring an obligation to pay for the services provided by PwC to the banks and to indemnify PwC against any liabilities they might incur in carrying out their task."

Dismissing Airtours' appeal Lord Justice Vos said that the true question was not whether Airtours needed the report to be produced or whether it obtained a benefit as a result of its production, but whether in producing it PwC were providing a service to Airtours for which Airtours paid.

In a dissenting judgment Lady Justice Glover said that the input tax could be recovered. She decided that there were two distinct supplies provided by PwC and it supplied to Airtours the right to have the services provided by PwC to the banks.

In February 2013 the Court of Appeal decided that VAT incurred by a holding company on a takeover was not recoverable in a case concerning UK airport operator BAA.

Eloise Walker said "The real problem with both these cases is that it leaves everyone wondering what the correct position in law really is. Would Airtours be successful if they'd been a bit more careful about how they drafted PwC's engagement letter? Would BAA if there had been better evidence of intention to make taxable supplies of management services? It is to be hoped that Airtours will seek leave to appeal, and that we get a bit more clarity next time around."