When claiming input VAT on purchases, it is important to ensure that the purchase is for the taxpayer’s business purposes.
In Airtours Holidays Transport Ltd v Revenue and Customs Commissioners ( EWCA Civ 1033, published 25 July 2014), the Court of Appeal considered a tripartite agreement. One party to the agreement (Airtours) had claimed the VAT charged by a second party (PwC). HMRC stated that PwC’s supply was not made to Airtours, but to the third party to the agreement (banks). Airtours’ claim was denied.
Interpreting the contract was central. The decision turned on “reading the document as a whole, together with the terms and conditions, in a businesslike manner and seeking to identify what legal relationships the parties intended to create.” Although Airtours needed PwC’s report to secure funding and paid PwC for its services, the Court found the economic reality was that PwC had only provided its report for the business purposes of the banks and not for those of Airtours, as was indicated by the terms of the tripartite contract.
This has been a difficult issue for the courts to decide. The FTT had found in favour of Airtours and the UT had found for HMRC. The Court of Appeal’s decision was a majority verdict, the dissenting judge’s view being that two supplies had been made by PwC, with Airtours requiring from PwC the service of supplying a report to the banks. This decision is likely to be appealed.
However, one issue has been clarified. It is important that contract terms are expressed carefully and make it clear who is receiving services for their business purposes, as this does have significant VAT implications for those involved.