In Airline Placement Limited v HMRC [2025] TC09595, the First Tier Tribunal (FTT) found that 'security bonds' paid by trainee pilots (cadets) were consideration for the supply of a taxable service to the cadets.
Airline Placement Ltd (APL) recruited cadets and trained them to become pilots of aeroplanes.
- Many of the cadets were placed with a sponsor airline at the end of their training.
- Other cadets were not sponsored and paid APL’s fees themselves.
- The sponsored cadets paid a £69,000 ‘security bond’ to APL. Then, on completion of the training, the cadet would give consent for the bond to be transferred to their sponsor airline.
- The sponsor airline would then pay the bond to APL as a ‘placement fee’ along with the VAT due.
- The airline would repay the bond to the newly qualified pilot over seven years, during which the pilot would receive a reduced salary.
- HMRC issued a decision letter saying that they did not accept that the arrangement was that of a bond, but rather consideration paid by the cadet for training.
- APL Appealed to the First Tier Tribunal (FTT), arguing that the bond was a genuine security deposit.
Before the appeal was heard, HMRC issued a Clearance Letter in which they agreed that APL was making a ‘Business to Consumer’ (B2C) supply of Educational services, which is subject to VAT based on Where the service takes place. This was of particular relevance because a significant proportion of the training took place in New Zealand and was therefore outside the scope of UK VAT.
- HMRC subsequently issued a second Clearance Letter, saying that they had changed their position and considered the training to be a ‘Business to Business’ (B2B) supply of services from a New Zealand group company to APL and therefore subject to VAT where the customer belongs; in this case, the UK.
- APL argued to the FTT that the first Clearance Letter constituted an agreement under s.85 VATA and that HMRC’s assessments must now be varied to exclude VAT assessed concerning supplies of training that were made in New Zealand.
In respect of the security bonds, the FTT found:
- Although APL argued that the sponsor airlines were the ones paying for the cadets’ training and that the cadets were merely depositing a security bond, there was actually a reciprocal relationship between APL and the cadets.
- Even on completion of a cadet’s training, the reality was that the bond never actually returned to the cadet. The bond was transferred by APL to the sponsor airline, which then paid the cadet a reduced salary to reflect in whole or in large part, the sum of the placement fee. As a matter of economic and commercial reality, it was the cadet who had borne the costs of training.
- The bond payments were consideration paid to APL for a taxable supply and, therefore, subject to VAT.
In respect of the Clearance Letter, the FTT found:
- HMRC’s first clearance letter constituted a s.85 VATA agreement between the parties with regard to the supply of training that took place in New Zealand.
- HMRC’s attempt to change their position in their second clearance letter was "an attempt to shut the stable door after the horse had bolted”, even though both parties had already entered into an agreement. It was one 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”.
The appeal was allowed in part.
Useful guides on this topic
Place of Supply: Services
The Place Of Supply (POS) of a service determines whether the supply is within the scope of UK VAT and whether VAT is payable on that supply.
Education & VAT
What rate of VAT applies to education? What sort of services are classed as education? What do you do if you have multiple supplies including education? What cases are there on VAT and education?
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