United Kingdom Supreme Court

The factual and procedural background

Para 1, which confirmed that PwC had “been retained by the Institutions as defined in para [4] to provide … ‘the Services’”, which were set out in an Appendix to the Letter, and as I shall refer to them. They included items such as “Current trading position”, “historic cash utilisation”, “Review of accounting policies and issues”, and “Budget for year to 30 September 2003”.

Para 4, which stated that the Report was “for the sole use of the Institutions who have expressly agreed to this letter … by countersigning below”, and that the information and advice given by PwC could be passed to the Institutions, to whom PwC were prepared to “assume a duty of care” if they countersigned the letter.

Para 6, which recorded a request “you” had made that PwC “assist in providing information to the institutions providing facilities to [Airtours]”.

Para 7, which referred to the work being carried out in phases, and referred to Airtours’ “likely requests for facility extensions”

Para 8, which stated that “Information and advice produced from this engagement is to be addressed to the Engaging Institutions with a copy to the directors of [Airtours], with the exception of any part of the report prepared exclusively or confidentially for the Engaging Institutions”.

Paras 9, under which PwC accepted that they had “a duty of care to the Engaging Institutions”.

Para 10, under which “[y]ou accept that the aggregate limit referred to in paragraph 9 of our Terms and Conditions applies to our liability to [Airtours] and the Engaging Institutions”.

Para 12, which provided that “[y]ou have requested us to undertake a review of [Airtours] as set out below. Our work is required by the Institutions in considering the level of facilities granted to [Airtours]”.

Paras 13-18, which described the “scope” of these Services, including the phasing, the limitations, and the extent of the work to be done.

Para 19, which provided that “a draft of our findings will be available for discussion with management” by a specified date, and on a subsequent date “with the Engaging Institutions”.

Para 22, which stated that “[Airtours] will be responsible for our fees, expenses and disbursements incurred in carrying out our work ...”.

Para 25, which provided that “… [o]ur terms are that a retainer of £200,000 be payable on the commencement of our work and that weekly invoices will be rendered to [Airtours and] … are payable on submission”.

Para 26, which stated that “[t]he attached terms and conditions (‘the Terms and Conditions’) … set out the duties of each party in respect of the Services. The Terms and Conditions provide that among other matters:

i)                  [Airtours] will indemnify us against claims brought by any third party. For the avoidance of doubt, the reference to “you” in clause 10 of the Terms and Conditions (and only in that clause) refers to [Airtours] and not the Engaging Institutions …

ii)                our aggregate liability to [Airtours], the Engaging Institutions and any other third party … will be limited in accordance with clause 9.4 of the Terms and Conditions …

iii)             … the Engaging Institutions and [Airtours] both agree to all the terms contained in the Contract.

Clause 2, which required “you” to ensure that all information provided is accurate, that any reports will be based on “information provided by you”, and states that “we will not be required to direct your affairs”.

Clause 3, under which “you agree to pay our fees promptly …”.

Clause 9.4, which limited PwC’s liability for “loss or damage … suffered by you”, and 9.5, where the Letter is signed by more than one party, this limit will “be allocated” between them.

Clause 10, which provided that “[y]ou agree to indemnify us to the fullest extent permitted by law against all liabilities, losses, claims, demands and expenses arising out of or in connection with your breach of any of the terms of the Contract …”.

Clause 12, subclause 1 of which provided that “either of us may terminate the Contract … upon the expiry of 30 days’ notice”; the clause contained other provisions for determination, including in subclause 5 a right for PwC to terminate “if we do not receive payment from you of any invoice within 30 days of the due date”.

“The principle of the common system of VAT entails the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, however many transactions take place in the production and distribution process before the stage at which the tax is charged. On each transaction, VAT, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of VAT borne directly by the various cost components. The common system of VAT shall be applied up to and including the retail trade stage.”

“‘Supply of goods’ shall mean the transfer of the right to dispose of tangible property as owner.”

“‘Supply of services’ shall mean any transaction which does not constitute a supply of goods.”

“in respect of the supply of goods or services … everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, …”

The issues on this appeal in summary

The first question: was there a contractual obligation to supply?

The second question: was there nonetheless a supply?

“I think that Lord Millett went too far [at p 418G] when he said that the question to be asked is whether the taxpayer obtained ‘anything - anything at all’ used or to be used for the purposes of his business in return for that payment. Payment for the mere discharge of an obligation owed to a third party will not, as he may be taken to have suggested, give rise to the right to claim a deduction. A case where the taxpayer pays for a service which consists of the supply of goods or services to a third party requires a more careful and sensitive analysis, having regard to the economic realities of the transaction when looked at as a whole.”

“a supply of services is effected ‘for consideration’ … and hence is taxable, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.”

Conclusion

LORD CLARKE: (dissenting) (with whom Lord Carnwath agrees)

i)                   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.

ii)                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.

iii)              The case law of the CJEU indicates that, 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. Thus the relevant contracts have to be understood in the wider context of the totality of the arrangements between the various participants.

iv)              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. That may be particularly so where certain contractual terms do not wholly reflect the economic and commercial reality of the transactions. However, the contractual position is generally the most useful starting point for the VAT analysis.

v)                 There may, as a matter of analysis, be two or more distinct supplies within the same transaction. Moreover, a single course of conduct by one party may constitute two or more supplies to different persons. Once the taxpayer has identified the payment the question to be asked is: did he obtain anything - anything at all - used or to be used for the purposes of his business in return for that payment? This will normally consist of the supply of goods or services to the taxpayer. But it may equally well consist of the right to have goods delivered or services rendered to a third party. The grant of such a right is itself a supply of services. In one case (“Redrow”) the taxpayer did not merely derive a benefit from the services which the agents supplied to the householders and for which it paid. It chose the agents and instructed them. In return for the payment of their fees it obtained a contractual right to have the householders’ homes valued and marketed, to monitor the agents’ performance and maintain pressure for a quick sale, and to override any alteration in the agents’ instructions which the householders might be minded to give. Everything which the agents did was done at the taxpayer’s request and in accordance with its instructions and, in the events which happened, at its expense. The doing of those acts constituted a supply of services to the taxpayer. … The services obtained by the taxpayer were different. They consisted of the right to have the householder’s home valued and marketed in accordance with the taxpayer's instructions. Unless the householder sold his home and completed the purchase of a ‘Redrow’ home, however, the taxpayer was not liable for the agent's fees and paid no input tax, so there was nothing in respect of which a claim to deduction could be made. What must await events was not the identity of the party to whom the services were rendered, for different services were rendered to each; but which of the parties was liable to pay for the services rendered to him and so bear the burden of the tax in respect of which a claim to deduction might arise.

vi)              However, the mere fact that the taxpayer has paid for the service does not necessarily mean that it has been supplied to him. Consideration of economic realities is a fundamental criterion for the application of VAT. Thus substance and reality remain critical. What is required is a realistic appreciation of the transactions in question. Consideration paid in respect of the provision of a supply of goods or services to a third party may sometimes constitute third party consideration for that supply, either in whole or in part. Economic reality being what it is, commercial businesses do not usually pay suppliers unless they themselves are the recipient of the supply for which they are paying (even if it may involve the provision of goods or services to a third party), but that possibility cannot be excluded a priori. A business may, for example, meet the cost of a supply of which it cannot realistically be regarded as the recipient in order to discharge an obligation owed to the recipient or to a third party. In such a situation, the correct analysis is likely to be that the payment constitutes third party consideration for the supply. A case where the taxpayer pays for a service which consists of the supply of goods or services to a third party requires a more careful and sensitive analysis, having regard to the economic realities of the transaction when looked at as a whole. It may lead to the conclusion that it was solely third party consideration, or it may not.

“i)       The supply by PwC to [Airtours] of the service of having PwC, after appropriate liaison with the [Airtours’] 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 [Banks]. That supply of the service of liaison, review etc, and reporting to the [Banks] was provided to [Airtours] pursuant to the Contract which conferred a contractual right on [Airtours] to have such work carried out for the purposes of PwC reporting to the [Banks]. As Lord Millett pointed out in Redrow at 418G, the grant of such a right (ie the right to have services rendered to a third party) is itself a supply of services. The supply of that service, pursuant to the Contract, was for a consideration payable by the appellant.

ii)        The supply by PwC to the [Banks] of the service of reporting on, monitoring and advising in relation to [Airtours’] 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 [Banks] to decide whether to continue their credit facilities to [Airtours]. This supply was also made pursuant to the Contract but it was made in circumstances in which the [Banks] incurred no liability or contractual obligation to PwC to pay for the supply.”

“Although it may have been the case that PwC was originally approached by the [Banks] … it is clear from the facts as found by the FTT that [Airtours] not only had positively to consent to the appointment of PwC but also that it had an input into the decision to choose PwC rather than another firm. [Airtours] also had to agree that PwC would have unrestricted access to its books and records and that [Airtours’] directors and senior management would positively co-operate with PwC in the provision of information; see for example the appellant’s confirmation of the November 2002 Letter of Engagement and paragraph 2 of the Terms and Conditions. As reflected in both para 6 and para 12 of the November 2002 Letter of Engagement, the commercial reality was that one of the contracting parties requesting PwC to carry out the work was indeed [Airtours] itself. If [Airtours] had not joined in the request and agreed to PwC’s appointment, and the scope of its work, the assignment would have taken a very different form since PwC would have had no contractual right to access to [Airtours’] books and records or to cooperation from its directors and senior management. It is also relevant in this context that the evidence showed that at each stage the scope of the work to be carried out by PwC was agreed by all three parties, namely [Airtours], the [Banks] and PwC. Thus although … a distinction can be drawn with the factual scenario in Redrow - where the taxpayer itself selected and gave instructions to the estate agents, which could not be countermanded by the house owners - those factors are not sufficient in my judgment to prevent their being two distinctive services in the present case.”

“26.     The attached terms and conditions (“the Terms and Conditions” have been agreed between the parties and set out the duties of each party in respect of the Services. The Terms and Conditions provide among other matters:

i)                  the Group will indemnify us against claims brought by any third party. For the avoidance of doubt, the reference to ‘you’ in clause 10 of the Terms and Conditions (and only in that clause) refers to the Group and not the [Banks]; and

ii)                our aggregate liability to the Group, the [Banks] and any other third party to whom we later agree to assume a duty of care taken together, whether in contract, negligence or any other tort, will be limited in accordance with clause 9.4 of the Terms and Conditions. For this purpose, our liability in respect of Phase 1 of the Services will in no circumstances exceed £10m. In the event that you request and we agree to provide services beyond Phase 1, the financial limit of our aggregate liability will increase to £25m in respect of the Services and any additional services we provide to you.

iii)             The Letter of Engagement and the Terms and Conditions are together referred to as the Contract, and evidence the entire agreement between the parties. For the avoidance of doubt, the [Banks] and the Group both agree to all the terms contained in the Contract.”

Those provisions strongly support the conclusion that it was agreed that PwC owed a duty of care both to the Banks and to Airtours, as one would expect in the light of the substantive obligations of PwC in a Contract which was for the benefit of both Airtours and the Banks.

LORD CARNWATH: (dissenting) (with whom Lord Clarke agrees)

i)                   In October 2002 Airtours was in serious financial difficulties and needed something done quickly to ensure its own commercial survival. PWC’s involvement was essential to the achievement of that objective, and Airtours was willing to pay for it. It was entitled to expect a correlative commitment from PwC, and, had the issue arisen, it is hard to see any reason why it would have been resisted.

ii)                The letter of engagement seems to me to acknowledge (as was the fact) that Airtours were party to the “request” to PwC to provide the services. I agree with the First-tier Tribunal and Gloster LJ that “you” in para 6 (request for assistance) and 12 (request to undertake a review) includes Airtours. This is apparent from para 26(i) which limits “you” to the Group in respect of clause 10 of the terms (indemnity), thereby implying that elsewhere it refers to both the Group and the Engaging institutions.

iii)              Although the terms of the contract are in some respects equivocal, it is not in dispute that Airtours was a fully contracting party. It is possible, but in my view artificial, to read that as limited to its obligations to pay and indemnify. The terms of its confirmation letter (taken with para 30 of the principal engagement letter), make clear that it was accepting “the terms of [PwC’s] engagement” as set out in that letter. This implies that PwC was “engaged” to Airtours, no less than to the Banks.