The Hotel La Tour VAT recovery case was scheduled for April 10, 2024. The outcome of the decision could potentially open the door for businesses across various sectors to reclaim VAT on the costs of selling the shares of a subsidiary that have taken place in the last four years. Potentially becoming feasible if they can demonstrate that the sale is aimed at generating funds for a taxable business activity under VAT regulations.
Background to the case
The Hotel La Tour Limited (HLT) is the holding company within a corporate group managing a series of hotels, each owned and operated by a subsidiary company.
In 2015, HLT decided to build a new hotel in Milton Keynes, financing the project by selling its existing Birmingham hotel, with shares in the subsidiary that owned the Birmingham property being sold off in 2017.
HMRC disputed HLT over the eligibility to reclaim input VAT incurred on professional services (such as those provided by marketing agents, solicitors, and tax advisors). HMRC initially denied VAT recovery, asserting that the professional services facilitated a share transaction, which falls under VAT-exempt supplies, making the VAT deduction impermissible. HLT successfully appealed, contending that the fees constituted expenses incurred in raising funds for the construction of the new hotel—a taxable business activity under VAT regulations.
In 2021, the First-tier Tribunal (FTT) ruled in favour of HLT, allowing VAT recovery on the advisers’ costs due to a link to future taxable supplies by the seller of the shares. HMRC subsequently appealed to the Upper Tribunal. Upon review, the Upper Tribunal upheld the decision of the First-tier Tribunal, affirming the recoverability of input VAT.
The impact of the decision
HMRC’s current policy dictates that input VAT associated with expenses related to a UK share sale is not recoverable, citing a ‘direct and immediate link’ to a VAT-exempt transaction. However, the Upper Tribunal’s recent decision suggests that in specific “fund-raising” contexts, this policy may not hold, potentially enabling input VAT recovery.
This decision could establish a precedent, offering a potential avenue for other taxpayers to seek input VAT recovery in similar situations where it hasn’t been claimed previously. It’s a significant development for businesses encountering limitations in input VAT claims concerning share sales of subsidiaries, opening the possibility for additional claims spanning the last four years, given the appropriate circumstances.
Furthermore, this ruling could have broader implications for scenarios where VAT recovery hasn’t been pursued in other fund-raising contexts, prompting a reassessment of such cases.
With the recovery case scheduled for April 10 2024, businesses that haven’t previously claimed VAT on share sale expenses over the past four years should monitor HMRC’s response to the Upper Tribunal’s decision and any potential further appeals.
What next?
If you believe you’ve been affected and if the Court of Appeal ruling favours the taxpayer, we can review the details to determine eligibility and, if suitable, provide support in submitting claims through the relevant process.
If, on the other hand, the decision favours HMRC and the input tax linked to the share sale remains unrecoverable, we can also aid in rectifying the situation by facilitating the necessary adjustments to HMRC. Our approach will be guided by the appropriate procedure, with a focus on mitigating potential penalties.
If you or any of your clients meet either of the two scenarios above, please contact the Gravita VAT team here (vat_team@gravita.com).
