In this article we look at the recent Court of Appeal judgment in Hotel La Tour and its impact for taxpayers in overturning the Upper Tribunal decision handed down last year.

The facts and case history of Hotel La Tour

The taxpayer in the case, Hotel La Tour Ltd (HLT), was in the hotel business. In 2015, HLT decided to develop a new hotel site in Milton Keynes.

In order to fund that development, HLT made plans to sell its (then) wholly-owned subsidiary Hotel La Tour Birmingham Ltd (HLTB) which owned and operated a luxury hotel in Birmingham. HLT and HLTB were in a VAT group of which HLT was the representative member and HLT was subject to VAT in its own right too.

In order to maximise the funding available for its new development, HLT engaged various marketing, legal, and accounting advisers to obtain the best price possible for the shares in HLTB. The sale completed and HLT used the proceeds to pay its adviser fees, plus VAT of course, and fund the new development.

HLT’s subsequent claim for repayment of the input VAT incurred on the adviser fees was rejected by HMRC.

The taxpayer was, however, successful in appealing HMRC’s position in both the First-tier Tribunal (FtT) and the Upper Tribunal (UT).

The Court of Appeal decision – input VAT recovery on share sale fees denied

In contrast, the Court of Appeal held that HLT could not recover the input VAT incurred in connection with the sale of shares in HLTB.

The Court held that:

• HLT provided HLTB with management services in relation to its hotel business. HLT was therefore a taxable person undertaking economic activity for VAT purposes.
• The sale by HLT of its shares in HLTB was straightforwardly exempt for VAT purposes.
• The facts determined before the FtT were that the adviser costs incurred by HLT were “part of the process” of selling the shares and therefore were directly and immediately linked with the exempt share sale and consequently the VAT on such costs was irrecoverable.

This reasoning may feel like familiar territory – why is it newsworthy that VAT costs incurred in relation to a VAT-exempt share sale are irrecoverable? Hasn’t that been the case for almost 30 years?

Crucially, the Court of Appeal rejected a key argument that had found favour in the lower tribunals.

HLT’s case was that because its share sale was a means of fundraising, there was a direct and immediate link between the costs incurred and HLT’s “downstream taxable general economic activities”.

On that basis, the FtT and UT considered that HLT’s right to deduct was not denied by the exempt share sale. In other words, while the lower tribunals seemed to open the door to potential VAT recovery windfalls for taxpayers that have used share sales as a means of capital raising, the Court of Appeal has broadly returned to the status quo prior to HLT’s first appeal.

What can we learn from Hotel La Tour?

Although the Court of Appeal’s decision appears to return us to well-trodden ground on input VAT recovery related to share sales, there are some additional points worth noting.

First, the Court of Appeal acknowledged that the case law in this area could be read in a way to support HLT’s case, though that was not the interpretation the Court preferred.

Specific consideration was given to comments made by the Supreme Court which appear potentially to be at odds with the Court of Appeal’s reasoning. HLT may consider this encouraging for their chances in any potential appeal.

Second, the Court of Appeal’s interpretation of the case law was that the general rule of no recovery for input VAT on exempt share sales carried out by taxable persons had been modified, albeit in a far more limited way than the lower tribunals had concluded.

The position now (versus 30 years ago) is that the mere existence of a share sale does not lead inevitably to a conclusion that any input VAT is irrecoverable. Instead, recoverability of VAT on costs in some way connected to a share sale depends on whether the evidence demonstrates a direct and immediate link to the share sale or, if not, to the general business of the taxpayer.

This will be a matter for taxpayers to consider based on their specific facts when filing their VAT returns.

Finally, it’s worth noting the inconsistency in VAT treatment depending on the type of transaction being carried out by a taxpayer.

The Court of Appeal didn’t accept that the principle of fiscal neutrality (the idea that economically similar transactions should be treated in the same way) required them to permit recovery of HLT’s input VAT. This means that we return to the seemingly inconsistent position whereby objectively similar fundraising transactions result in different VAT outcomes.

Input VAT on adviser fees relating to a share issue or TOGC as VAT “nothings”, for example, are recoverable as having a direct and immediate link to a taxpayer’s general business but input VAT on adviser fees related to an exempt share sale are (subject to the modification to this general rule discussed above) typically going to be irrecoverable.

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