Input VAT claimable on fund-raising share sale

In HMRC v Hotel La Tour Ltd [2023] UKUT 178, the Upper Tribunal (UT) agreed with the First Tier Tribunal (FTT) that Input VAT can be reclaimed on professional services fees incurred during a share sale, where the ultimate economic purpose was fundraising.

• Hotel La Tour Ltd (HLT) owned a 100% subsidiary Hotel La Tour Birmingham (HLTB), which owned and operated a luxury hotel.
• HLT provided Management services to HLTB and both formed a VAT group.
• HLT wished to build a new hotel in Milton Keynes and separately a decision was taken that the Birmingham hotel could not be grown as a business any further within the group. 
• The shares in HLTB were subsequently sold and the proceeds used to fund the Milton Keynes build.
• Professional fees of approximately £383,000 were incurred, along with approximately £77,000 of Input VAT, that HLT reclaimed.
• HMRC refused the claim on the basis that as the sale of shares was exempt from VAT, it broke the direct and immediate link to taxable supplies.
• HLT Appealed to the FTT, who upheld the appeal on the basis that the direct and immediate link was not broken by the exempt transaction.
• HMRC appealed to the UT.

The UT considered the leading CJEU case, Skatteverket v AB SKF (Case C-29/08) [2010] STC 419, which in turn was interpreted by the Supreme Court in the leading UK case, Frank A Smart & Son Ltd v HMRC [2019] UKSC 39. It held that the established principle in relation to the recoverability of Input VAT is now:

• Input VAT may be recovered where:
  • There is a direct and immediate link between goods and services received and the goods and services provided by the business as part of its trade.
  • There is a direct and immediate link between goods and services received and transactions that are outside of the scope of VAT. This was extended by the principle of fiscal neutrality to transactions that are exempt for VAT.
  • The Input VAT is part of costs constituting general overheads when the transaction is part of the ultimate economic purpose of the business.

The UT held:

• HLT's purpose for the transactions were fundraising.
• The funds raised were later used for taxable supplies.
• The costs incurred were components of taxable downstream activities, not part of the price of the shares (which would rarely be the case).
• The direct and immediate link was not broken.
• The Input VAT was recoverable.

The appeal was dismissed.

As of September 2023, HMRC have been granted permission to take this to the Court of Appeal.

Useful guides on this topic

Share sale was actually a fundraising activity for taxable supplies
In Hotel La Tour Ltd v HMRC [2021] TC08335, the First Tier Tribunal (FTT) found that the sale of a subsidiary was a means of fundraising that could be directly linked to future trading activities. This allowed the input VAT on associated professional fees to be reclaimed.

Input VAT: What constitutes a valid claim (& VAT invoice)
What is Input VAT? Who can claim it? What is needed for a valid claim? What needs to be included on a VAT invoice and can you make a claim without one?

Management re-charges (holding companies)
When are intercompany charges subject to VAT? What rate of VAT applies to an intercompany charge? Is an intercompany charge a supply for VAT? Is there VAT on an intercompany payment for group relief?

Groups
What are the conditions for forming a VAT group? What rules apply once a VAT group is in place?

External links

HMRC v Hotel La Tour Ltd [2023] UKUT 178

Hotel La Tour Ltd v HMRC [2021] TC08335