The banks sought to have PwC appointed to carry out the diligence and produce a report on the viability of Airtours. Airtours was required to pay for the report and received a copy of the report. PwC issued an engagement letter that was signed by the banks and by Airtours and issued its invoice to Airtours. HMRC denied Airtours’ input tax recovery on the basis that PwC supplied its services to the banks, with Airtours merely bearing the cost.
Unfortunately by a majority the Court of Appeal upheld the Upper Tribunal’s decision that Airtours was not entitled to recover this VAT. The majority took the view that the “economic reality” of the transaction was that the report was for the benefit of the bank’s business and that the banks had required the report and instructed PwC to prepare the report. Airtours was only party to the engagement letter to the extent that it was required to pay for the services provided to the banks.
In a strong dissenting judgement the lead judge held that PwC had provided services to Airtours for which Airtours was required to pay. PwC’s report was clearly of benefit to Airtours’ business, and Airtours was a signatory to the engagement letter. The fact that the banks received a benefit did not mean that Airtours could not recover the VAT it paid.
It is unclear at this stage if Airtours will be granted leave to appeal to the Supreme Court. If it is, and it does appeal, we believe that it has a good chance of getting this decision overturned.
The case is a further reminder of the fine distinctions that can affect recoverability of input tax.