Airtours – UK Supreme Court finds that a firm paying for PwC accounting services was not entitled to a credit for the VAT because PwC was not contractually obligated to it

A corporation in financial difficulty (Airtours) agreed to pay PwC to prepare a report for its lenders to satisfy them that a proposed restructuring was viable. Lord Neuberger accepted that Airtours would be entitled to a credit for the VAT charged to it by PwC for the report if PwC was contractually obligated to Airtours to provide its report to the lenders (so that Airtours could satisfy the VAT test that it have received a supply from PwC), but instead found that PwC had no such contractual obligation to Airtours, so that no VAT credit was available. The minority, in concluding that PwC also was making a supply to Airtours, found an implied contractual obligation of PwC to Airtours and also paid more heed to the economic reality that Airtours benefited significantly from the PwC report, as it contributed to its successful restructuring.

It is unclear whether a different result would have obtained in Canada. Airtours likely would have been deemed under ETA s. 123 to be the “recipient” of the supply by PwC as it was liable under the engagement agreement to pay PwC’s fee. However, the ETA provision according an input tax credit (s. 169) was amended in April 1997 to replace a reference to property or a service being “supplied to” a particular person by a reference to a property or service being “acquired” by the particular person. In any event, the recognition by both the majority and minority in Airtours, that a contractual right of a person to require service to be provided to a third party represents a supply to that person, is helpful.

Neal Armstrong. Summary of Airtours Holidays Transport Ltd. v. HMRC, [2016] UKSC 21 under ETA s. 169(1).