Court of Appeal overturns decision in Hotel la Tour on VAT costs on share sale

HMRC has historically taken the position that VAT on transaction costs, for example legal and professional fees, associated with the sale of shares is not recoverable. This is because these costs were viewed as relating to an exempt supply for VAT purposes, or alternatively the shares were not sold in the course of an economic activity.

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Hugh Doherty, Owen Burn and Damon Wright
Published: 29 May 2024 Updated: 29 May 2024
Business tax Tax

Back in 2023, the Upper Tribunal (UT) opened the door for VAT recovery in relation to sell side transaction costs. It agreed with the First Tier Tribunal (FTT) that these could be connected to the wider taxable activities of the company on the basis that the proceeds of the share sale of its subsidiary were to part-fund the development of its hotel in Milton Keynes.

The UT had argued that the effect of an exempt transaction in the context of that transaction being a ‘fund raising’ transaction was not ‘chain breaking’ and therefore the business was effectively allowed to look through to its wider taxable activity, being the activities of running a hotel.

Unfortunately, this week the judge in the Court of Appeal disagreed with the decisions made by the FTT and UT and concluded the company was prevented from recovery “by operation of the ordinary rules of VAT which are long-settled”. Whilst in certain circumstances costs ‘relating to’ the sale of shares should not always be characterised as directly attributable to the share sales, and can sometimes be characterised as overheads of the business for VAT purposes, the costs incurred by the company in the judge’s view most certainly were. As the costs were directly attributable to exempt supplies, the input tax could not be deducted.

The judge referred to the CJEU case (Case C-29/08 Skatteverket v AB SKF [2010] STC 419). This had indicated that non-business funding (sale of new shares) as well as otherwise exempt share sales should be viewed in the same way when considering whether VAT incurred on associated costs should be attributed to general costs, where the purpose was to generate funds to increase the business’s taxable activities. This is the basis on which the company had won the case in the FTT, however the judge in the Court of Appeal denied this look through. It remains to be seen if this could be reinstated if this case is appealed to the Supreme Court.

The judge went on to confirm her view of VAT grouping, that it is simply an administrative easement. The judge noted that it is still vitally important to correctly characterise transactions for VAT purposes, by reviewing what the tax liability of the supplies would be between the entities if they were not deemed ‘outside the scope’ on the basis of being part of the same VAT group, to determine the correct liability of the transactions.

Therefore, on the basis that Hotel la Tour provided management services to the subsidiary, when that entity was sold that transaction fell within the scope of VAT as an exempt transaction, and could not be ignored for VAT purposes because the companies were VAT grouped.

The outcome from the Court of Appeal is disappointing news for all businesses incurring deal costs on the sale of shares, as this further supports the very strict application of recovery on VAT incurred on deal costs. It is not yet clear whether or not Hotel la Tour will seek to appeal this decision, however in the meantime we encourage all businesses to reach out to us to ensure the VAT position taken on the recovery of deal costs is carefully considered.

How can we help?

If you have any questions or want to understand how the decision by the Court of Appeal impacts your business, please speak to your usual contact or get in touch with our experts, Hugh Doherty, Owen Burn or Damon Wright.

Tax legislation

Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2024/25.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.