The Supreme Court has today published its decision in a significant VAT case which is concerned with whether VAT incurred on legal and professional fees on the sale of shares by a holding company in its subsidiary company, can be reclaimed as input tax.
In Commissioners for HMRC v Hotel La Tour Ltd, the issue was whether input tax incurred on professional services relating to the sale of shares in a subsidiary was recoverable. The question turned on the application of the ‘direct and immediate link’ test and whether such costs were linked to the exempt share sale or to the taxable business as a whole.
About the appellant
Hotel La Tour Ltd (HLT) owned the entire share capital of Hotel La Tour Birmingham Ltd (HLTB), which operated a luxury hotel in Birmingham, and provided it with management services. In 2015, HLT decided to develop a new hotel in Milton Keynes. The development was funded partly through the sale of HLTB and partly through bank borrowing. To support the sale, HLT engaged professional advisers to provide services including market research, buyer shortlisting, financial modelling and tax compliance. HLT sought to recover the VAT on these professional fees on the basis that the sale was undertaken to raise funds for its taxable activities. HMRC denied recovery, arguing that the VAT was attributable to the exempt share sale.
First-tier Tribunal decision
The First-tier Tribunal (FTT) found that the direct and immediate link was with HLT’s overall taxable economic activity rather than with the exempt share sale, and allowed the input tax deduction. It considered that the direct and immediate link test was modified where a share sale was undertaken to raise funds for the taxable business, and also that the costs of input services were not incorporated in the price of the shares sold. The Upper Tribunal (UT) broadly upheld that decision. HMRC appealed and the Court of Appeal overturned the FTT and UT decisions, holding that the fees were directly and immediately linked with the exempt share sale and were therefore not deductible. HLT appealed to the Supreme Court.
Supreme Court judgement
The Supreme Court has unanimously dismissed HLT’s appeal. It held that the FTT and UT had misapplied the CJEU case law by relying on the manner in which the share price was determined and by modifying the direct and immediate link test in the context of fundraising share sales. The Court confirmed that the ‘costs component’ concept does not form part of the direct and immediate link test, and that there is no need to examine whether the professional fees were incorporated into the price of the shares. It further held that the sale of HLTB was within the scope of VAT but exempt, and that the authorities draw a clear distinction between exempt transactions and those that are out of scope. The Court rejected HLT’s argument that recent CJEU decisions had blurred this distinction or required exempt transactions to be treated as if they were out of scope to give effect to fiscal neutrality.
The Court also rejected HLT’s submission that the direct and immediate link test was modified where the purpose of the share sale was to raise funds for taxable activities. The CJEU has not departed from earlier case law, which makes clear that the fundraising purpose of a share sale is not relevant to the attribution of input tax. Applying the correct test to the facts, the Court concluded that the direct and immediate link was with the exempt sale of HLTB, not with HLT’s general hotel business. As a result, the VAT on the professional fees was not deductible.
The Court further dismissed HLT’s argument that, because there was a VAT group between HLT and HLTB, the activity of disposing shares in HLTB should be disregarded in the same way supplies between VAT group members are disregarded. The Supreme Court held that the VAT grouping does not disregard economic activity between group members for all purposes and does not alter whether the share sale was exempt or out of scope.
Our comment
The Supreme Court’s decision provides final clarity on the question of VAT recovery on deal fees linked to exempt share disposals. While disappointing for many holding companies that had hoped the earlier tribunal decisions might widen the scope for recovery in fundraising scenarios, the outcome aligns with the established principle that input tax on costs directly linked to exempt transactions is irrecoverable.
The judgment emphasises that the use of sale proceeds to fund taxable activities does not influence the attribution of input tax. Businesses that have made, or were considering, protective claims following the earlier tribunal decisions should now review their position in light of the Supreme Court’s conclusion. Going forward, it remains important for businesses to analyse deal-related costs carefully, and preferably in advance, to determine whether any elements can properly be attributed to the business as a whole and treated as overheads, particularly where advisers have been engaged for broader purposes beyond executing the share sale itself.
Sources that may be of interest:
- Commissioners for His Majesty’s Revenue and Customs (Respondent) v Hotel La Tour Ltd (Appellant) – UK Supreme Court
- Saffery VAT Update – June 2024
If you’d like to discuss any of the points raised, please get in touch.
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