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January 9, 2017

Airtours Holidays v HMRC - VAT Recoverable on Financial Report?

In the case of Airtours Holidays Transport Ltd v HMRC, the Supreme Court dismissed the taxpayer's appeal and held that it was not entitled to recover input tax paid on an invoice for work carried out by PwC on behalf of its lenders.


  • In October 2002, Airtours Holidays Transport Ltd ("Airtours") was in serious financial difficulties after borrowing money from around 80 financial institutions (the "Institutions").
  • Airtours commissioned PwC to prepare an accountants' report to satisfy the Institutions that the proposed restructuring and refinancing proposals were viable.
  • Airtours paid PwC for the report and sought to recover the VAT it had paid on the fees.
  • HMRC rejected the claim on the basis that PwC's services were supplied to the Institutions, and not to Airtours.

The Case

In determining whether there had been a supply of services by PwC to Airtours, the Court looked closely at the original terms of PwC's appointment and the following was noted:

  1. The documentation was addressed to the Institutions and confirmed that they had retained PwC to provide the services as set out in the letter;
  2. The terms stated that the Institutions request that PwC assist in providing information to them who in turn were providing facilities to Airtours;
  3. Information and advice produced from the engagement was to be addressed to the Institutions with a copy to the directors of Airtours, with the exception of any part of the report prepared exclusively for the Institutions;
  4. There was a duty of care to the Institutions;
  5. The work was required by the Institutions in considering the level of facilities to be granted to Airtours; and
  6. Airtours was responsible for PwC's fees, expenses, and disbursements incurred in carrying out the necessary work.

HMRC argued that Airtours was not entitled to deduct VAT as although the contract was of commercial benefit to the company, the services provided by PwC were supplied to the Institutions and not to Airtours.

In response, Airtours contended that not only had it initiated the idea of having the report prepared and was involved in the selection of PwC, it was liable to pay for the services and was party to the agreement as it had countersigned the terms.

When the commercial background for the report was looked at in the whole, PwC had a contractual duty to Airtours to provide the Institutions with the services and on this basis, the services had been provided to Airtours.

The Decision

The Supreme Court agreed with HMRC and held that on the true construction of the terms, there was no doubt that the contract imposed an obligation on PwC to supply services to the Institutions.

While the fact that Airtours was responsible for paying PwC for the services raised an expectation that PwC would owe a duty to it, the Court did not consider this to be a powerful point. Had the Institutions not required the services, then Airtours would not have arranged for the report to be prepared.

The appeal was therefore dismissed.


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