VAT on Independent Business Review costs not recoverable

A 2:1 majority of the Court of Appeal has dismissed an appeal from the Upper Tribunal.  The decision confirms that the VAT payable on IBR advice provided by PricewaterhouseCoopers “PwC” on the restructure of Airtours Holiday Transport Ltd (“Airtours”) was not recoverable. This was on the basis that PwC’s services were not supplied to Airtours, even though Airtours had paid the PwC fee and was a party to PwC’s engagement letter (the “Contract”).

30 September 2014


Lenders typically instruct an independent business review (“IBR”) to explore options/solutions for customers facing financial distress and standard form facility documentation will generally require any such costs to be borne by the bank’s customer.

In this case PwC were initially engaged to provide advice on the restructuring of Airtours in 2002, and agreed the Contract for preparation of an IBR . The Contract was addressed  “To the Engaging Institutions” - the syndicate lenders who had provided funding to Airtours, together with various other parties who had advanced funds to Airtours on a bi-lateral basis.  Airtours was also a party to the Contract.  In terms of the Contract, Airtours was responsible for payment of the PwC fee.


In order to reclaim the VAT payable on PwC’s fee, Airtours would need to show that a supply of services had been made to it that was used by Airtours for the purpose of its business.

The Court held that this is an objective test.  The Court should read the Contract “to identify what legal relationships the parties intended to create”.  The nature of the transaction should be the starting point when analysing who PwC was providing their services to and what, if anything, Airtours (as the taxable person) received in exchange for the price paid?

It was clear from certain clauses of the Contract that the work to be undertaken would be for the benefit and sole use of the lenders.  The Court considered that Airtours was a party to the contract solely for the purposes of incurring an obligation to pay PwC’s fees for the services they were providing to the lenders.  This was the case despite Airtours’ subjective “need” for PwC to produce the report in order to stay in business.

It is not clear from the judgement whether PwC had a contractual duty of care and / or potential liability in negligence to Airtours.  Even if PwC did have a contractual duty to Airtours, this did not determine that services had been provided to Airtours that allowed them to reclaim the VAT payable on PwC’s fee.


The level of IBR fees (and the associated VAT) will vary from case to case, but in complex businesses the level of irrecoverable VAT could be significant, especially given the business is already facing financial distress. Relationship managers engaged in the instruction of IBRs should be aware that the irrecoverable VAT will add further to cash flow pressures within the business.

While this case relates specifically to VAT on IBR fees, the judgement may be of more general application to VAT on other transaction costs. 

The judgement confirms that the Court will interpret the intentions of the parties in terms of any bespoke letter of engagement, and apply these to any incorporated standard terms and conditions.  The potential tax consequences of multi-party agreements should be considered upfront.

This was a majority verdict. It remains to be seen whether the decision will be appealed to the Supreme Court.

Full case report