In a decision released today, the Supreme Court has ruled in favour of HM Revenue & Customs (HMRC) in its long-running dispute with Hotel La Tour Ltd, confirming that VAT incurred on costs directly attributable to share sales is not recoverable, even when those sales fund taxable business activities.
The Case at a Glance
Hotel La Tour Ltd sold its Birmingham hotel subsidiary in 2017, incurring over £76,000 in VAT on professional services including legal advice, financial modelling, and consultancy. The company argued that the sale was a strategic move to finance the development of a new hotel in Milton Keynes, an undeniably taxable venture.
While earlier tribunals had supported Hotel La Tour’s position, the Court of Appeal reversed those rulings, and the Supreme Court has now upheld that reversal, siding with HMRC.
Supreme Court’s Findings
The Court reaffirmed that:
- The sale of shares is an exempt supply under UK VAT law.
- Input VAT on costs directly linked to exempt transactions, such as the sale of shares, is not recoverable.
- The intended use of the proceeds (e.g. funding taxable activity) does not override the nature of the exempt transaction.
This decision reinforces a strict interpretation of VAT recovery rules, focusing on the direct attribution of costs rather than broader business intent.
Practical Guidance for Businesses
While the ruling narrows the scope for VAT recovery on share sale costs, it does not shut the door entirely on VAT recovery during corporate reorganisations. Businesses should take note:
- VAT Recovery is still possible: Input VAT may be recoverable on costs that are not directly attributable to exempt share sales, such as general advisory services or restructuring costs that relate to the wider taxable business.
- Direct attribution matters: Costs that can be clearly linked to the execution of a share sale (e.g. legal fees for drafting sale agreements, due diligence specific to the transaction) are now firmly outside the scope of recovery.
- Document intent and structure: Businesses should carefully document the purpose and scope of professional services to demonstrate whether costs relate to taxable activities or exempt transactions.
- Seek specialist advice early: Engaging VAT specialists during the planning phase of a corporate restructure can help optimise recovery and avoid costly disputes.
Sector-Wide Implications
The ruling is expected to impact holding companies, private equity firms, and corporate groups that frequently use share disposals to fund growth. HMRC may now take a firmer stance on input VAT claims linked to exempt transactions, prompting businesses to reassess their structuring and documentation practices.
Final Thoughts
For Hotel La Tour, the decision marks a financial setback, but for UK businesses, it offers clarity. The message is clear: VAT recovery hinges not on business strategy, but on the legal character of each transaction. With careful planning, recovery on corporate restructuring costs may still be possible in certain circumstances, but precision is now more important than ever.
