In 2002 the appellant faced a financial crisis that threatened the continuation of its business and its own existence. It was indebted to over 80 banks and other financial institutions (“the Banks”), pursuant to the terms of various credit facilities. It became apparent to the appellant that it would need to involve the Banks that had been providing the Bank Facilities in agreeing a refinancing package.
PwC was engaged pursuant to a contract contained in a letter of engagement from PwC. The material terms are extracted in the judgment and those terms included the following
- PwC had been retained by the Institutions (various lenders) to provide the Services to enable the Institutions to develop views on the Group’s current financial position and financing needs;
- The Group will be responsible for PwC’s fees, expenses and disbursements in carrying out the work.
There were four further engagement letters for additional work to be carried out by PwC. The terms and conditions of those engagements were not materially different.
It was common ground that there was a tripartite contract between the appellant, PwC and the Institutions in respect of all five engagements – referred to in the judgment as the “Contract”.
The First Tier Tribunal described the work carried out by PwC under the Contract as relating to:
professional services consisting, in summary, of liaising with and making representations to banks and other creditors or bondholders of the appellant, carrying out a strategic review of its business and restructuring proposals, liaising with the Civil Aviation Authority and creating what was termed an entity priority model. That work was wide ranging and highly technical work of a kind that only institutions such as PwC would be capable of carrying out, especially as there was a need for urgent action.
The appellant paid PwC for the work and ultimately the restructuring of the appellant’s business was achieved successfully. The appellant contended that this was only achieved with the assistance of the work undertaken by PwC.
The appellant sought to deduct the VAT which it had been invoiced and had paid in respect of PwC’s fees as input tax in its VAT returns for the relevant periods. The Revenue did not dispute before the FTT that the arrangements were of commercial benefit to the appellant or that the work done by PwC was unnecessary. The Revenue accepted that, if the financial restructuring was to go ahead, there was plainly a need for PwC to perform the services at issue but maintained the position that PwC’s services were not supplied to the appellant, with the result that the appellant was not entitled to deduct the VAT on PwC’s fees as input tax.
The First Tier Tribunal
The Tribunal found in favour of the taxpayer. The Tribunal construed the word “you” in the terms of the Contract to refer to the appellant as well as to the Institutions, thereby finding that the appellant had requested the work as well as having authorised it. The Tribunal also observed that the work of PwC (and the ultimate report) was needed by the appellant and that the appellant authorised it and secured it for its own purposes. The work was not obtained purely for the purposes of the Institutions.
The Upper Tax Tribunal
The Tribunal allowed the appeal by the Revenue. The Tribunal concluded as follows:
- the substance of the transactions was that there was a supply of services by PwC to the Institutions;
- the Contract should be construed as one in which the Institutions contracted with PwC to supply services which the Institutions needed for the purposes of their own businesses and the appellant contracted with PwC to pay its fees, rather than one in which the appellant received something of value from PwC to be used for the purpose of its business in return for payment.
The Tribunal did not consider that the appellant received any Redrow-type benefit and observed as follows:
Unlike Redrow (which used the estate agent’s services supplied to X because that enabled Redrow to sell a new house to X simultaneously with the sale of X’s house), and unlike WHA (which used the garage’s services by obtaining “satisfaction of an obligation to Viscount and the ability to earn the £17.60”), there was no business use made by Airtours of having PwC’s services supplied to the Engaging Institutions. It did not start by needing PwC’s report to place before the Institutions; the Institutions started by wanting the report for themselves, as the Agreement states. The benefit to Airtours was that PwC’s report might lead to continued finance from the Institutions for which Airtours was willing (or was forced) to pay. The choice … is whether in reality Airtours received PwC’s services to be used for the purpose of its business, or received nothing from PwC’s services because they were supplied to the engaging Institutions to be used for the purpose of their business. In substance we decide it was (b) because, as the Agreement makes clear, the Engaging Institutions needed PwC’s services for the purposes of their own businesses and the fact that Airtours received a copy of the report was more of a courtesy than the receipt of the supply of PwC’s services. We consider that the substance is that the Engaging Institutions (and not Airtours) were contracting with PwC for the provision of services, and that PwC supplied those services to the Engaging Institutions (and not to Airtours)…
The majority of the Court of Appeal dismissed the appeal (2:1).
Vos LJ (at ) observed that the appropriate test to determine whether there is a supply of services to a taxable person is to ask whether something was “being done for him for which, in in the course or furtherance of a business carried on by him, he has to pay consideration which has attracted value added tax” – referring to Redrow at 412H per Lord Hope. His Honour then observed (at ) that “the most important elements of the analysis are to ascertain, by reference to the economic realities, the nature of the transaction and what, if anything, the taxable person is receiving in exchange for the consideration he has paid.”
His Honour found that the contract provided quite clearly for the services of PwC to be provided to the Banks and once that was clear, the First Tier Tribunal was wrong to use the evidence of the appellant’s “need” for the report to override the clear meaning of the contract. The existence of that need did not assist in answering the legal question at issue. His Honour found that it was open to the Upper Tribunal to construe the contract as, in substance, a contract for PwC to do something that the Banks wanted for the purposes of their own businesses in order to decide whether to support the appellant in the future and that it only received a copy of the report as a courtesy.
Moore-Bick LJ (at 91]) observed that the appeal raised a narrow point, but one of some difficulty on which it is possible to take different views. His Honour outlined the critical question in the following terms:
…the critical question is whether, as a matter of economic reality, “PwC” provided a service to the Group or to the banks alone and in order to answer that question it is necessary to start by considering the nature of the transaction under which the service was provided. The need for there to be some reciprocity between the payment of consideration and the supply of the service means that, put simply, the critical question in relation to the present transaction is whether PwC entered into an obligation to the Group to provide the banks with a report on its financial position.
His Honour considered that the Upper Tribunal adopted the correct approach in deprecating a linguistic analysis of the letter of engagement and considering the substance of the matter, which involved:
..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. In my view when read in that way it is possible to see that it contained a contract under which PwC undertook an obligation to the banks to provide certain services for which the Group agreed to pay. The language of the letter of engagement is not in my view consistent with the conclusion that PwC undertook an obligation to the Group to provide the services to the banks. The Group’s participation in the contract was limited to incurring an obligation to pay for the services provided by PwC to the banks and to indemnify PwC against any liabilities they might incur in carrying out their task.
In conclusion, his Honour observed that the question (as pointed out by Voss LJ) was not whether the Group needed the report to be produced or whether it obtained a benefit as a result of its production, but whether in producing it PwC were providing a service to the Group for which the Group paid. His Honour found that the Upper Tribunal correctly answered that question in the negative.
The dissenting judgment
Gloster LJ outlined the following propositions which could be drawn from the cases, including Redrow, LMUK and WHA. The majority did not dispute these propositions.
- Consideration of economic realities is a fundamental criterion for the application of the common system of VAT as regards the identification of the person to whom services are supplied.
- Decisions about the application of the VAT system are highly dependent upon the factual situations involved. Thus a small modification of the facts can render the legal solution in one case inapplicable to another.
- When determining the relevant supply in which a taxable person engages, regard must be had to all the circumstances in which the transaction or combination of transactions takes place – in cases where a scheme operates through a construct of contractual relationships, it is necessary to look at the matter as a whole in order to determine its economic reality and the relevant contracts have to be understood in the wider context of the totality of the arrangements between the various participants.
- The terms of any contract between the parties, whilst an important factor to be taken into account in deciding whether a supply of services has been made, are not necessarily determinative of whether as a matter of “economic reality” taxable supplies are being made as between any particular participants in the arrangements. However, the contractual position is generally the most useful starting point for the VAT analysis.
- There may, as a matter of analysis, be two or more distinct supplies within the same transaction.
- The mere fact that the taxpayer has paid for the service does not necessarily mean that it has been supplied to him.
Her Honour found that the cases, on a proper analysis, was like Redrow, and two distinct supplies were being provided by PwC within the same overall transaction, being:
- The supply by PwC to the appellant of the service of having PwC, after appropriate liaison with the appellant’s directors and senior management, review, monitor, and validate (if appropriate) its financial statements, budgets, financial performance, EPM, arrangements with the CAA etc. and report on such matters to the Institutions; and
- The supply by PwC to the Engaging Institutions of the service of reporting on, monitoring and advising in relation to, the appellant’s financial statements, budgets, financial performance, EPM, arrangements with the CAA etc. – in other words the provision to them of “the Services” as defined in the Engagement Letters – in order to enable the Engaging Institutions to decide whether to continue their credit facilities to the appellant.