As the sale of shares is an exempt supply, HMRC will generally seek to deny the recovery of VAT on professional fees related to the sale. However, Hotel La Tour is the latest in a string of cases demonstrating that VAT recovery may be possible where the money generated by the share sale is used to fund an expansion of the business’s taxable activity.

Where we started

BLP Group was a holding company that provided management services to a group of trading companies producing goods for use in furniture and DIY. By virtue of the taxable management charges made to its subsidiaries, BLP was fully taxable. However, in 1991 the company made an exempt disposal of shares in one of its subsidiaries. 

BLP incurred a significant amount of VAT on professional fees in connection with the transaction, which it tried to recover through its VAT return. It argued that as the purpose of the sale of shares was to raise funds so that it could continue its taxable trade, the VAT should have been recoverable.

However, HMRC denied the claim on the basis that the VAT incurred did not directly relate to its taxable supplies, but rather to the exempt share disposal. The case made its way through the courts, eventually reaching the Court of Justice of the European Union (CJEU) in 1995 (BLP Group v Commissioners of Customs & Excise (Case C-4/94)).

The CJEU ultimately agreed with HMRC that there was no “direct and immediate link” between the professional fees incurred and the taxable supplies made by BLP. The fees were incurred in connection with the exempt sale of shares. This “direct and immediate link” became a key test going forward when evaluating the right to recover VAT incurred on professional fees.

HMRC has relied heavily on the BLP case in guiding its position on VAT recovery relating to professional fees. HMRC’s internal manuals aimed at its VAT officers still state that the BLP case: “confirmed that … the ultimate purpose of a business is irrelevant so it is only the immediate supply to which any input is a cost component that matters”.

This stance has come under scrutiny many times over the years with several cases challenging this view, including the 2019 case of Frank A Smart & Son Limited [2019] UKSC 39. However, HMRC’s position may never have been under quite as much pressure as it is following a recent case.

Hotel La Tour

Hotel La Tour Limited (HLT) operates a chain of luxury hotels, each owned by a subsidiary company. In 2017, HLT sold the shares in an existing subsidiary to finance the construction of a new hotel in Milton Keynes.

HLT tried to recover £76,000 of VAT it had incurred on professional fees relating to the sale of shares. Following its usual stance off the back of the BLP decision, HMRC disallowed the input tax claim. HMRC argued that the professional services were used to make an exempt supply of shares.

HLT appealed, arguing that the fees were incurred in the process of raising funds to build the new hotel, which would generate taxable income for VAT purposes for HLT. 

The First-tier Tribunal (FTT) found in favour of HLT on the basis that there was a direct and immediate link between the costs incurred and HLT’s taxable business of the new hotel in Milton Keynes. 

However, permission to appeal was granted on the basis that the FTT had potentially: 

1. erred in law and applied the wrong test for determining whether there was a direct and immediate link between the services and the sale of the shares; and 
2. made a decision contrary to binding authority.

HMRC duly appealed to the Upper Tribunal (UT) but, on 24 July 2023, the UT ultimately came to the same conclusion as the FTT. The UT noted that, “the reasoning and jurisprudence of the CJEU has evolved considerably since BLP”. In particular, the UT referenced the CJEU cases of Kretztechnik (Case C-465/03) and AB SKF (Case C-29/08).

In Kretztechnik, the CJEU concluded that it was possible to recover input tax as a general overhead in circumstances where the input tax was incurred in relation to a transaction that was outside the scope of VAT. In this case, the holding company did not provide management services to its subsidiary and so did not carry out any economic activity, leading to the sale of shares falling outside the scope of VAT.

In AB SKF, the CJEU grappled with the issue of fiscal neutrality as there was a right to deduct input tax in accordance with Kretztechnik but no right to deduct input tax according to BLP. In this case, the CJEU considered the ultimate economic purpose of the transaction.

Where are we now?

The 2019 UK Supreme Court decision in Frank A Smart, which was based on the principles set out by the CJEU in AB SKF, has also called the BLP decision into question by attributing expenditure on the raising of capital to the general overheads of the business.

That decision, combined with this decision in HLT, certainly casts doubt over whether BLP can or should still be relied upon by HMRC. It can no longer be assumed that selling shares automatically precludes a business from recovering VAT on the costs of the transaction.

It remains to be seen whether HMRC will appeal HLT to the Court of Appeal. Losing this case in the UT is a damaging blow to HMRC’s position regarding VAT recovery on professional fees and HMRC will want to rectify this. But will HMRC want to risk losing this case in a court of even higher standing?

In the meantime, businesses that have incurred VAT in the last four years on costs relating to a sale of shares, where the money generated by the sale was used to fund an expansion of the business’s taxable activity, should consider whether they are able to submit a repayment claim to HMRC for underclaimed input tax. 

Repayment claims are usually made under s80, VAT Act 1994. Claims such as this have specific requirements. Claims may fail where these requirements are not met.

As part of the claim, the taxpayer should make HMRC aware that any claim is on the back of – or, where relevant, pending the outcome of – the relevant litigation. 

Taxpayers and their agents should ensure that all correspondence from HMRC relating to the claim is read carefully and responded to accordingly. If HMRC rejects the claim and this is not appealed within the relevant time limits, the taxpayer could lose the opportunity to recover the VAT.

It may be tempting to read across from this case to similar scenarios where VAT has been incurred on deal fees. There is certainly no harm in reviewing the position of other fees incurred, and a claim in other scenarios may be successful. However, as ever with VAT, and particularly in this area, the position regarding VAT recovery will depend on the specific facts of a case. 

If in doubt, professional advice should be sought.

Ed Saltmarsh, VAT and Customs Manager, ICAEW