VAT recovery on deal costs – selling shares to fund ‘downstream’ taxable activity

VAT recovery on professional fees relating to raising funds for a business has been a much-debated topic over the years. There are many ways in which a business can raise funds, from raising business loans to selling assets, which could include shares in subsidiaries. There have been numerous cases taken to the VAT Courts on the VAT recovery of costs associated with this topic. The Court of Appeal has now released its judgement in the VAT case of Hotel La Tour which addresses the question of whether VAT on the costs of selling shares in a subsidiary to fund future development of the business elsewhere is recoverable.

The facts

Hotel La Tour Ltd (HLT) was the parent company operating a subsidiary Hotel La Tour Birmingham Ltd (HLTB). HLT had formed a VAT group with HLTB and acted as the representative member. HLTB owned and operated a luxury hotel in Birmingham under the name “Hotel La Tour”. HLT provided HLTB with management services and owned the right to the name “Hotel La Tour” together with other intellectual property (the domain name for the Hotel La Tour website, the Hotel La Tour logo, and agreements with two online booking agencies).

In 2015, HLT decided to construct and develop a new hotel in Milton Keynes at an estimated cost of £34m. Various options were considered to raise funds but ultimately the preference was to sell the shares in HLTB and to borrow the remainder from a bank (clear from board meeting minutes): the FTT accepted as fact that the whole of the net proceeds received from the sale of the shares in HLTB were used or are planned to be used towards the Milton Keynes hotel.

HLT claimed the VAT on its costs of selling HLTB, but HMRC denied the recovery on the basis that the sale of the shares was an exempt supply, and one cannot look beyond this immediate supply (based on precedent authority of the European Court of Justice in a case BLP from 1995).

The FTT decision

The key issue in the case was whether the services and the professional fees on which VAT was paid were directly and immediately linked to HLT’s exempt supply of shares or instead related to its downstream taxable activities.

The FTT held that more recent caselaw including the 2019 Supreme Court decision of Frank A Smart had indicated a different approach should be applied to fundraising costs, which requires an objective assessment of the intended use of the funds. The means of how those funds are obtained, whether it be a loan or by disposing of shares, should not impact the VAT recovery. However, this is not the case when the costs of the professional services are cost components of the share price (and the VAT then would be irrecoverable).

In this case, the FTT held, looking at objective evidence, that the purpose of the share sale was to fund HLT’s taxable downstream business activities - building, development and management of the Milton Keynes Development and evidence showed that the funds had been used wholly for this purpose. Additionally, the FTT held the costs were not cost components of the price of the shares but were business overheads. Therefore, the VAT incurred on fees related to selling the shares was recoverable.

Alternative arguments put forward by HLT to support VAT recovery (around VAT grouping and a potential transfer of a going concern (TOGC)) were dismissed by the FTT. HMRC then sought and received permission to appeal the FTT decision to the Upper Tribunal (UTT).
 

The UTT decision

In July 2023, the UTT dismissed HMRC’s appeal, rejecting HMRC’s arguments on the approach to attributing input tax and deciding that the FTT was correct to find a modified approach should be applied in fundraising transactions and could be applied to benefit HLT. 

HMRC were given permission to appeal the UTT to the Court of Appeal (COA).

The COA decision

On 21 May 2024, the COA handed down its decision in the case in favour of HMRC. The COA ruling follows the long-established position that there needs to a "direct and immediate link” between the fundraising costs and the use of the funds in the business. The judgement states that the costs were “directly and immediately linked with, the exempt share sale.” 

This is unwelcome news to HLT (and those who have filed claims to HMRC in light of the UTT decision) whose only option now is to seek leave to appeal to The Supreme Court. We wait to hear whether HLT would want to litigate further and whether permission to appeal would be granted.

Those who have filed claims based on the UTT ruling will no doubt await HMRC’s formal response to the COA decision.