Purpose doesn't trump exemption: Supreme Court clarifies VAT rules on share sale costs in Hotel La Tour

Overview

After a long wait, the Supreme Court has issued its decision in a VAT case concerning Hotel La Tour. This has been a case of interest not just for the hotel sector but for a broad range of businesses looking at sales of subsidiaries or other financial transactions to raise capital, as a win for Hotel La Tour could have opened opportunities for taxpayers to recover VAT on professional fees in various fundraising contexts.  

However, the Supreme Court has unanimously upheld the Court of Appeal’s (“CA”) decision in HMRC v Hotel La Tour Ltd [2025] UKSC 46, confirming that VAT on professional fees associated with an exempt share sale cannot be reclaimed - even where the purpose of the share sale is to raise funds to further the seller’s taxable activities.

Background

Hotel La Tour Ltd (“HLT”) owned the whole of the share capital of a subsidiary, Hotel La Tour Birmingham Ltd (“HLTB”), which owned and operated a luxury hotel in Birmingham. HLT and HLTB formed a VAT group, with HLT as the representative member, and HLT provided HLTB with management services.

In 2015, HLT decided to develop a new hotel in Milton Keynes. The development was part-funded by HLT selling its shares in HLTB, and the shortfall was financed by a bank loan. In July 2017, HLT sold the shares in HLTB to a third party. To assist with the sale and obtaining the best price achievable for the shares, HLT incurred significant professional fees (including marketing costs, solicitors' and accountants' fees), totalling £382,899.51 plus VAT of £76,822.95.

HLT sought repayment of the input tax incurred on the professional fees when filing its next VAT return, but HMRC rejected the deduction on the basis that the VAT incurred by HLT disposing of HLTB was directly attributable to a sale of shares. Both parties agreed that the management services provided by HLT to HLTB were taxable and that the sale of HLTB was an extension of this economic activity. As a result, the share sale was exempt from VAT and not outside scope. The issue was, therefore, whether HLT could recover from HMRC that VAT it had paid on the professional fees.

The Supreme Court’s judgment overturns decisions by both the First-tier Tribunal (“FTT”) and Upper Tribunal (“UT”), in agreement with the CA, confirming that both had incorrectly applied the 'direct and immediate link’ test for input VAT recovery by holding that it was possible to disregard the chain-breaking VAT effect of an exempt share sale in a fundraising scenario where the relevant costs did not form a ‘cost component’ of the initial transaction (in this case, the share price). Both the FTT and UT had held that the input VAT was linked to HLT’s downstream taxable development of the Milton Keynes hotel, as the costs had not been incorporated into the share price and were instead paid out of the share sale proceeds. Both Tribunals had relied heavily on recent CJEU cases, including Skatteverket v AB SKF, Case C-29/08 (“SKF”), suggesting they had created a special “fundraising look through” exception.

The CA held that this interpretation of SKF had not been correct and that the CJEU’s judgment had not modified the direct and immediate link test for share sales, holding, based on earlier CJEU case law, in particular BLP Group plc v Customs and Excise Comrs, Case C-4/94 (“BLP”), that the costs were directly and immediately linked with the exempt share sale and were irrecoverable.

The Supreme Court’s decision

The Supreme Court started by addressing the ‘cost component’ concept in the direct and immediate link test applied by the FTT and UT. The Court confirmed that it is not the test applied by the CJEU, despite its “unhelpful” use of the phrase in certain decisions. Instead, the Supreme Court confirmed there is no reason why one should examine whether professional fees were included in the calculation of the price charged for the shares. 

The Supreme Court then considered transactions that are within the scope of the VAT regime but exempt, and transactions that are out of scope. The court noted that before SKF, the position taken in earlier case law (primarily CJEU decisions) drew a clear distinction:  (i) a transaction within scope is generally the transaction with which the inputs have a direct and immediate link so that if that specific transaction is exempt, there is no deduction; but (ii) if the transaction which consumes the inputs is out of scope, then the inputs may (but not always) be attributed to the overall business, with the extent of their deductibility dependent on the nature of that business’s overall activities (i.e. between taxable, out of scope and exempt transactions).

HLT argued that SKF had erased this distinction for share sales, so that exempt share sales must be treated in the same way as out of scope share sales to comply with the principle of fiscal neutrality. The Supreme Court however disagreed on the basis that the CJEU’s case law demonstrates that fiscal neutrality is not an overarching principle that allows a court to ignore whether legislature has treated a particular transaction as exempt or not.  It is a principle of interpretation and not of substantive law.

HLT also argued the direct and immediate link test had been modified by SKF and cases like Frank A Smart & Son Ltd v Revenue and Customs Comrs [2019] 1 WLR 4849 in relation to share sales and other financial transactions, to focus on the ultimate purpose of that transaction, such that if the exclusive reason for the share sale was to fund the taxable hotel business then there was a direct and immediate link of the sale costs to that business and not to the specific transaction (i.e. the exempt share sale). However, the Supreme Court disagreed, holding that previous case law such as BLP, which rejects the need to focus on the purpose of the share sale, has not been modified as argued by HLT. The purpose for which funds are raised therefore remains generally irrelevant when determining for VAT recovery purposes whether the costs incurred are linked to a specific transaction or to the taxpayer’s general business (although purpose can be relevant in certain limited (other) circumstances). The Supreme Court noted that such a rule for share sales would not only be a “recipe of confusion” in cases where funds go into a common pot, but it would also encourage companies to manipulate their accounts and/or correspondence to make a share sale appear as linked to a particular purpose that suits it tax goals.  However, as a further comment, the Supreme Court held that the case law is also consistent that it cannot be always be assumed that inputs incurred in connection with a share sale have a direct and immediate link to that share sale, and that there may be a possibility that they have a direct and immediate connection with the general business.

The final issue related to the VAT grouping of HLT and HLTB. HLT submitted that as HLT and HLTB were in the same VAT group when HLT provided the management services to HLTB, those services could be disregarded, converting the share sale into an out of scope transaction and, in turn, arguing that the fees would be directly and immediately linked to the overall business of the group and recoverable. However, the Supreme Court rejected this secondary argument and agreed with the CA on the basis that the purpose of VAT grouping is to simplify tax collection, not to extinguish the business activities of its members. HLT was therefore undertaking a business activity, within a VAT group, and the share sale was an extension of that business.  

Reflections for business

The Supreme Court’s judgment restores some welcome legal certainty that there is no general “fundraising exception” or “look through” argument to displace the fundamental principle that VAT incurred on costs associated directly with an exempt transaction is irrecoverable. As set out in the decision, the starting point is whether the costs are directly and immediately linked to a specific exempt transaction - such as a share sale.  If that is found to be the case on the facts, the seller’s wider business objectives and their intended use of funds are not to be taken into account.  

Although this outcome is unlikely to end share disposals in fundraising contexts, it will be disappointing news to taxable businesses who have reclaimed VAT on fundraising-related fees relying on the earlier case law decisions, and for those in financial distress that are looking to restructure or raise funds through a share sale and limit costs.  

However, the Supreme Court has left open the possibility that VAT incurred on certain costs in relation to share sales may still be recoverable as a general overhead of the taxpayer, if the relevant costs can be directly linked to the taxpayer’s overall business and not to the exempt share sale. It remains to be seen exactly what those circumstances may be; the court suggests this is more than “fanciful” but made clear that such cases would be fact dependent and would need to be determined on an individual basis.  

Similarly, it remains open to argue based on other lines of case law that VAT on costs associated with other types of financial transactions which may be outside the scope of VAT (rather than being exempt), such as the issue of shares or taking out a loan to raise funds, may be linked to a taxpayer’s overall business and recoverable as a general overhead of that business.

The case also highlights the various and complex VAT recovery issues to be considered by businesses and advisers when considering different types of financial transactions based on how CJEU and UK’s case law have evolved. As this case shows, input VAT recovery principles will not always be the same when considering such transactions, noting that the application of the direct and immediate link test could lead to a different result depending on whether the specific transaction is exempt or out of scope.

Written by Caroline Brown and Alice Yarker