The decision of the Court of Appeal in Airtours Holidays Transport Limited (formerly MyTravel) (“Airtours”) regarding VAT recoverability on costs relating to restructuring and refinancing has just been released. This case has important implications for businesses that are currently being challenged in this area in both the corporate and private equity M&A sphere.
Key points from the judgment
Airtours lost its appeal, chiefly based on the construction of the contract (letter of engagement) between Airtours, PwC and the banks. The Court found that Airtours’ participation in the contract was restricted to incurring an obligation to pay for the services provided by PwC to the banks and to indemnify PwC against any liabilities it might incur in carrying out their task. It was therefore considered that under the contract PwC was obliged to provide certain services to the Banks for which Airtours agreed to pay. As Airtours was not seen to be the recipient of the services, they were unable to recover the VAT.
The decision was not unanimous. The majority held that the “substance and the economic reality of the agreement was that PwC was supplying services to the Banks in exchange for Airtours’ payments”.
The third judge thought that the Upper Tribunal had not appreciated that even though the banks initially approached PwC, it was Airtours that “not only had positively consented to the appointment of PwC but also that it had an input into the decision to choose PwC rather than another firm.” This resulted in the Upper Tribunal failing to correctly construe and analyse the contract and the surrounding arrangements and to apply the relevant case law.
What does this decision mean for businesses?
It is understood that Airtours has until 20th August to seek leave to appeal the decision, and it seems likely that they will do so. In the meantime, if you :
- Have an appeal currently stayed pending the Airtours decision: HMRC are likely to contact you following the release of this decision. You should consider whether the specific features of the Airtours decision apply to your own facts. For a number of acquisition cost related appeals, it is anticipated that the business wanting to recover input VAT does, as opposed to Airtours, completely participate in the rights and obligations arising under the contract;
- have undertaken a corporate acquisition, restructuring, refinancing or similar transaction in the last 4 years: you should review the VAT position adopted by the business now and underlying documentary evidence, as it may be subject to review by HMRC.
- Are involved in a transaction currently: you should consider contractual arrangements with advisers (particularly those contracts which include more than two parties) and where possible, ensure that the intentions of the parties are properly documented as early as possible so that VAT deductions can be justified by reference to both the facts and documents.