Input Tax recovery on share sales
Is a business able to recover Input Tax on share sales?
In the case of Hotel La Tour’s (HLT) the Court of Appeal has reversed earlier tribunal decisions regarding entitlement to Input Tax recovery on the costs of selling shares in a subsidiary company Hotel La Tour Birmingham Ltd (HLTB).
Instead, the court unanimously decided that the various professional fees incurred by the hotel chain had a direct and immediate link to the sale of the shares—an exempt supply on which VAT is not recoverable.
Case history of Hotel La Tour
The taxpayer in the case, HLT was in the hotel business. In 2015, HLT decided to develop a new hotel site in Milton Keynes.
In order to raise funds for the building development, HLT made plans to sell whole of the share capital of its wholly-owned subsidiary HLTB which owned and operated a luxury hotel in Birmingham. HLT and HLTB were in a VAT group of which HLT was the representative member and HLT provided HLTB with management services and was also subject to VAT in its own right.
As part of negotiaating the funding available for its new development, HLT engaged various marketing, solicitors’, and accounting advisers to obtain the best price possible for the shares in HLTB. The sale completed and HLT used the proceeds to pay its adviser fees, plus VAT, and fund the new development.
HLT’s subsequent attempt to claim Input Tax recovery incurred on the adviser fees was rejected by HMRC.
Tribunal decisions
The taxpayer was successful in appealing HMRC’s position in both the First-tier Tribunal (FTT) and the Upper Tribunal (UT). The FTT allowed Input Tax recovery due to a link to future taxable supplies by the seller of the shares (HLT). HMRC subsequently appealed to the UT which upheld the decision of the FTT, affirming that Input Tax recovery was correct.
The Court of Appeal – Input Tax recovery on share sale fees denied
In contrast, the Court of Appeal held, HMRC v Hotel la Tour [2024] EWCA Civ 564, that HLT could not recover the Input Tax incurred in connection with the sale of its shares in HLTB.
The Court of Appeal held that:
- HLT provided HLTB with management services in relation to its hotel business. HLT was therefore making taxable supplies being an economic activity for VAT purposes.
- The sale by HLT of its shares in HLTB was exempt for VAT purposes.
- The facts determined before the FTT were that the adviser costs incurred by HLT were “part of the process” of selling the shares and therefore were directly and immediately linked with the exempt share sale and consequently the VAT on such costs was irrecoverable.
Crucially, the Court of Appeal rejected a key argument that had found favour in the lower Tax Tribunals.
HLT’s case was that because its share sale was a means of fundraising, there was a direct and immediate link between the costs incurred and HLT’s “downstream taxable general economic activities”.
On that basis, the FTT and UT considered that HLT’s Input Tax claim was not denied by the exempt share sale. Whilst the Tax Tribunals seemed to open the door to potential Input Tax recovery windfalls for taxpayers that have used share sales as a means of capital raising, the Court of Appeal has essentially returned to the position prior to HLT’s appeal to the FTT.
Conclusion
The position now is that the mere existence of a share sale does not lead inevitably to a conclusion that Input Tax recovery is allowed. Instead, Input Tax recovery on costs in some way connected to a share sale depends on whether the evidence demonstrates a direct and immediate link to the share sale or, if not, to the general business of the taxpayer.
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