Airline Placement Limited v The Commissioners for HMRC

APL which was incorporated in 2004 was, until the end of March 2025, a subsidiary within a group of companies, the L3 Harris Group, that provides training to airline pilots. APL was 100% owned by L3 A&AT which itself was owned by L3 CTS. L3 A&AT was formed to acquire the business of CTC Aviation Group plc (“CTC”) which it did in May 2015 through the purchase of shares in CTC Aviation Holdings. APL was previously part of CTC, which included CTC McAlpine Ltd and Airline Recruitment Limited.

Airline Recruitment Limited was the entity initially responsible for administering the Sponsored Training Programme, a role which was essentially taken over by APL following its incorporation.

The Sponsored Training Programme (“STP”) was originally conceived by McAlpine Aviation Training Limited and CTC as an alternative to the traditional method of airlines, such as British Airways (“BA”), paying upfront for the training of their future pilots and deducting part of that cost from their salaries in the first five years of their employment.

Under the STP a Sponsor Airline would, instead of paying for the training of its cadets, would pay a placement fee (equal to the cost of training) plus VAT on employing a fully trained cadet whose training had been sponsored (ie paid for) by APL (or before APL’s incorporation a McAlpine Aviation or a CTC company). On paying the placement fee, the Sponsor Airline would receive the “security bond” (also equal to the cost of training) from APL that had been deposited with the APL by the cadet (pursuant to the sponsorship agreement between the cadet and APL).

This enabled the Sponsor Airlines to defer the (expensive) training costs of their pilots. Additionally, as Mr Glover-Faure explained, in the case of BA (which guaranteed loans taken out by cadets to pay the bond), it gave opportunities to those who would not have been able to obtain a loan to fund themselves or who, even if they could obtain funding, could not afford to take on the risk of not being employed at the end of their training. Something that, Mr Glover-Faure said, the British Airline Pilots Association (“BALPA”) agreed was a good means of facilitating the training of the next generation of airline pilots from more diverse backgrounds.

In summary, under the STP:

The three main Sponsor Airlines during the Relevant Period, were easyJet Airline Company Limited (“easyJet”) from 2003, BA from 2011 for its Future Pilot Programme and, from 2014, Virgin Atlantic Airways (“Virgin”). These would collaborate with L3 A&AT to market the STP to potential applicants with advertisements on the websites of the Sponsor Airline and L3 in addition to other relevant social media channels.

Two types of cadets were accepted onto the STP:

The Sponsor Airlines were involved in the recruitment process for the cadets as each airline had slightly different selection criteria. However, there was no selection criteria for the 10-15% of cadets who paid for their own training and were not required to deposit any bond with APL. The selection process involved a potential cadet making an application via a link on the L3 A&AT website (or via the website of the relevant Sponsor Airline, which would then redirect them to the relevant page of the L3 A&AT website).

The initial screening of the potential cadets would be undertaken by L3 A&AT to ensure that they met the minimum entry requirements. Those that passed the initial screening would be contacted by email and invited to a selection event. This initial screening would include vetting by and in accordance with the criteria set by the Sponsor Airline concerned, with the precise process varying from airline to airline. The final decision whether to offer a cadet a place was made by the Sponsor Airline.

The Whitetail cadets were selected through the L3 A&AT applicant system with their applications reviewed by L3 to ensure that they met the minimum entry requirements. Those that did would be invited to a Whitetails selection day.

Between 2013 and 2020, of the 200-300 cadets that were selected each year, 73% of those that completed their training were placed with a Sponsor Airline which paid a placement fee to APL. APL charged and accounted for VAT on the placement fees. Other than the VAT on the placement fee, the Sponsor Airline had no cash outlay as, on the placement of the cadet, it received payment by APL of the bond that had been deposited to it (APL) by the cadet, the amount of the bond being equal to the placement fee the Sponsor Airline paid to APL.

The salaries paid to cadets on their employment by a Sponsor Airline was, APL contends, a matter for that airline and was also subject to agreement by BALPA.

In the case of easyJet, the placement fee due to APL from 2016 was £69,000 (see paragraph 3 of the Appendix). A cadet having completed training was required, on commencing employment with the airline to make a loan to it of £69,000 which easyJet would repay at an annual rate of £11,223 over seven years (see clause 4 of the easyJet Loan Agreement at paragraph 49 of the Appendix). This had a bearing on the salary as is clear from the schedules below:

As Constable J observed at [54] of his judgment in the judicial review proceedings in R (on the application of Airline Placement Ltd) v HMRC [2023] STC 1113 (the “Judicial Review Judgment” – to which we refer in more detail below):

“Thus, it can be seen that the Basic Salary for someone starting employment with easyJet having been trained through APL and having ‘loaned’ the bond monies to [easyJet], is reduced by the value of the bond (as at 2015, amounting to £69,000) together with an amount for interest. The Basic Salary for a person employed in precisely the same position with equivalent level of training and experience but who had not trained through APL, earned £11,223 more a year. The difference in salary over 7 years was exactly commensurate with the value of the bond, plus interest.”

However, when it was put to him in cross-examination that the salary of a cadet was “cut by the same amount” as the cost of training, Mr Glover-Faure said:

“… the premise of your question is that the salary has been reduced, but the salary wasn’t being reduced. The salary was the salary that reflected the particular circumstances of these individuals. The route through which they came to the airline, the training, the investment that the airline had made, the security guarantee of the loan: these are all things that have cost British Airways and I suspect easyJet, although easyJet didn’t do the loan guarantees. And so we agree at a salary scale based on those criteria, and it’s a higher salary scale if somebody has got experience. 1,000 hours on an Airbus 320 – you have an Airbus 320 rating – we would recognise that that attracts a higher salary. So the salary is the salary determined through industrial negotiation between ourselves and the trade union based on those type of criteria.”

The same training was provided to both tagged and Whitetail cadets. If a Sponsor Airline subsequently found it was able to accept further cadets, it would approach APL with a view to “tagging” some of the Whitetail cadets. An advantage to the Sponsor Airlines was the flexibility of such an arrangement. Although they preferred to offer places on their programmes to cadets to whom they could offer employment when qualified it was not possible to predict the market within the airline industry (which can be particularly susceptible to major world events, eg, 9/11 and the covid-19 pandemic).

Cadets were trained for either the Airline Transport Pilot Licence (“APTL”) or the Multi-Crew Pilot Licence (“MPL”). The ATPL allows the pilot to fly a wider range of aircraft whereas the MPL (the course content for which is set by the airline and agreed with the Civil Aviation Authority) only permits the pilot to fly a specific aircraft for a specific airline. All Whitetails trained for the ATPL. Although most tagged cadets trained for the MPL (tailored to the requirements of their Sponsor Airline) some of the tagged cadets did train for the ATPL.

The Sponsor Airlines were involved in the creation of the cadets training syllabuses. These were subject to the approval of the UK Civil Aviation Authority (“UK CAA”). For example, schedule 1 to the Virgin Placement Contract (see paragraph 24 of the Appendix) required the:

“… course syllabus to be agreed between [APL] and Virgin and submitted to the UK Civil Aviation Authority for approval by EASA [the European Union Aviation Safety Agency].”

In the case of BA, Mr Glover-Faure, observed that the structure of the training would be set and agreed by BA and the training providers. He explained that the training was monitored and “heavily controlled” by BA as is clear from, eg clause 14.1 of the BA Placement Contract (see paragraph 11 of the Appendix) under which APL was required to supply cadets who had been qualified to a frozen APTL level and completed a fully BA standardised Jet Orientation Course of groundschool and simulator time to achieve and MCC certificate followed by a rating on an aircraft specified by BA.

Although they did not interfere with a cadet’s training (once the structure had been set and agreed) the Sponsor Airlines did receive regular reports to monitor the progress of their cadets and were also involved in their pastoral care.

Mr Barnett explained that that the Sponsor Airlines took their commitment to cadets with conditional offers of employment very seriously. They monitored the cadets’ training and put measures in place to protect the cadets’ welfare during their training programme. This included the appointment of liaison officers to provide mentorship and pastoral care.

Ms Lockett’s evidence was that the Sponsor Airlines would even occasionally send a first officer to New Zealand as a morale boost. She recalled that BA were particularly good at doing this. As Mr Glover-Faure explained, given the significant financial risk it took by guaranteeing the cadets’ loans to fund the bonds, BA took its cadets’ admission into its Future Pilots Programme (“FPP”) very seriously. It employed a manager to run the programme and current BA pilots would volunteer as cadet mentors to “enthuse the cadets and help keep them on track”. It also organised visits to BA and provided cadets with opportunities to travel on a BA service to gain experience of what their future job might entail.

The progress of the cadets on the STP was monitored by the ‘Training Review Board’ (“TRB”) a body within L3A&AT. This would meet monthly and make recommendations in relation to the cadets’ training. If cadets were not meeting the required standards, the chief training pilots would recommend whether additional training was needed or, if it had reached the stage where a cadet’s training should be terminated. The TRB would then make recommendations to APL in respect of the cadets on the STP. When the recommendation involved a cadet on an airline programme, the Sponsor Airline would be involved in the decision-making and their approval would be sought, but if the cadet was a Whitetail it was for APL to make that decision.

All cadets that had been selected for training under the STP were required to deposit a bond, referred to in the contractual documents as the “Security Bond”, with APL. This was payable in instalments as set out in the sponsorship agreements between the cadet and APL. In several of the documents, and contrary to APL’s case, it is referred to as being “in consideration” for the procurement or receipt of training (eg see clause 4.8.3 of the BA MPL Sponsorship Contract; clause 2.1 of the Virgin MPL; and clauses 1.1 and 1.9 of the Security Bond Addendum, at paragraphs 40, 45 and 48 respectively of the Appendix).

On the completion of their training and being placed with a Sponsor Airline the bond would, as noted above, on the cadet’s instruction or agreement pursuant to the Sponsorship Agreement between the cadet and APL, be transferred in whole to the Sponsor Airline (see eg clause 4.6 of the BA MPL Sponsorship Contract, clause 2.4 of the easyJet MPL Sponsorship Contract and clause 3.3 of the Virgin MPL Sponsorship Contract at paragraphs 40, 44 and 45 respectively of the Appendix).

The bond was subject to forfeiture if, for example, a cadet chose to be placed with a non-sponsored airline, placed with a Sponsor Airline overseas, was not selected from the FlexiCrew hold pool within a two year period (see below) or voluntarily withdrew from the STP in which case , as Mr Barnett accepted, the cadet would have paid for their training. The cadet would also forfeit the bond if they were removed for breach of contract (see eg, clauses 4.8.3 and 13.3 of the BA MPL Sponsorship Contract and clause 4.3 of the easyJet Sponsorship Contract at paragraphs 40 and 44 respectively of the Appendix). However, if a cadet was unable to complete their training due to a lack of proficiency their bond (and any fee paid, less a non-refundable deposit of £5,000) would be returned to them under the STP’s performance protection policy (“PPP”). Such repayments would be funded from APL’s margin on the placement fee.

The PPP (as of April 2018) relevantly provided:

“L3 CTS provides Performance Protection for cadet pilots who have qualified and enrolled on to [a] qualifying … Programme. Performance Protection provides cadet pilots with protection for their Security Bond in the event that they do not meet the required standard at any point throughout their training.

…

1.

Performance Protection applies to all training provided under the … programme and is secured by the payment of the fees described therein. …

2.

In the event that the Cadet fails to meet the required training standards, Performance Protection shall cover the cost of remedial training, including re-test fees, where applicable, for the part of the programme that the Cadet has not met the required standard. …

3.

In the event that the Cadet is removed from the … programme, Performance Protection shall return the fees paid by the Cadet, less the non-refundable deposit; …

…

5.

Performance Protection shall not apply, and will not result in a return of the fees paid [or the bond], where the Cadet through their action or inaction, breaches the terms of the Cadet Training Agreement & Cadet Sponsorship Agreement, voluntarily withdraws from the L3 CTS Programme, or the Cadet is removed from the L3 CTS Programme due to an incidence of misconduct …”

APL operated the PPP (with broadly similar terms) until about mid-2019.

Mr Barnett explained that although clause 1 of the PPP referred to “fees”, it should be read as having referred to fees and the deposit of any bond deposited by the cadet. This, he explained, “was a simple mistake, and it was certainly always the intention that we would refund the bond as well as the fees, and that was what we did in practice.” Also, despite clause 4.5 of the easyJet MPL contract stating that any repayment of the bond will be at the “discretion” of APL (see paragraph 44 of the Appendix), neither Mr. Barnett, Mr. Glover-Faure nor Ms. Buckingham knew of any circumstance where the bond was not repaid to a cadet who failed to achieve the requisite proficiency.

As Mr Barnett and Ms Buckingham explained, only a small number of cadets were refunded due to their lack of proficiency. Terminations recorded on an L3 A&AT master spreadsheet show that, between 1 January 2017 and 31 December 2020, 21 cadets received a refund under PPP and 25 cadets chose to continue training outside the STP.

By 2017, as the cost of training had increased, both easyJet and BA (but not Virgin) tagged cadets, as well as Whitetail cadets, were required, under a “Cadet Training Agreement” between the cadet and L3 A&AT, to pay an additional fee and VAT thereon for that part of the cost of training that exceeded the bond that the cadet had deposited with APL.

In 2019 APL integrated the sponsorship and training contracts into a single “Cadet Pilot Training Agreement”. This showed an amount broken down into “a training fee” and “security bond”. The terms of the “security bond” were then contained in an addendum (see paragraphs 47 – 48 of the Appendix). If the Cadet failed due to non-performance after Performance Protection was withdrawn, they would forfeit the “security bond”. The contracts from 2020 show that refund of any “security bond” was at APL’s discretion.

The majority of the STP cadets were placed with easyJet. Until 2018 this was generally through the “FlexiCrew” scheme. As Mr Barnett explained, this scheme related to the provision of newly qualified FlexiCrew pilots who were placed in a “hold pool” and supplied to easyJet by Airline Recruitment Limited on zero-hour contracts. These pilots would generally be employed by easyJet if it identified sufficient consumer demand to increase the number of pilots it employed on a full-time basis.

A newly qualified FlexiCrew pilot could remain in the hold pool for up to two years and could, in addition to being employed by easyJet, be selected for employment by another Sponsor Airline or another airline altogether. It was unusual for a cadet to be remain in the hold pool for two years but, if not employed at the end of the two year period, as we have noted at paragraph 35, above, a cadet’s bond would be forfeited.

The cadets’ UK training took place in Southampton, Bournemouth and Coventry. For MPL the training comprised ground school, basic, intermediate and advanced training. For ATPL cadets it comprised ground school (Phase 1), multi-engine instrument rating (Phase 5 flying), upset prevention and recovery training, airline qualification course type rating and base training.

Actual flight training in aircraft (known as ‘core training’ for MPL cadets and ‘Phases 2, 3 and 4 flying’ for ATPL cadets) which lasted from eight to 12 months, depending on the type of licence a cadet was working towards and to which Sponsor airline he of she was tagged, generally took place overseas. During the Relevant Period this was mainly in New Zealand where approximately 200 cadets were training at any given time. Around 30% of these cadets were self-funded cadets from New Zealand or aligned to an airline in the Aisia/Pacific region with direct contracts with L3 NZ. The remaining 70% were STP cadets.

The flight training programme was designed by, and the responsibility of, L3 CTS Airline Academy (NZ) Limited (“L3 NZ”) a New Zealand subsidiary of L3 A&AT. L3 NZ was responsible for ensuring the cadets had the necessary medical certificates. It also arranged accommodation and visa renewals for the cadets and provided pastoral care and ensured that they attended the training. The progress of every cadet would be discussed by its Training Review Board each month and L3 NZ would liaise with L3 A&AT and share updates as to the cadets’ progress as necessary. This included any recommendation as to whether a cadet’s training programme should be terminated.

However, notwithstanding the liaison with L3 A&AT, any training issues arising in New Zealand would be dealt with by L3 NZ internally. Its Training Review Board would meet monthly to discuss each individual cadet. Although no employee from L3 A&AT attended these meeting all of the information was saved and shared to a database that both L3 NZ and L3 A&AT could access. This enabled L3 A&AT to update the Sponsor Airlines if required.

L3 NZ trained both tagged and Whitetail cadets. Although the training itself would be similar for tagged and Whitetail cadets, the airline programmes did have some of what were described by Ms Lockett as “particularities”. Although she could not recall any “specifics”, she gave as a “random example”, that a particular airline might require their cadet to have to do four steep turns rather than three.

Although L3 NZ did have simulators and groundschool facilities in New Zealand, the cadets went to New Zealand mainly for flight training in planes. Very occasionally – perhaps once every two years – L3 NZ took a cohort of the cadets for groundschool training because the UK groundschool facilities were full. However, most of the time the cadets undertook their groundschool in the UK. This lasted for around six months.

The Head of Training at L3 NZ, Jon Stanwix, was responsible for all aspects of the training in New Zealand from the development of the course content to the organisation of the timetable and the actual provision of training. The flight training involved the cadets completing a series of lessons (referred to as “events”), each of which would involve different elements. The cadet was required to fly for a set number of hours with all of that flight training taking place in New Zealand airspace.

The L3 NZ planning team would coordinate with its UK equivalent to let them know how many candidates they should send to New Zealand for flight training and when to send them to ensure an even flow through the training. Although the overall training timetable was managed by the planning team, the daily flight schedules were organised by the scheduling team at L3 NZ. The scheduling team would organise the timetable around the availability of the cadets, flight instructors and aircraft, as well as taking account of the weather conditions. These variables meant that the schedule would need to be adapted daily – if not hourly – to make the timetable work. The scheduling team would also meet with the aircraft maintenance team every week to manage the training timetable around planned aircraft maintenance

The training provided by L3 NZ was regulated by the New Zealand Qualification Authority (“NZQA”) which has very stringent requirements for pastoral care (particularly in relation to students attending from overseas). Any education provider that wanted to enrol international students had to sign up to the Education (Pastoral Care of International Students) Code of Practice 2016 which was administered by the NZQA. In addition, to enable it to provide training, L3 NZ required approval from the UK CAA. Accordingly L3 NZ had its own UK CAA licence authorising it to train the cadets in New Zealand (in addition to its licence from the equivalent New Zealand aviation authority).

Following completion of the necessary events the cadets would return to the UK for their further training.

The last cadets under the Virgin programme commenced their training in 2018. Around the same time APL entered into a new contract with BA to place up to 100 cadets annually. In mid-2019 APL lost a bid to continue to provide candidates for easyJet although easyJet did continue to employ and pay placement fees for Whitetail cadets. Although it was hoped that new airlines could be attracted to the STP, this was scuppered by the start of the covid-19 pandemic in 2020 leading to APL withdrawing the STP in November 2021.

Tagged cadets who were still in training at the time had their conditional offers of employment withdrawn by easyJet and BA. Although it was understood that easyJet would accept the transfer of the bond and pay a placement fee if it subsequently offered a tagged cadet employment the position was less clear with BA. However, in the absence of any confirmation to the contrary it was assumed the position would remain as previously agreed.

In November 2021 easyJet determined that it would not participate in the STP and, in December 2020, APL wrote to all the cadets (except for those with conditional offers from BA) and advised them that the bonds would have to be forfeited. Ms Buckingham explained that APL had not included the BA cadets as it was understood that until the end of 2023, when it became clear that it was not the case, that BA would be paying a placement fee for any of the cadets with bonds to whom it had offered employment.

The contractual arrangements underpinning the STP were:

Save for the services contract between APL and L3AT&T, these arrangements were all arm’s length agreements between unconnected parties.

Ms Shaw, in Appendix 1 to the ‘Appellant’s Note of Evidence’, helpfully set out the contractual terms to which we were referred and, as it is not disputed that these have the effect that APL contends (the issue between the parties concerns the economic and commercial reality of those contracts) we have included an adapted version of this as an Appendix to this decision.

A “CTC VAT Report” by Deloitte, dated 29 November 2007, records that the document:

“… was produced as a result of our meeting on 20 August 2007. During 2002, McAlpine Aviation Training (‘MAT’) and CTC Aviation Group plc (“Group”) were contemplating setting up a JV to run what is today known as the CTC Wings Programme (“the Wings programme”). In anticipation of the introduction of the Wings programme, in August 2002 MAT sought and obtained a ruling from HM Revenue & Customs (“HMRC”) on the VAT treatment of the Wings programme. Subsequent to receiving that ruling from HMRC, in May 2004 Group bought MAT out of its share of the business and progressed with the Wings programme of its own accord.

However, now that the Wings programme is up and running Group (including its subsidiary companies) has decided that it needs more certainty regarding the VAT treatment of various payments made to or held by Group or its subsidiaries. In particular, the retention of certain elements of bonds by Group/ its subsidiaries was not covered in the original ruling given by HMRC. Consequently, you have asked us to comment on the VAT treatment of the Wings Programme, any practical measures that may support any such analysis, and any possible alternatives or recommendations for the appropriate next steps for seeking further certainty on the VAT treatment.

Please find below a summary of our findings and conclusions. Please note that we have only commented on the VAT aspects of the agreements we have been provided with and have not considered any other potential implications.”

The Deloitte Report also referred to the requirement, mentioned above (at paragraph 33), on a cadet to deposit a bond with APL which, on completion of the cadet’s training, was transferred by APL to the cadet’s Sponsoring Airline when it paid a placement fee (in the same amount as the deposit) plus VAT to APL for the provision of the fully trained cadet. The Report continued, stating that the cadet may receive a reduced salary to take account of the placement fee the airline has paid to APL.

This was incorporated into a letter prepared by Deloitte in relation to the STP to be sent to HMRC and which included the following paragraph:

“During their employment with the sponsor airline, the cadet may receive a reduced salary to take account of the fact that the sponsor airline has paid a placement fee to APL for the provision of the cadet. However, these arrangements are made between the sponsor airline and the cadet without APL being party to the agreement.”

However, before the letter was sent to HMRC it was reviewed by the Finance Director of CTC who commented:

“… we would like to remove this paragraph as it might indicate that the Cadet is paying for the training they received from CTC by way of taking a reduced salary once employed and therefore in effect the Cadet is paying for their training.”

The paragraph was not included in the letter of 4 March 2009 and/or final report from Deloitte which was sent to HMRC requesting non-statutory clearance for the VAT treatment of the STP. On 17 July 2009 HMRC issued a letter (the “Clearance Letter”) which, as Constable J noted at [34] of the Judicial Review Judgment:

“… confirmed that HMRC was in agreement with APL’s proposed VAT treatment, in that the payment of the bond by successful cadets is not consideration for any supply by APL to the cadets, and that retention of the bond by APL upon early termination of the agreement between the parties is not consideration for any supply by APL to the cadets. The Clearance Letter explained the basis for this conclusion. It pointed out that the clearance was based upon the information provided, including the Programme brochure and the information on the CTC Wings website.”

However, on 10 November 2016 HMRC wrote to CTC to “open an enquiry into the VAT treatment of the supplies … in relation to the CTC Wings Programme”. That enquiry and associated correspondence continued for a number of years culminating on 26 January 2021 with the issue of the decision letter and, on 16 August 2021, the assessment, the subject matter of this appeal.

Notwithstanding APL had appealed to the Tribunal on 20 May 2022, in early 2023 the parties entered into negotiations to agree that such part of the amounts paid by the cadets as related to training that took place outside the UK should be excluded from the assessment to VAT. Following an unsuccessful ADR meeting on 27 February 2023, HMRC invited APL to provide its written representations on the ‘place of supply’ of services, ie the training of cadets to enable these to be considered by HMRC’s policy team.

These were sent to HMRC by APL’s solicitors, Macfarlanes, on 2 May 2023 as an attachment to an email. Insofar as material, the representations state:

“1 Introduction

1.1

This paper is provided following discussions at the ADR held on 27 February 2003. At the meeting it was agreed that Airline Placement Limited (“APL”) would provide further representations in relation to the alternative argument they have put forward on place of supply, and HMRC would ensure that these representations are considered by the appropriate policy holder.

…

1.3

For the avoidance of doubt, APL does not consider that there has been any supply of training to the Cadets. This paper is presented on the alternative basis (which is denied) that APL’s primary position is incorrect and APL supplies training to the Cadets. In these circumstances, for the reasons set out below, each supply of training services to a Cadet will have been outside the scope of UK VAT to the extent that the training was performed outside the UK. 1.5 The question is where the activities undertaken by the relevant group companies are performed. As is clear from the details set out in the body of this paper, these activities are split between the UK and outside of the UK (primarily New Zealand). In such circumstances, the logical way forward is to carry out an apportionment between the activities performed in the UK and outside of the UK. The alternative – and the implication in HMRC’s current position – is that UK VAT could be avoided entirely by setting up the same type of shell company outside of the UK to supply services performed within the UK.

The representations continue noting, at sub-paragraph 10.4 that it is necessary to consider the activities of L3 UK and L3 NZ to whom the training and organisation of training was subcontracted. Sub-paragraph 10.5 explains how both companies have similar infrastructure and carry out significant part of the training stating that, “[t]here is no basis for concluding that either L3 NZ or L3 UK is carrying out the essential activities, rather, the training is split between activities in the UK and activities outside the UK.”

The material parts of sub-paragraph 11 provide:

“11 Proposed basis for apportionment

11.1

… As explained further below, we consider an apportionment based on the cost of delivering training to Cadets in the various locations to be the most rationale and accurate option.

…

11.4

Using an apportionment based on cost where it is not possible to use values, accords with HMRC’s recent guidance on the apportionment of consideration …

11.5

On that basis we propose an apportionment based on the cost of delivering training in the UK to Cadets on the bonded programme throughout the assessment period versus the cost of delivering training outside the UK to the same Cadets in the same period.

…

11.7

Apportioning the bond payments received during the assessment period in the manner described above would give the following result:

Cost of training delivered outside the UK during the assessment period	£17,285,114
Cost of training delivered in the UK during the assessment period	£30,136,520
Percentage of bond payments treated as consideration for supplies outside the scope of UK VAT	34%

The representations conclude at paragraph 12, “Next steps”, stating at sub-paragraph 12.2:

“If HMRC agree in principle with the basis of apportionment that has been proposed, we would be happy to discuss the calculations further.”

By email of 3 May 2023, HMRC (Officer Miranda Widger) confirmed receipt of the representations stating that these would be forwarded to “specialist colleagues”. On 26 September 2023 Officer Widger and Officer Peter Rowe, of HMRC’s Policy Team, in a call discussed the representations following which Officer Rowe emailed Officer Widger with a summary explaining that the view of HMRC’s Policy Team was:

Officer Widger had a further call with Officer Rowe and the wider case team later in the afternoon of 26 September 2023. After discussing the view received from HMRC’s Policy Team, it was agreed that a new decision should be made in relation to the place of supply of services with the assessments amended accordingly.

A letter, dated 31 October 2023, from Macfarlanes, records, inter alia, that on 27 September 2023 a call had been received from a Mr Ian Painter, of HMRC’s Solicitor’s Office to confirm that HMRC agreed with APL’s proposal and that the next step would be to confirm the figures so that the assessments could then be amended on that basis. This is not disputed by HMRC neither is the fact that Mr Painter informed Macfarlanes that HMRC would shortly provide them with a letter confirming the additional information that was required to verify the calculations. He also noted that he would draft an application to the Tribunal that explained the situation and sought a further extension to the directions.

On 28 September 2023, HMRC (Mr Painter) made an application to the Tribunal for further amended directions to:

“… extend the upcoming deadline for the exchange of lists of documents by 16 weeks in order to allow the Respondents to implement a change in its view re ‘place of supply’ and the resulting amendments to the assessments necessitated by the aforementioned change of view.”

On 13 October 2023, HMRC (Officer Widger) wrote to Macfarlanes “in response to your email dated 2 May 2023 and the place of supply representations provided.” The letter set out HMRC’s original view that the STP was a business to consumer supply wholly supplied in the UK. It continued:

“HMRC’s revised view

After due consideration of your representations on the operations of APL and the L3 group, HMRC has revised its view on APL’s place of supply for the training that takes place in locations outside of the UK.

…

It is [now] HMRC’s view that:

However, on 20 October 2023 HMRC (Officer Widger) wrote to Macfarlanes in the following terms:

“I write in relation to my letter to you dated 13 October 2023.

I apologise but I must withdraw the ruling set out in that letter.

HMRC has now completed further analysis of its position. During this analysis HMRC has been considering its legal position.

For this reason I must withdraw my letter dated 13 October 2023 until I can provide a comprehensive explanation of HMRC’s view on the place of supply of APL’s services.”

Macfarlanes responded on 31 October 2023 explaining that it was “not open to HMRC to withdraw from their clear agreement on place of supply”. Essentially, Macfarlanes contended that HMRC’s letter of 13 October 2023 amounted to an agreement under s 85 VATA.

Following receipt of the Decision Letter, APL commenced Judicial Review proceedings on the grounds that it, and the subsequent assessment, were a breach of its legitimate expectation that the VAT treatment set out in the Clearance Letter would apply for the duration of the Relevant Period and that it would not be withdrawn without fair notice and with retrospective effect. APL’s alternative position was that even if there was no legitimate expectation, it was nevertheless unreasonable and/or an abuse of power for HMRC to withdraw the Clearance Letter without fair notice and with retrospective effect.

HMRC contended that, because of the absence of a full and frank disclosure in APL’s request for non-statutory clearance, no legitimate expectation could arise on the basis of the Clearance Letter. In particular, HMRC relied on APL’s failure to disclose that during their employment with a Sponsor Airline, a cadet might receive a reduced salary to take account of the fact that the airline had paid a placement fee for the provision of the cadet.

The judicial review was heard by Constable J on 10 and 11 May 2023. The Judicial Review Judgement was handed down on 19 May 2023.

Having been provided with the easyJet Loan Agreement (see paragraph 49 of the Appendix) and easyJet Pilots Pay and Benefits schedule, dated 1 October 2015 (see paragraph 22, above) showing that a Senior First Officer “without the Loan Agreement” would receive a higher salary than a Senior First Officer with a Loan Agreement, the difference being the amount of the bond, Constable J observed, at [55]:

“… It is abundantly clear, therefore, that in relation to easyJet, the cadet in fact pays for their own training through a salary sacrifice and no part of the bond is, in reality, repaid to it. …

Constable J also referred to statements included in APL’s request for non-statutory clearance, the STP programme brochure for potential cadets and website, noting, at [57], that these gave:

“… the clear and unambiguous impression to the reader of the material that the scheme was such that the cadet ultimately has its bond repaid to it in full, in a real rather than illusory way, and that the cadet was not therefore the one who (in reality) paid for their own training”

He went on to observe, at [59]:

“It is in these circumstances entirely understandable that [the Finance Director of CTC whose comments we refer to at paragraph 63, above)] had formed the impression that the fact of the salary sacrifice arrangement, ‘might indicate that the Cadet is paying for the training they received from CTC by way of taking a reduced salary once employed and therefore in effect the Cadet is paying for their training’. This comment hits the nail on the head – although the word ‘might’ is something of an understatement.”

Having found, at [60] of the Judicial Review Judgement, that APL’s non-statutory review request and supporting information was “inaccurate and misleading” and, at [76], it was “materially so”, Constable J dismissed APL’s claim for judicial review. However, it is accepted, quite rightly, that the Judicial Review Judgment is not binding on this Tribunal although, as Mr Watkinson submitted, it is nevertheless “very persuasive”.

It is common ground that the following issues arise:

Although the parties addressed issue (5) before issue (4), we consider it more appropriate to consider these issues in reverse order as, depending on our conclusion on issue (4), issue (5) may fall away.

The law on this issue is well established and not in dispute. It is common ground that we should adopt the two step approach set out by the Supreme Court in Secret Hotels2 Ltd (formerly Med Hotels Ltd) v HMRC [2014] 2 All ER 685 (“Secret Hotels2”) in which Lord Neuberger said, at [34]:

In taking such an approach it is necessary, in a case such as the present, where the question at issue involves more than one contractual arrangement between different parties, to consider the “whole” of the relationship between the various parties when assessing the issue of who supplies what services to whom for VAT purposes (see Secret Hotels2 at [30]). In doing so, we remind ourselves that, where there is a written agreement, the labels which the parties have used to describe their relationship “cannot be conclusive and may often be of little weight” (see Secret Hotels2 at [32]) and that, although contractual terms constitute a factor to be taken into account they sometimes do not wholly reflect the economic and commercial reality of the transactions (see HMRC v Newy (trading as Ocean Finance) [2013] STC 2432 at [52]).

It is common ground that, under the contractual documentation, there is a legal relationship between APL and the cadet which is one of sponsor and spondee and that the payment from the cadet to APL is characterised as a “security bond”. However, the parties disagree as to whether the contractual documentation reflects the economic and commercial reality of the relationship between APL and the cadet in this case. It is therefore this issue, step two as described in Secret Hotels2 with which we are concerned.

In essence, Ms Shaw contends that the contractual documentation does reflect the economic and commercial reality. She says that the security bond paid by the cadet is not consideration for the supply of training as that training is paid for by the Sponsor Airline via a placement fee. Ms Shaw accepts that there is a legal relationship between the cadet and APL but submits that the relationship is one of sponsorship under which the cadet is required to deposit a security bond, not pay for training.

She also contends, relying on the decision of the Tribunal (Judge Raghavan and Mr Nicholas Dee) in Cabvision v HMRC [2013] UKFTT 721 (TC) at [171] (“Cabvision”), that the bond cannot be properly regarded as consideration for the supply of training as the bond monies are subject to a restriction and not freely at the disposal of APL as it was repayable to the cadet and transferred on their instruction to their Sponsor Airline. Additionally, Ms Shaw contends, that even if the Sponsor Airline did seek to have the cost of the placement fee reflected in the cadet’s salary, as APL is not a party to such an arrangement this is a matter between the Sponsor Airline and cadet.

Although the Tribunal in Cabvision observed, at [171], that it was “clear from the authorities that consideration is the amount which is actually received” and that, “in looking at what is actually received … it is necessary to look at whether there are restrictions on what is received such that the amounts are not at a person’s free disposal”, it continued, stating at [177] that:

“… whether the purported restrictions in this case are such that the appellant cannot be said to have received the full amount, is something we think must be determined on the basis of the particular facts of this case.”

As such, given the issue of any restriction on the use of the bond monies is a question to be answered on the facts, we do not consider that APL can derive any assistance from Cabvision. If, as a matter of fact, the “security bond” is a bond it cannot be consideration but if it is not, it will be consideration.

Although Mr Watkinson referred to what he described as “wrinkles” in APL’s case at step one, where the bond is described in the sponsorship agreements as “consideration” (see eg clause 4.8.3 of the BA MPL Sponsorship Agreement at paragraph 40 of the Appendix; clause 1.9 of the Integrated Contact Security Bond Addendum at paragraph 48 of the Appendix; clause 1.1 of the Integrated Contact Security Bond Addendum at see paragraph 48 of the Appendix; and clause 2.1 of the Virgin Sponsorship Contract see paragraph 45 of the Appendix) he contends that the best approach is to take these features, which Ms Shaw put down to “loose language”, as confirmation that the label, “security bond”, in any of the contracts is merely that, ie a label, and to take that feature into account in assessing the overall commercial and economic reality.

As noted above, the parties agree that there is a legal relationship between APL and the cadets. However, they part company on whether there is any reciprocal performance pursuant to that legal relationship as required for there to be a supply of services effected by consideration (see Tolsma v Inspecteur der Omzetbelasting Case C016/96 [1994] STC 509 at [14]).

Ms Shaw contends that under the sponsorship agreements there is simply an obligation on the cadet to deposit a security bond. However, we agree with Mr Watkinson that there is reciprocity under the sponsorship agreements. For example, clause 1.1 of the easyJet MPL Sponsorship Contract requires APL to “sponsor and procure” the cadet’s training; and the cadet, under clause 2.1 of that contract, is required to make payments to APL (see paragraph 44 of the Appendix). There is, therefore, a clear direct link. If the payments are not made by the cadet APL can cancel to the agreement (under clause 3.3.8, see paragraph 44 of the Appendix) and the training will not be provided.

However, as Ms Shaw contends, it does not necessarily follow that payment by the cadet is of itself, as a matter of commercial and economic reality, consideration for training. As is the case with any bond arrangement goods or services will not be provided in the absence of the security of a bond. That said, and contrary to Ms Shaw’s submission that this indicates the Sponsor Airlines rather than the cadets are paying for training, we consider that payment by the cadets of that part of the training that exceeded the placement fee indicates a direct link between the bond and the reciprocal provision of training given that had the cost of training continued to increase, the cadets would be required to pay directly for it.

In order to determine whether, as Mr Watkins submits the term “security bond” is merely a label which, as we have noted above (at paragraph 93), was not always applied, it is necessary to consider how it actually operated.

Before doing so, however, it is necessary to address an issue arising out of Ms Shaw’s closing submissions in which she contended that, despite the various agreements, and APL’s witnesses, referring to a singular “security bond” to be paid to APL and subsequently transferred to a Sponsor Airline, there were in fact two bonds.

The first from the cadet to APL, the proceeds of which was returned to the cadet and, on the cadet’s direction, transferred to the Sponsor Airline to fund the second bond. This was between the cadet and Sponsor Airline for the purposes of securing the Sponsor Airline against the risk of the cadet leaving its employment before it had seen a return on its investment in the cadet in the form of the placement fee.

Although Mr Watkinson referred to specific clauses that referred to the “Security Bond” in the singular (see eg clause 4.6 of the BA MPL Sponsorship Contract at paragraph 40 of the Appendix and clause 1.6 of the Integrated Contract Security Bond Addendum at paragraph 48 of the Appendix) and passages from the witness statements made by APL’s witnesses that referred to “the bond” being transferred to the Sponsor Airline, we agree with Ms Shaw that it is not possible as a matter of legal and economic reality to conflate the two bonds and treat them as having been simply assigned to the Sponsor Airline.

First, there are different terms governing the bond between APL and the cadets and the bond between the cadets and Sponsor Airlines (see eg the easyJet Sponsorship Contract at paragraph 44 of the Appendix and easyJet Loan Agreement at paragraph 49 of the Appendix). Secondly, if the bond had been assigned to the Sponsor Airline by the cadet it would not have been necessary for APL to obtain the consent of the cadet to transfer the funds to the Sponsor Airline rendering clauses 4.6 of the BA MPL Sponsorship Contract, clause 2.4.1 of the easyJet MPL Sponsorship Contract and clause 3.3 of the Virgin MPL Contract (at paragraphs 40, 44 and 45 respectively of the Appendix) otiose.

As such, we find that the references in the various agreements to “the bond” should properly be construed as being references to the proceeds of the bond rather than the bond itself. However, such a conclusion does not resolve the issue of whether as a matter of economic and commercial reality those proceeds were returned to the cadet.

Ms Shaw submits the proceeds were returned to the cadet on the completion of training when the funds were transferred to the Sponsor Airline on the cadet’s instruction in accordance with the sponsorship agreements (eg clause 4.6 of the BA MPL Sponsorship Contract, at clause 2.4.1 of the easy Jet MPL Sponsorship Contract and clause 3.3 of the Virgin MPL Sponsorship Contract at paragraphs 40, 44 and 45 respectively of the Appendix).

However, we agree with Mr Watkinson who contends that even if there is scrupulous compliance with the obligations by the cadet (eg with clause 8 of the easyJet MPL Sponsorship Contract at paragraph 44 of the Appendix) and all of the training is completed, the bond or rather, as we have concluded, its proceeds are in reality never actually returned to the cadet. This is because these are transferred by APL to the Sponsor Airline which then pays the cadet a reduced salary to reflect in whole, or in large part, the sum of the placement fee. As such, and as a matter of economic and commercial reality, it is the cadet that has borne the costs of training.

It therefore follows that the bond does not function as a security bond at all and the description of it as such is merely a label which, as we have noted above (at paragraph 87), cannot be conclusive.

We find support for this conclusion not only from the contractual references to the bond (ie its proceeds) being referred to as “consideration” (see paragraph 93, above) but also from sub-clauses 6.4 and 6.5 of Appendix A and 2.1 of Appendix B of the updated BA Placement Contract (see paragraphs 15 and 17 of the Appendix) from which it is clear that “on transfer” of the proceeds of the bond by APL to BA, BA will pay the same amount to APL (clause 6.5 of Appendix A) and that “in return” for payment of the placement fee APL will transfer the proceeds of the bond to BA (clause 2.1 of Appendix B).

Additionally, and perhaps of greater significance, is that our conclusion mirrors that of Constable J in the Judicial Review Judgment particularly at [55] where he said that it was “abundantly clear” that the cadet “in fact pays for their own training through a salary sacrifice and no part of the bond is, in reality paid to it” (see paragraph 81, above).

Although Constable J did not determine the issue that is before us, ie whether the bond was consideration for training, as this is a matter for this Tribunal, he did, in determining the issue before him, ie whether there was a breach of APL’s legitimate expectation (see paragraph 78, above), reach conclusions on the reality of what happened. This is because he had to determine whether the information provided to HMRC by APL was materially misleading or inaccurate when compared with what actually occurred.

Like Constable J, at [59] of the Judicial Review Judgment (see paragraph 82, above), we also find it “entirely understandable” for the Finance Director of CTC to want to remove the paragraph to which we have referred in paragraph 62, above, regarding the reduction in the cadet’s salary which “might indicate that the cadet is paying for the training received”, in what was to become the non-statutory clearance request letter.

As Constable J noted at [59(3)]:

“… APL cannot distance themselves from the importance of the salary sacrifice arrangement as part of the overall arrangement in circumstances when it was CTC itself that provided the predecessor scheme (which APL correctly asserts is materially similar to the 2009 Programme) and which, as set out in the 2003 easyJet contract, is stated as having been ‘devised by CTC comprising all of the following elements’:

‘The transfer of the bond to the airline on completion of pilot training

The payment by the airline of a reduced salary scale

The repayment by the airline of the bond to the pilot over a period of employment’”

In reaching our conclusion, having taken into account the whole of the relationship between the various parties, that as a matter of commercial and economic reality it is the cadet paying APL with that payment being consideration for their training we reject Ms Shaw’s submission that, if the cadet is paying anyone for their training it is the Sponsor Airlines. This is because there is no legal relationship under which the Sponsor Airlines are required to provide training to the cadets and no training was provided or procured by the Sponsor Airlines.

Having concluded that the security bond was consideration for the provision of training this issue falls away and, as such, it is not strictly necessary for us to address it. However, as it was argued before us, and in case of any further appeal, we have set out our conclusion on this issue, albeit not as comprehensively as would have been the case had we come to a different conclusion in relation to the consideration issue.

As the Court of Justice of the European Union (“CJEU”) observed in HMRC v RBS Deutschland Holdings GmbH (Case C-277/09) [2011] STC 345 at [53]:

“… taxable persons are generally free to choose the organisational structures and the form of transactions which they consider to be most appropriate for their economic activities and for the purposes of limiting their tax burdens.”

However, this subject to an exception for “abusive transactions” as discussed in Halifax plc v Customs and Excise Comrs (Case C-255/02) [2006] STC 919 (“Halifax”). In Halifax the Court noted, at [73], that where there is a choice of one of two transactions a taxable person is not required to choose the one which “involves paying the highest amount of VAT but may choose to structure their business so as to limit their tax liability. The Court continued:

“74.

… it would appear that, in the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.

75.

Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage. As the Advocate General observed in para 89 of his opinion, the prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages.

…

80.

To allow taxable persons to deduct all input VAT even though, in the context of their normal commercial operations, no transactions conforming with the deduction rules of the Sixth Directive or of the national legislation transposing it would have enabled them to deduct such VAT, or would have allowed them to deduct only a part, would be contrary to the principle of fiscal neutrality and, therefore, contrary to the purpose of those rules. a

81.

As regards the second element, whereby the transactions concerned must essentially seek to obtain a tax advantage, it must be borne in mind that it is the responsibility of the national court to determine the real substance and significance of the transactions concerned. In so doing, it may take account of the purely artificial nature of those transactions and the links of a legal, economic and/or personal nature between the operators involved in the scheme for reduction of the tax burden (see, to that effect, Emsland Starke [2000] ECR 1-11569, para 58).”

Although it must be a principal aim, it is not necessary for the tax advantage to be the sole aim of the taxpayer concerned (see Ministero dell’Economia e delle Finanze v Part Service Srl [2008] STC 3132 at [45] – “Part Service”). Also, as is apparent from Part Service, at [59]-[60], the tax advantage does not have to be for the taxpayer but can equally be for its customer.

It is clear from HMRC v Pendragon Plc and others [2015] 1 WLR 2828 that the effect of the whole arrangement or scheme has to be considered. This is because the principle of abuse of law is, as Lord Sumption observed at [13]:

“… is, in this context, directed mainly to the method by which a commercial purpose is achieved, it is necessary to analyse each transaction by which it is achieved. Because the purpose of each step will generally be to contribute to the working of the whole scheme, …”

In Massey (trading as Hilden Park Partnership and another v HMRC [2016] STC 304 (“Massey”) the Upper Tribunal (Rose J, as she then was, and Judge Sinfield) at [60] held that it was for HMRC to establish a that a tax advantage is contrary to the VAT Directives and the essential aim of the transactions is to obtain a tax advantage.

Assuming therefore, for the purpose of this issue, that we had concluded that as a matter of economic and commercial reality the cadet does not pay for their training, it is necessary to consider whether a tax advantage is obtained contrary to the purpose of the statutory provisions; and if so whether that was the aim of the STP.

Ms Shaw contends that the STP, although structured in a tax efficient manner as it was clearly entitled to do, did not result in any tax advantage to APL. Neither, she says, was the obtaining of a tax advantage the essential function to the STP, the essential aim of the STP was an alternative to the traditional method of airlines funding the training of their new recruits (see paragraphs 11 – 13, above).

However, as is clear from Part Service, it is not necessary for any tax advantage to be restricted to APL and any such advantage to its customers, ie for the cadets or Sponsor Airlines, could be enough to regard the STP arrangements as abusive.

As such, we agree with Mr Watkinson that there was a tax advantage in this case and that this comprised two cumulative components. The first that the Sponsor Airlines were able to deduct the input tax on the placement fee even though they were immediately recompensed in the same sum by the proceeds of the bond being transferred to it in return for the placement fee. The second component is that the cadet who bears the economic consequences of training does not pay VAT on those sums.

We also agree with Mr Watkinson that the STP arrangement was designed from the outset to achieve such a tax advantage. This is clearly apparent from the VAT analysis, as discussed in the CTC VAT Report (see paragraph 60, above). That VAT was critical to the commercial viability of the arrangement is also apparent from the reference to the supply of cadets in a “tax efficient manner “ at sub-clause 4.3 of the Special Conditions in Schedule 1 to the BA Placement Contract (see paragraph 10 of the Appendix).

Finally, as confirmed in the Judicial Review Judgment, APL provided materially inaccurate and misleading information to HMRC (see paragraph 83, above) which, as Mr Watkinson contends, is a common feature of a tax avoidance scheme and also indicates that gaining a tax advantage was a principal aim of the STP.

Therefore, for these reasons, we find that, had we come to a different conclusion in regard to the consideration issue we would have concluded that the STP arrangement did give rise to a Halifax abusive result.

In Halifax at [94] the Court stated:

“It follows that transactions involved in an abusive practice must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice.”

Therefore, as Mr Watkinson submits, redefinition of a supply only applies where there has been an abusive practice. As we would have found that to be the case if we had reached a different conclusion on the “consideration” issue, we would agree with him that, as the “VAT gap” is the failure to charge the cadet VAT, any redefinition would be to treat the security bond as a taxable supply of training to the cadet.

Ms Shaw contends that this (and our conclusion that the bond is consideration for training) would lead to double taxation as, in addition to the VAT on the supply of training to the cadet there would also be VAT on the supply of that same training under the placement fee and that credit should therefore be given. This she argues is not only a principle of basic fiscal fairness but a prerequisite for fiscal neutrality of the VAT system.

While that must be correct, it does not necessarily follow that there would be double taxation in this case. As Mr Watkinson submits, the better analysis is that there were two taxable supplies made by APL. The first of training to the cadets and the second of newly qualified pilots to Sponsor Airlines. When this was put to Ms Shaw by the Tribunal her response was why would the Sponsor Airlines pay such an “enormous price” and that the placement fee only makes sense if it is a payment for training, otherwise it would be “an absolutely exorbitant fee for a cadet that has already paid for their own training.”

However, even if that is the case, as is clear from Massey at [76] the outcome does not have to be economically realistic when the transaction is redefined. Accordingly, we do not consider any redefinition to give credit for the VAT on placement fees to be necessary.

It is common ground that if there was an agreement between the parties under s 85 VATA in regard to the supply of training that took place in New Zealand, HMRC must give effect to it. It is also agreed that if there is to be an apportionment that 27.4% of the amounts received by APL from the cadets should be treated as relating to training in New Zealand. However, the parties part company on whether, in fact, there was such an agreement.

Section 85 VATA, insofar as applicable, provides:

In Schuldenfrei v Hilton (Inspector of Taxes) [2019] STC 821 the Court of Appeal considered whether the parties in that case had “come to an agreement” in relation to s 54 Taxes Management Act 1970 (“TMA”), the direct tax equivalent of s 85 VATA. Jonathan Parker J delivering the first judgment of the Court of Appeal said:

“… . The question which arises under s 54(1) is whether the Revenue and the taxpayer have ‘come to an agreement’ in relation to the assessment under appeal. If they have, then the subsection itself prescribes the consequences which are to follow from that agreement. Thus, the question whether a s 54 agreement has been concluded has to be considered in a statutory, not in a common law, context.

43.

That is not to say, however, that common law concepts such as that of offer and acceptance are not of assistance in addressing that question. It does not follow from the mere fact that parties are ‘in agreement’ in relation to a particular matter that they have concluded, reached, or ‘come to’ any agreement about it. As the commissioners rightly said: ‘the fact that two persons find that they have the same expectations or objectives does not mean that they have come to any agreement’ (see [1997] STC (SCD) 193 at 202, para 23).

44.

To my mind, the notion of parties having ‘come to’ an agreement plainly implies not merely that they are of the same mind in relation to a particular matter, but also that their minds have met so as to form a mutual consensus; and that that a meeting of minds, that mutual consensus, has resulted from a process in which each party has to some extent participated. On that footing it is, in my judgment, both legitimate and helpful (as both sides have accepted) to approach the question whether the Revenue and the taxpayer have made a s 54 agreement in the instant case by applying common law principles of offer and acceptance.”

In Delbourgo v Field (Inspector of Taxes) [1978] 2 All ER 193 at 197, Orr LJ (who was also concerned whether there was an agreement under s 54 TMA) said:

“… in my judgment, the agreement, to fall within the section, must be an agreement that the assessment is to be upheld or an agreement that it be discharged or an agreement that it is to be varied and, if it is an agreement to vary, it must specify what the varied amount of the assessment is to be or, at the very least, must provide the commissioners with a basis from which the varied figure can be readily calculated.”

As it is accepted that the same principles apply in the context of s 85 VATA (which is in very similar terms to s 54 TMA) it is necessary to consider whether the parties came to an agreement following the exchanges between them that we have set out above under the sub-heading “Contact with HMRC” (see paragraphs 66 – 77, above).

Ms Shaw contends that, although not expressed in terms of offer and acceptance, the substance and effect of the exchange between the parties is that APL, through its solicitors in the representations of 2 May 2023 (see above at paragraph 69) did provide the basis from which a varied figure could be readily calculated and that this was accepted by HMRC in their letter of 13 October 2023 (see paragraph 75, above).

Mr Watkinson, however, contends that the bases of a s 85 VATA agreement are not present. There is he says, no reference in the process to the settling the appeal or part of it, coming to any negotiated position on it, entering any contractual agreement any offer or any acceptance and even if there was it was withdrawn a week later before there had been any response to it. Moreover, he submits that any purported agreement is contingent on APL not accepting HMRC’s primary case and therefore there has been no variation in terms of quantum or actual liability.

However, we have come to the conclusion that HMRC’s response of 13 October 2023 was clearly acceptance of the representations made on APL’s behalf on 2 May 2023 which, particularly at paragraph 11 of the representations (see paragraph 69, above), does give HMRC a basis from which the varied amount can be readily calculated. Accordingly, it follows that there was a s 85 VATA agreement between the parties in regard to the supply of training that took place in New Zealand.

We find support for this conclusion in the application to the Tribunal on 28 September 2023 in which HMRC sought an extension of time to exchange lists of documents to accommodate the “change in its view” regarding place of supply (see paragraph 74, above).

Although HMRC sought to withdraw from that agreement by the letter of 20 October 2023, we consider that this was an attempt to shut the stable door after the horse had bolted. By 20 October 2023 the parties had already entered into an agreement from which HMRC could not resile given that it must be treated, under s 85 VATA, as if “a tribunal had determined the appeal in accordance with the terms of the agreement”.

We do not consider the fact that APL did not accept HMRC’s primary case has any bearing on our conclusion on this issue. Given that APL had already appealed to the Tribunal at the time it entered into negotiations regarding the place of supply with HMRC it would have been understood by the parties that, as is the case with all litigation, they might not succeed on every issue and seek to reach agreement to cover that eventuality.

Given our conclusion in relation to the s 85 VATA agreement this issue falls away. However, as with the “abuse” issue, as it was argued before us and in case of a further appeal, we shall briefly set out our conclusions in relation to this issue.

The general rule in relation to the place of supply of services are set out in s 7A VATA the relevant parts of which provide:

For present purposes, the relevant paragraph of Schedule 4A is paragraph 14A. This provides:

Paragraph 14A gives effect to what was Article 9 of the Sixth Directive and is now Articles 52 and 54 of the Principal VAT Directive which provides that for educational activities the place of supply shall be the place where those activities are physically carried out.

It is common ground that the provision of training is an educational activity and that this was provided outside the UK, mainly in New Zealand where the cadets were physically present and received that part of the training on location from local instructors.

In Staatssecretaris van Financiën v L W Geelen Case C-568/17 (“Geelan”) the CJEU was concerned with the place of supply of services provided for consideration by Mr Geelen, who was registered for VAT in the Netherlands. Those services consisted of the offer of live interactive erotic webcam sessions, which could be viewed by several customers simultaneously, in which the models filmed were in the Philippines. The models worked for Mr Geelen who provided them with the hardware and software required to broadcast those sessions over the internet. To access the sessions, Mr Geelen’s customers were required to create an account with one of the internet service providers. Those providers received the payments for those sessions from the customers and paid a portion of them to Mr Geelen.

Having noted, at [47], that the supply of services was a “complex supply” rendered by Mr Geelan rather than the models, the Court stated at [50]:

“… since the activities necessary for the supply of those complex services are concentrated in the place from which the provider, on the one hand, organises the interactive sessions relating to the erotic show performed by the models and, on the other hand, provides customers with the opportunity to view those sessions on the internet, from the place of their choice, and to interact with those models, such a complex supply of services must be regarded as being ‘physically carried out’, within the meaning of Article 9(2)(c) of the Sixth Directive, in the place where that service is supplied by that provider, namely, in the case in the main proceedings, the place where his business is established: the Netherlands.”

Such an approach was adopted by the Tribunal (Judge Sinfield) in St Georges University Ltd v HMRC [2021] SFTD 675 (“St Georges University”)in which it was agreed that St Georges University made a single supply of services relating to educational activities which took place in different countries (Grenada and the UK) at different times over a period of four years. At [133] Judge Sinfield observed that although the services were of a “very different nature” the case that appeared to provide the “closest parallel was Geelan. Applying that analysis Judge Sinfield said, at [143]:

“Applying the CJEU’s analysis in Geelen, it seems to me that the supply of the MD Course which, for some SGU [St Georges University] students, includes the GSP [Global Scholars Program which was provided at the campus of the University of Northumbria in Newcastle] and UK Clinical Training Programme, is a complex supply by SGU. Mr Beal was not inclined to accept that SGU was making a complex supply, however, I consider that it is properly described as such. SGU devises, organises and supervises the GSP and UK Clinical Training provided by the UNN and the UK Teaching Hospitals. SGU offers the students the opportunity to take part of the four year MD Course in the UK if they so choose. Where students choose to take part of the MD Course in the UK, SGU’s services are not the performance of the underlying educational activity but the provision to students of the opportunity to take part of the MD Course in the UK and the organisation of the provision of education and training in the UK. I consider that, as in the case of Mr Geelen’s supplies, the place where SGU’s activities actually take place is where it makes all the necessary arrangements for the provision of the GSP and UK Clinical Training to the students, ie Grenada. It follows that SGU’s supplies are outside the scope of UK VAT.”

Ms Shaw submits that unlike Geelan the provision of training in the present case which took place in New Zealand was not a complex supply. She contends that it is readily apparent that L3 NZ operated with a high degree of autonomy over the training provided to the cadets provided on site in New Zealand which, she says, distinguishes the present case from St Georges University in which materials from the university in Grenada were used in the University of Northumbria in Newcastle, the Grenadian University designated the Associate Dean and provided course directorships. It also provided clinical tutors to assist with small group teaching and brought in visiting professors to provide specialist instructions. Accordingly, she submits, that it is necessary to apportion that part of the training that took part in New Zealand.

However, as Mr Watkinson contends, it is apparent from the contractual documentation that it is APL that devises, organises and supervises the training. APL services are not the performance of the underlying training but the provision to the cadets of the opportunity to take part in it and the organisation and the provision of training in the UK and New Zealand. As such, the place where APL’s activities actually take place, is where it makes the necessary arrangements for the provision of that training, ie the UK.

Therefore, as in St Georges University apportionment is not necessary and as we do not consider it to have been wrongly decided and, as a matter of judicial comity, we would, if we had come to a different conclusion regarding the s 85 VATA agreement, have followed Judge Sinfield’s decision in that case.

For the reasons above, we have concluded that the payment of the security bond by the cadet to APL is consideration for the taxable supply of training to the cadets and therefore liable to VAT. However, given the s 85 VATA agreement between the parties, 27.4% of the amounts paid to APL by the cadets should be treated as training which took place outside the UK and therefore outside the scope of VAT.

Therefore, we allow the appeal in part to take account of the adjustment to reflect the agreement under s 85 VATA but in all other respects the appeal is dismissed.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.