In a 3:2 decision, the UK Supreme Court has dismissed the taxpayer’s appeal in Airtours Holidays Transport Ltd v Revenue & Customs [2016] UKSC 21. The issue in the appeal was whether Airtours was entitled to recover, by way of input tax, VAT charged by PwC in respect for services provided by PwC to various financial institutions which were paid for by Airtours.

The majority reviewed previous domestic and Court of Justice judgments, including Redrow and Loyalty Management. In doing so, the majority agreed with the majority in Loyalty Management that Lord Millet’s observations in Redrow went too far, when he said that the question to be asked was whether the taxpayer obtained “anything- anything at all”. Rather, the question to be asked was as follows (at [50]):

…where the person who pays the supplier is not entitled under the contractual documentation to receive any services from the supplier, then, unless the documentation does not reflect the economic reality, the payer has no right to reclaim by way of input tax the VAT in respect of the payment to the supplier.

Applying this analysis, Airtours appeal failed for the following reasons:

• it was not entitled under the contract (expressly or by implication) to receive any services from PwC; and
• the Contract did reflect economic reality and was not in any way an artificial arrangement.

The dissenting judgements considered that the “narrow legalistic approach” of the majority was too narrow, was inappropriate in the circumstances, and gave too little attention to the legal relationship between PwC and Airtours and to the economic realities of that relationship.

The decision illustrates the difficulties that can arise in the context of VAT/GST and “tripartite agreements”. The decision also illustrates how minds may readily differ on the characterisation of a transaction for the purposes of VAT/GST, with strong dissenting judgments in both the Supreme Court and the Court of Appeal.

My analysis of the decision can be accessed here. A more detailed analysis of the issue of tripartite agreements can be found in a paper that I presented earlier this year at the Television Education Network GST Symposium in Brisbane – my paper can be accessed here and also under the “My Articles” menu.