Airline training company loses £10.7m VAT appeal

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An airline training provider has lost a High Court appeal against a demand issued by HMRC for £10.7m related to a clearance request

Airline Placement Limited appealed to the High Court against an assessment of £10.7m related to a non-statutory clearance (NSC).

The key issue was whether or not Airline Placement had a ‘legitimate expectation’ related to the NSC, which was issued by HMRC in 2009.

NSC applications are only available where there are genuine points of uncertainty in the legislation.

The basis of the application is that the decision and assessment raised by HMRC, which was issued for the periods 03/17 to 12/12 for £10,717,426.00, was in breach of the company’s legitimate expectation.

HMRC argued that the request for the NSC had been ‘materially inaccurate’ and ‘misleading’ as there had not been a full disclosure, meaning that no legitimate expectation could arise.

The tax authority also accepted that if the NSC request had been accurate, then a legitimate expectation would have arisen and they would not be entitled to levy VAT and would have been required to allow a ‘reasonable time’ for the company to re-organise its affairs.

Airline Placement advanced an alternative argument that even if no legitimate expectation arose, then it was nevertheless ‘unreasonable’ and an ‘abuse of power’ to withdraw the clearance letter without fair notice.

The company was a member of CTC Aviation Group plc, and was incorporated on 28 April 2004. The group was later acquired by L3Harris Technologies Group, a provider of global aerospace and defence technology, in May 2015.

The VAT treatment issue established in the High Court relates to a training programme for cadet pilots called the ‘wing programme’.

The programme was initially set up in 2003 as a joint venture with CTC Aviation Training UK Limited, also a member of the CTC group.

Before the introduction of the programme, Airline Placement sought an NSC from HMRC’s predecessor body, the Commissioners of Customs & Excise, in relation to the VAT treatment of fees for flying training.

The letter stated that a new company had been formed with the intention of offering airlines an alternative to the ‘traditional method sponsoring future pilots through their training’ and employing them as pilots.

It stated that the most significant difference between the proposed scheme and the ‘traditional sponsorship model’ was that finance was being offered by a bank, rather than the airlines being expected to directly fund the programme.

Between August 2002 and March 2009, HMRC conducted at least four audit visits to UK members of the CTC Group and no issues with the VAT treatment of the arrangements were raised.

Deloitte then carried out a review of the programme in November 2007, and were later asked to comment on the VAT treatment and provide recommendations for any appropriate next steps.

CTC’s competitors operated their training programmes in jurisdictions where VAT did not apply to training fees and so they could charge lower prices.

In recommending that Airline Placement sought a ruling from HMRC, Deloitte advised that the tax authority had to be ‘in possession of the complete facts and context of the issues of uncertainty’.

The company then submitted its NSC request for clearance on 4 March 2009, but did not include reference to the fact that cadets within the programme received a reduced salary from the sponsor airline.

It requested clearance regarding the VAT treatment of the retention of security bonds deposited by cadets with the company on joining the programme, and the amounts forfeited by cadets as compensation as a result of early termination.

HMRC responded on 10 November 2016, stating that it was opening an enquiry into the VAT treatment of the programme.

This was prompted by the fact that a competitor, which provided similar training, tried to obtain a similar tax result using a slightly different mechanism and submitted a clearance request, which was rejected.

Justice Constable said: ‘In the communications which followed the ruling and in which HMRC explained the basis of its decision, it should have become more than clear to Airline Placement that HMRC was labouring under the misapprehension that the effect of the arrangement was that the airlines were paying for the training when, at least concerning its biggest customer, this was plainly wrong.

‘In circumstances where the ruling was obtained by omitting material facts and giving a materially inaccurate impression of the overall arrangement, the decision is in no way unfair or otherwise an abuse of power. In the circumstances, the case fails.’

The appeal was dismissed.

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