The Supreme Court’s ruling in the case of Hotel La Tour has clarified a key issue regarding VAT recovery on fees connected with exempt share sales, providing businesses with important insights into the VAT treatment of corporate transactions.
Hotel La Tour (HLT) sought to recover VAT on approximately £76,000 in legal and advisory fees related to the sale of its Birmingham hotel.
The sale of the shares in the hotel-owning company was intended to fund a new hotel project in Milton Keynes, an entirely taxable activity.
However, the VAT incurred on the deal fees was linked to the exempt share sale. Despite the funds being used for a taxable purpose, the Supreme Court unanimously upheld that VAT on the fees could not be reclaimed, as the sale was still classified as exempt.
This ruling provides clarity on the importance of understanding the direct and immediate link between the input costs and the taxable or exempt nature of the underlying transaction.
In this case, despite the funds being used for a taxable project, the court determined that the VAT incurred on the legal and advisory fees was inextricably linked to the exempt share sale itself.
The ruling provides a clear message for businesses involved in share disposals, that VAT on costs related to share sales cannot be recovered simply because the funds raised are later used for a taxable project.
The judgment also makes it clear that VAT recovery is determined by the nature of the transaction and not the intended use of the proceeds.
One of the key points from this ruling is the application of the ‘direct and immediate link’ test.
Businesses should understand that even if a share sale is for the purpose of raising funds for a taxable business, this does not automatically mean that the VAT on deal fees will be recoverable.
The Supreme Court has confirmed that the focus must remain on the specific transaction, not the broader intention behind it.
This decision provides clarity on the narrowness of VAT recovery in relation to corporate transactions involving exempt share sales.
Businesses should now review their past share-related transactions to ensure that VAT claims have been appropriately handled.
With HMRC likely to scrutinise such claims, it is crucial to ensure that any VAT incorrectly claimed is adjusted and paid back.
A further complexity that needs to be considered is what this case tells us about VAT recovery on general overhead costs.
It may still be possible in some circumstances to recover VAT if the share sale is ‘’non business’’ and it can be argued the costs in question do not have a direct link to the sale of the shares, but is instead an overhead of that business, it would be good for HMRC to provide guidance on this point.
If your business has incurred legal or advisory costs on a share disposal, it may be worth reviewing whether VAT has been treated correctly. Our VAT specialists can provide a clear assessment of recoverability and support you in addressing any exposure before it becomes an issue.
For a confidential discussion, get in touch with our VAT Partner, Jas Dhillon (jaspaldhillon@lubbockfine.co.uk) or Director, Sharon Parker (sharonparker@lubbockfine.co.uk).
