HMRC Prevails in Supreme Court VAT Dispute With Hotel La Tour

HM Revenue and Customs has secured a significant win in the Supreme Court after successfully challenging Hotel La Tour’s attempt to recover VAT linked to the sale of shares in one of its subsidiaries. The ruling marks a decisive conclusion to a long-running dispute over whether VAT incurred on professional fees connected to a share sale can be reclaimed when the proceeds are used for taxable business activities.

The judgment was delivered on December 17 by a panel comprising Lord Michael Briggs, Lord Nicholas Hamblen, Lord George Leggatt, Lady Vivien Rose and Lord David Richards. At the heart of the case was the question of whether Hotel La Tour (HLT) was entitled to deduct VAT paid on professional services used to facilitate the sale of shares in its managed subsidiary, Hotel La Tour Birmingham (HLTB).

HMRC appeared as the respondent in the case, which was argued before the Supreme Court during a full hearing in June. HLT, the appellant, owned the entire share capital of HLTB, which operated as the lessee of a luxury hotel. HLT provided management services to the subsidiary as part of its wider business operations.

In the middle of 2015, HLT made the decision to develop and construct a new hotel in Milton Keynes. To finance this project, the company sold HLTB and borrowed the remaining required funds from a bank. At the time of the sale, HLT and HLTB were members of the same VAT group.

To support the disposal of HLTB, HLT instructed third-party advisers to deliver a range of professional services related to the share sale. These services covered market research, shortlisting potential buyers, financial modelling and ensuring tax compliance. As a result, HLT incurred professional fees totalling £382,900 ($511,263), alongside VAT of £76,823.

When submitting its VAT return, HLT sought to deduct the £76,823 VAT paid on those services. HMRC rejected the claim and disallowed the deduction, prompting HLT to challenge the decision before the UK’s First-tier Tribunal (FTT). The FTT found in favour of HLT, concluding that the “direct and immediate link” existed between the input costs and HLT’s taxable general economic activities, rather than the exempt transaction involving the sale of shares. On that basis, the tribunal held that the input VAT was recoverable.

That finding was subsequently upheld by the Upper Tribunal (UT). However, HMRC successfully appealed to the Court of Appeal, which overturned the earlier decisions and sided with the tax authority. HLT then appealed to the Supreme Court, but its challenge was unanimously dismissed.

In its ruling, the Supreme Court held that the Court of Appeal had been right to reject the reasoning adopted by the FTT and UT. In particular, the court criticised the lower tribunals’ reliance on how the sale price of the HLTB shares had been calculated to rule out a direct and immediate link between the professional fees and the share sale itself. As the judgment stated, “There is no reason why one should examine whether the costs were included in the calculation of the price when considering sales of shares when one does not do so for any other kind of transaction.”

The court also addressed whether the VAT outcome should differ because the share sale was an exempt transaction rather than one that fell outside the scope of the VAT regime altogether. The Supreme Court reiterated that established case law draws a clear distinction between transactions that are within the VAT system but exempt, and those that are entirely out of scope.

It explained that where a transaction is within scope, it is normally that transaction which has the direct and immediate link to the inputs. If such a transaction is exempt, the associated input VAT is not deductible. By contrast, where the transaction consuming the inputs is out of scope, the costs may instead be attributed to the business as a whole, with deductibility depending on the mix of taxable, exempt and out-of-scope activities carried on by that business.

Applying those principles to the facts of the case, the Supreme Court concluded: “On the facts found by the FTT and applying the correct test, the direct and immediate link was between the inputs and the sale of the shares in HLTB rather than the overall hotel business of HLT.

“Since that share sale was exempt, the VAT paid on the professional fees was not deductible.”

By fLEXI tEAM