VAT Tribunal decision allows recovery of VAT on costs of a share sale

Hotel La Tour vs HMRC

Background 

HMRC has generally held the view that VAT recovery on costs depends on whether the costs were directly linked to or a cost component of a taxable supply. Taxable supply means a supply liable to VAT at either the standard rate, reduced rate or the zero rate. VAT cannot be recovered on costs that relate directly to exempt supplies. The sale of shares is VAT exempt.

However, a recent VAT Tribunal decision in Hotel La Tour Ltd (“HLT”) has challenged HMRC’s view. This decision could have far reaching implications for those raising finance in order to initiate, support or extend their taxable business activities.

Hotel La Tour vs HMRC - case summary

HLT incurred VAT on professional services in respect of a sale of shares in its subsidiary Hotel La Tour Birmingham Ltd (“HLTB”).  HLT sold the shares in order to finance the construction of a new hotel which it intended to operate.  HLT reclaimed the VAT on professional services, arguing it was directly and immediately linked to HLT’s intended taxable activities (namely the operation of the hotel).  HMRC disagreed, arguing the VAT related directly to a sale of the shares in HLTB which was an exempt supply and therefore input VAT recovery on costs was prohibited.

The VAT Tribunal has agreed with HLT ruling that the VAT incurred on the professional services did not relate to the sale of the shares as the sale of the shares was not the “endgame”.  The “endgame” was to generate VATable income from the newly built hotel and it is that to which the services and the VAT applied.  As such HLT were entitled to reclaim the VAT on the professional services.

Implications for Business

The decision marks a critical moment in the development of VAT case law.  HLT was able to look through the sale of shares (which is a VAT exempt supply) because the supply was made solely to raise funds for a future taxable activity.  In HLT’s case funds were raised by a share sale but the principle could also apply in other cases where a financial transaction is undertaken to finance a taxable business activity. 

This has long been a contentious issue and HMRC are likely to appeal the decision to a higher court. However, this can take a long time to conclude and businesses may lose out if they do not take steps to protect their position.

How can we help?

Any business that has raised finance – via either debt or equity - in the last four years and which restricted VAT recovery on related costs, may now be able to make a claim for this VAT.  MHA MacIntyre Hudson can help you by reviewing the position and VAT recovery in relation to past transactions. We can prepare, submit and negotiate a claim with HMRC on your behalf.

Please contact one of our VAT team for further guidance using our online enquiry form.