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A recent ruling by the Court of Appeal that VAT is not recoverable on Independent Business Review costs may also have a risk of wider implications for other transaction costs.

The Airtours Holiday Transport Limited/MyTravel VAT ('Airtours') case considered the situation where an Independent Business Review ('IBR') of Airtours' business was undertaken in 2002, by PwC, in the context of re-financing Airtours' group debt.

The engagement was under a tripartite agreement between Airtours, PwC and a number of financial institutions.

The argument from HMRC was that no input tax (VAT) should be recovered by Airtours on the related professional fees it paid to PwC because the IBR report was really only for the financial institutions' benefit. That is, the only benefit Airtours received was an indirect one (i.e. the continuation of the lending facilities) and, therefore, Airtours was not entitled to deduct the input tax (VAT) incurred on related costs.

HMRC is adopting an increasingly hard line in challenging businesses that seek to recover VAT on transaction costs and, whilst the Airtours case relates specifically to IBR costs, there is a risk that HMRC could seek to apply the decision more widely to other transaction costs, particularly to VAT recovery around acquisition costs. Previously, HMRC concentrated on sell-side deals.

It is therefore important to consider the terms of the contract with the economic reality to the recipient(s) for the provision of the services.

Who is potentially affected?

  • Businesses and other organisations who may have recovered VAT on costs on an IBR, where there were multiple parties to an engagement letter and the fees were paid solely by a business/organisation that was not the main beneficiary of the work undertaken.

How can VAT Services (Scotland) Ltd help you?

  • We can assist businesses and other organisations by reviewing engagement letters for similar services to determine any sole use clauses, duty of care clauses and the party responsible for payment of the services with a view to either providing a case for input tax (VAT) recovery or, if not appropriate, assistance with disclosing any overclaimed input tax (VAT) to HMRC and, therefore, minimising potential penalties levied by HMRC.


Contact us

Should you wish further information on the above, please do not hesitate to contact Gary using the details outlined below.


Gary Moore
Direct line 0141 636 9353
Mobile 07812 061 582
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