11 January 2022
Businesses involved in mergers and acquisitions are accustomed to jumping through the necessary hoops to confirm that they are entitled to recover VAT on the costs of acquiring a new subsidiary. However, a recent tribunal appeal has looked at a corporate finance transaction from the seller’s point of view, considering whether a holding company was eligible to reclaim VAT incurred in the course of selling the shares of a subsidiary company to a new owner.
The Hotel La Tour case
Hotel La Tour Ltd 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, Hotel La Tour decided to build a new hotel in Milton Keynes, with the project to be financed by selling its existing hotel in Birmingham. The shares in the subsidiary that owned that hotel were eventually sold to an unrelated buyer in 2017.
A dispute arose with HMRC over Hotel La Tour’s entitlement to recover VAT of £76,000 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. Hotel la Tour appealed, arguing that the fees were in fact the costs of raising funds to create the new hotel, which would be a taxable business for VAT purposes.
The First-tier Tax Tribunal has now found in favour of Hotel La Tour, deciding that the 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 in Milton Keynes. That link was not broken by the exempt share sale – for the professional fees to be attributable to the sale of the shares, the tribunal ruled that there must be a ‘cost component’ of the price of the shares. However, according to the tribunal, that was not the case here, because the shares were sold at their open market value, which was not influenced by how much Hotel La Tour 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.
What does this mean for other businesses?
The impact of this decision is not restricted to the hotel sector and could potentially allow any business to recover VAT on the costs of selling a subsidiary to raise funds to pursue another business activity that is taxable for VAT purposes. However, HMRC is very unlikely to accept the tribunal’s findings and may decide to appeal to the Upper Tribunal. The outcome was based on some new and relatively untested European case law that emerged just before the UK left the EU, so this issue may lead to a long and complex litigation before the position is firmly settled.
For now, businesses which did not claim VAT on the cost of a sale of shares in similar circumstances over the last four years should study the Hotel La Tour decision, look out for news of a further appeal and consider whether they should submit a protective claim to HMRC.