Share sale VAT recovery

In HMRC v Hotel La Tour Ltd [2024] EWCA Civ 564, the taxpayer sold shares in order to raise finance for its wider taxable business, then sought to recover input VAT incurred on professional fees in connection with that sale.

The Court conducted an extensive review of the leading authorities on VAT recovery and although it left open the possibility of recovery in some circumstances, in this case it determined that there was a direct and immediate link between the costs incurred and the VAT exempt share sale, and therefore agreed with HMRC that input VAT was irrecoverable.

Facts

Hotel La Tour Ltd (HLT) provided management services to its wholly-owned subsidiary, and together, they formed a VAT group. HLT's subsidiary owned a hotel. The shares in the subsidiary were sold by HLT, in order to raise funds for the acquisition and development of a new hotel.

HLT incurred VAT on fees for professional services in connection with the share sale. It sought to recover the VAT, arguing that the services were directly and immediately linked to its downstream taxable hotel development activity. HMRC denied recovery, asserting that the fees were directly and immediately linked to the exempt share sale, which had severed the requisite link between the claimed input tax and the taxable activity.

Issues

HMRC appealed to the Court of Appeal on the grounds that the First-tier and Upper Tribunals had erred in:

1. failing to apply the two-stage test of asking whether the services had a direct and immediate link to a specific supply for consideration constituting an economic activity and, if not, whether there was such a link between the services and HLT's general taxable activity; and
2. disregarding the exempt sale of shares in the subsidiary and concluding that the services had a direct and immediate link with the HLT's general taxable activities.

The Court also had to decide whether the existence of a VAT group meant that the supplies of management services were disregarded for VAT purposes.

Findings

Overturning decisions of the First-tier and Upper Tribunals, the Court of Appeal found in favour of HMRC. The Court agreed with HMRC that there was a direct and immediate link between the costs incurred by HLT and the exempt share sale, regardless of the purpose of the sale being to further HLT's taxable activity, and therefore that VAT on the costs was irrecoverable.

The Court undertook an extensive review of the authorities in this area. In particular, its interpretation of the CJEU decision of SKF (Case C-29/08), and the extent to which this represented a departure from the CJEU in BLP (Case C-4/94), was central to its decision. 

In BLP, which also involved an exempt share sale to raise funds for a wider taxable purpose, the CJEU, rejecting the taxpayer's arguments, ruled that in order for VAT to be recoverable, "the goods or services [on which the VAT was incurred] must have a direct and immediate link with … taxable transactions, and … the ultimate aim pursued by the taxable person is irrelevant in this respect."

In the later case of SKF, the CJEU ruled that VAT recovery was possible in the context of an exempt share sale, provided "there is a direct and immediate link between the costs associated with the input services and [the taxpayer's] overall economic activities". According to the CJEU, a key factor in determining this link was "whether the costs incurred are likely to be incorporated in the price of the shares sold or whether they are among only the cost components of transactions within the scope of [the taxpayer's] economic activities."

The taxpayer's arguments in Hotel La Tour relied on SKF which, it argued, extended BLP, with the result that even where VAT is incurred in connection with an exempt share sale, there are circumstances where attribution to general taxable overheads, and therefore recovery of that VAT, is permitted.

The Court of Appeal considered how SKF had changed the position on recoverability since BLP, concluding that the effect of SKF had been to "remove any assumption that might have been implicit in BLP" that inputs incurred in the context of a share sale are necessarily directly attributable to that share sale, so as to be irrecoverable. SKF had not decided that such inputs were general overheads, "just that they might be". The Court of Appeal also noted that the 'direct and immediate link' test had not become a new separate test of incorporation of costs. SKF's focus on cost components was, at most, a change in emphasis.

Applying this position to HLT, the Court held that the inputs in this case were used in, were cost components of, and were directly and immediately linked with, the exempt share sale, and were consequently irrecoverable.

Reflections

This significant decision suggests a narrowing of the circumstances in which input VAT can be recovered. The Court of Appeal concluded that SKF has a more limited effect than many had thought, and does not appear to displace the principle that if input VAT incurred on services has a direct and immediate link to an exempt share sale, it will be irrecoverable. However, the Court did leave open the door to recovery: inputs incurred in the context of a share sale should not be assumed to be directly attributable to that transaction, and may have a direct and immediate link with a taxpayer's general taxable activity, leading to VAT recovery, depending on the facts and circumstances of each case. The precise scope of these facts and circumstances remains to be seen.

It is not uncommon for businesses to raise finance for taxable activities through a sale of shares, and to incur significant professional fees in doing so. The decision of the Court is therefore disappointing for such businesses, particularly in light of the taxpayer's success at the First-tier and Upper Tribunals.