Upper Tribunal supports VAT recovery on costs of selling one business to finance another

A recent Upper Tribunal (UT) appeal has looked at a corporate finance transaction from the seller’s point of view, considering whether a holding company was eligible to reclaim input VAT incurred on professional fees and other costs incurred when selling the shares of a subsidiary company to a new owner. 

The Hotel La Tour case

Hotel La Tour Limited (HLT) is the holding company of a corporate group that operates a chain of luxury hotels, each of which was owned and run by a subsidiary company. In 2015, HLT decided to build a new hotel in Milton Keynes, and financed the project by selling its existing hotel in Birmingham. The shares in the subsidiary that owned the Birmingham hotel were eventually sold to an unrelated buyer in 2017.

A dispute arose with HMRC over HLT’s entitlement to recover input VAT that it had incurred on various professional services related to the sale of those shares, including the fees of its marketing agent, solicitor and tax advisers. HMRC disallowed VAT recovery on the basis that the professional services were used to make a supply of shares, on which VAT is not deductible because it is a VAT exempt supply. HLT appealed, arguing that the fees were in fact the costs of raising funds to build the new hotel, which would be a taxable business for VAT purposes.

In 2021, the First-tier Tribunal (FTT) found in favour of HLT, deciding that the input VAT was recoverable because there was a direct and immediate link between the costs incurred and its taxable business of building, developing and the eventual management of the new hotel. That link was not broken by the exempt share sale – for the professional fees to be attributable to the sale of the shares, the FTT ruled that there must be a ‘cost component’ of the price of the shares. However, according to the FTT, that was not the case here, because the shares were sold at their open market value, which was not influenced by how much HLT had spent on the professional costs of the deal. Instead, the objective purpose of incurring the cost of the services was to raise funds to pay for the development of the Milton Keynes hotel.

The UT has now upheld this decision, supporting the rationale behind the FTT’s earlier ruling in favour of HLT. 

What does this mean for other businesses?

The impact of this decision is not restricted to the hotel sector and could potentially allow any type of business to recover VAT on the costs of selling the shares of a subsidiary, provided it can show this is done to raise funds to pursue another business activity that is taxable for VAT purposes. 

HMRC has yet to make a statement on this latest development, but the UT’s decision does create a binding precedent, which other taxpayers might be able to rely on to recover any input VAT they may have incurred but not claimed in similar circumstances. However, HMRC is very unlikely to accept the UT’s findings and is expected to pursue the case further to the Court of Appeal. If so, any refund HMRC agrees to pay at this stage will be subject to a protective assessment so it can be clawed back if HLT ultimately loses the case in a higher court. 

For now, businesses that did not claim VAT on the cost of a sale of shares in similar circumstances over the last four years should look out for HMRC’s reaction to the UT’s ruling and/or news of a further appeal. In the meantime, they should compare their transaction(s) to the facts in the Hotel La Tour case and consider whether they might have a claim. 

For more information, please get in touch with Simon Atkins, Philip Munn or your usual RSM contact.