Upper Tribunal dismisses HMRC's appeal confirming that input tax is recoverable on fiscal neutrality grounds

In HMRC v Hotel La Tour Ltd [2023] UKUT 00178 (TCC), the Upper Tribunal (UT) has upheld the decision of the First-tier Tribunal (FTT) and dismissed HMRC's appeal, confirming that input VAT can be reclaimed on professional services fees incurred during a share sale, where the ultimate economic purpose was fundraising.

Background

Hotel La Tour Ltd (HLT) was a holding company which owned the entire share capital of Hotel La Tour Birmingham Ltd (HLTB). HLTB owned and operated a luxury hotel in Birmingham and HLT provided management services and key personnel. Both companies were members of the same VAT group of which HLT was the representative member.

In 2015, HLT decided to construct a new hotel in Milton Keynes which was anticipated to cost £34.5 million. To finance this development, HLT decided to sell HLTB and borrow the balance from the bank. HLT received a net amount of £16 million from the sale of the shares in HLTB.

HLT engaged various advisers to provide professional services to assist in the sale of HLTB, including market research, buyer shortlisting, financial modelling and tax compliance. In total, HLT incurred £382,899.51 plus VAT of £76,822.95, in professional fees.

The entirety of the £16 million from the sale of shares was used in the development of the Milton Keynes hotel.

In November 2017, HLT filed its VAT return and sought recovery of the input VAT incurred on the professional fees incurred. By a decision letter dated 26 June 2018, HMRC disallowed the input tax in respect of the professional services. Although, initially, on different grounds, HMRC ultimately disallowed the input tax on the basis that the fees were incurred pursuant to making an exempt supply (sale of the shares in HLTB) rather than in making taxable supplies and therefore input tax could not be recovered. 

HLT appealed to the FTT.

FTT decision 

The appeal was allowed.

The question for the FTT to determine was essentially whether the relevant objective purpose of the professional services was for the initial fund-raising transaction (the sale of shares) or the purchase of the hotel in Milton Keynes.

HMRC argued that the professional services were used for the sale of shares which was an exempt supply and therefore input tax could not be recovered. The FTT disagreed and found that there was a direct and immediate link between the professional services and HLT's downstream taxable general economic activities. Accordingly, 'the chain' had not been broken by the sale of the shares in HLTB and input tax could be recovered.

Furthermore, the FTT was of the view that the relevant consideration in fund-raising cases was whether the cost of the services was incorporated into the price of the share transaction, or the downstream transactions. In this case, the cost was paid for out of the proceeds of the sale and therefore reduced the amount available for the taxable transactions and was therefore a cost of those transactions.

A copy of the FTT's decision can be viewed here.

HMRC appealed to the UT.

UT decision

The appeal was dismissed.

In reaching its decision, the UT considered Kretztechnik C-465/03, in which the CJEU confirmed that it was possible to recover input tax as a general overhead in circumstances where that input tax had been incurred in relation to a transaction which was outside the scope of VAT. The CJEU applied the principle of fiscal neutrality to conclude that if a taxpayer is able to deduct input tax in relation to transactions which are outside the scope of VAT (such as share issues) they should also be able to deduct input tax in relation to exempt supplies (such as share sales).

A copy of the UT's decision can be viewed here.

Comment

This decision will provide some certainty for businesses who incur VAT on costs pursuant to the sale of shares in similar circumstances. Following this decision, businesses should consider whether they have incurred irrecoverable VAT on such costs in the last four years as they may now be able to make a repayment claim. 

It is understood that HMRC has been granted permission to appeal and it will be interesting to see whether the Court of Appeal uphold the UT's decision.