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Deal costs: Is VAT recoverable?

26 October 2009

The First-tier Tribunal has held that VAT incurred on payments to accountants for services provided to rescue a business from closure are recoverable.

The facts of Airtours Holiday Transport Limited (formerly My Travel Group) v HMRC were that the My Travel Group was in severe financial difficulty and PricewaterhouseCoopers (PwC) was engaged to put together a rescue package to save the business.

HM Revenue & Customs (HMRC) argued that, although My Travel paid for PwC’s services and was a party to agreements between PwC and the creditors, the supply for VAT purposes was made by PwC to the creditors alone, and therefore My Travel could not recover the VAT.

However the Tribunal, applying case law including Redrow, WHA and Loyalty Management, held that the My Travel Group had received supplies from PwC, which My Travel had paid for and used for its business. Therefore the VAT could be deducted by My Travel.

Although a welcome decision, a number of important issues must be borne in mind. Firstly, ensuring  contractual documentation is correct is extremely important. The Tribunal carried out a detailed review of the various engagement letters entered into by PwC, MyTravel and its creditors to determine whether supplies had been made to My Travel.

Secondly, HMRC will continue to challenge such arrangements and review critically any documentation so that ambiguous or imprecise drafting could lead to irrecoverable VAT and additional costs for a business at a time when it least needs it.

Finally, this case may be helpful for companies that have incurred costs in other corporate or private equity transactions where HMRC is already challenging the recoverability of VAT.

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