In July 2023, the Upper Tier Tribunal (UTT) released its decision in the case of Hotel La Tour (HLT).

The UTT dismissed HMRC’s appeal against the decision of the First Tier Tribunal (FTT), which found that in certain circumstances, businesses which sold shares in subsidiary companies to fund their downstream, taxable activities, should be entitled to recover VAT incurred on the costs of the share sale. This decision allows businesses involved in the sale of subsidiary companies, like HLT, to recover VAT, which may have been previously blocked, by now making claims to HMRC.

The facts

HLT is a holding company and owned the entire share capital of Hotel La Tour Birmingham (HLTB). HLTB owned and operated a luxury hotel in Birmingham and HLT provided it with management services, which included the provision of key personnel, such as the general manager. In 2015, HLT decided to build a new hotel in Milton Keynes, which was anticipated to cost approximately £34.5 million.

To finance this development, HTL decided to sell HLTB and to borrow the shortfall from a bank. It was considered that HLTB’s business had reached the stage where it could grow no further. HLT engaged various advisors to provide professional services to assist in the sale of HLTB, including market research, buyer shortlisting, financial modelling, and tax compliance. This was with a view to obtaining the highest sales price available, which would provide for the largest sum possible to fund the new development.

HLT sought to recover the input VAT incurred on the professional services, but HMRC denied recovery on the basis that the input VAT was attributable to the VAT exempt sale of the shares. Despite HMRC’s position being based on well-established case law that businesses can only recover input tax based on the supply to which the VAT is immediately attributable (i.e. the European Court of Justice decision in the case of BLP Group plc v Commissioners of Customs & Excise), HLT appealed to the FTT against HMRC’s ruling.

The FTT’s decision

The FTT considered that previous case law made clear that VAT on professional services for a fundraising transaction, which was either outside the scope of VAT or exempt from VAT, was not blocked if:

• The purpose in fundraising was to fund a business’ economic activity;
• The funds are later used for taxable supplies; and
• The costs of the services are cost components of downstream activities, which are taxable.

The FTT concluded that the whole of the consideration, received by HTL for the sale of shares, had been used towards the development of the Milton Keynes hotel. HMRC initially argued that HLT was not carrying out an economic activity because the management services were provided by employees who were directors of both HLT and HLTB, rather than being provided by HLT. However, in a subsequent letter, HMRC accepted that sufficient management services were provided by HLT to constitute an economic activity. HMRC instead maintained that the professional services, which gave rise to the fees on which VAT was charged, were used in making an exempt supply (sale of the shares in HLTB), rather than in making taxable supplies.

The FTT found that there was a direct and immediate link between the professional services and HLT’s downstream taxable economic activities, and that the VAT should not be attributed to the sale of the shares in HLTB. In the FTT’s view, the relevant purpose for HLTB’s sale was for fundraising and the relevant use was to fund the development of the Milton Keynes hotel. It was clear from previous case law that the use of professional services for the initial fundraising transaction did not break the link between the input VAT and the downstream supplies. The link would only be broken where the cost of the inputs was a cost component of the price of the shares in the initial transaction.

Applying these principles to the facts of the appeal, the FTT found that the purpose of the share sale was to fund HLT’s taxable activities and that the VAT incurred should be recovered as if the costs were business overheads. That is to say, if HLT was fully taxable, the VAT incurred should be fully recoverable, or otherwise recoverable in line with the general residual VAT recovery under a partial exemption calculation.

The FTT dismissed other arguments presented by HLT, regarding the implications of VAT grouping and the possible application of the transfer of going concern.  However, based on the FTT’s decision regarding the attribution of input VAT to HLT’s taxable, downstream activities rather than to the exempt share sale, HMRC requested, and were granted, the right to appeal the FTT decision to the UTT.

The UTT decision

The UTT dismissed HMRC’s appeal against the FTT’s decision. In its findings, the UTT stated that the FTT was correct when it applied a “modified approach” in interpreting attribution of VAT on “deal fee” costs. This modified approach recognises that the VAT costs incurred on services for a fundraising transaction are not automatically restricted, provided the three key conditions identified by the FTT and listed above are met.

Next steps

It is not currently clear if HMRC intend to further appeal to the Supreme Court or if it will issue a Revenue and Customs Brief addressing the decision. However, the UTT decision creates a legally binding precedent, and all businesses which have restricted VAT recovery on share sales in the last four years, in facts similar to this case, should consider whether they are in a position to support and submit VAT repayment claims.

If you think you may be affected by the UTT decision or if you want to discuss VAT and financing issues more generally, please contact Dougie Todd, VAT Partner, or your usual haysmacintyre contact.