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The Court of Appeal has  that Hotel La Tour was entitled to recover input VAT on the costs of selling shares in a subsidiary company to raise funds to build a new hotel. Instead, the court has unanimously decided that the various professional fees incurred by the hotel chain had a direct and immediate link to the sale of the shares, an exempt supply on which VAT is not recoverable. 

The Hotel La Tour case

Hotel La Tour Limited is the holding company, providing management services to a corporate group that operates a chain of luxury hotels, each hotel being owned and run by a subsidiary company. In 2015, Hotel La Tour decided to build a new hotel in Milton Keynes, with the project to be financed in part by selling its existing hotel in Birmingham. The shares in the subsidiary that owned that hotel were eventually sold to an unrelated buyer in 2017.

A dispute arose with HMRC over Hotel La Tour’s entitlement to recover input VAT of £76,000 that it had incurred on various professional services related to the sale of those shares, including the fees of its marketing agent, solicitor and tax advisers. HMRC disallowed VAT recovery on the basis that the professional services were used to make a supply of shares to a UK buyer, on which VAT is not deductible because it is a VAT exempt supply. Hotel La Tour appealed to the tax tribunal, arguing that the fees were in fact the costs of raising funds to build the new hotel, which would be a taxable business for VAT purposes.

At earlier stages of the appeal, the First-tier Tribunal and then the Upper Tribunal both found in favour of Hotel La Tour, deciding that the VAT was recoverable because there was a ‘direct and immediate link’ between the costs incurred and its taxable business of building, developing and the eventual management of the new hotel in Milton Keynes. According to those decisions, that link was not broken by the exempt share sale. For the professional fees to be attributable to the sale of the shares, those fees must be a ‘cost component’ of the price of the shares. The lower tribunals thought that was not the case here, because the shares were sold at their open market value, which was not influenced by how much Hotel La Tour had spent on the professional costs of the deal. 

However, the Court of Appeal has now overturned the Upper Tribunal decision, supporting HMRC’s view that Hotel La Tour’s deal costs had a direct and immediate link to the VAT exempt share sale, meaning that it could not reclaim the input VAT it had paid on those fees. 

What does this mean for other businesses?

The impact of this decision is not restricted to the hotel sector. It will be disappointing news for any business that hopes to recover VAT on the costs of selling a subsidiary to raise funds to pursue another business activity that is taxable for VAT purposes. 

Having come this far, and won its argument in two out of three courts, Hotel La Tour has, however, subsequently sought permission to appeal this decision to the Supreme Court and we await further developments. 

Meanwhile, the road to proving entitlement to recover VAT incurred on the costs of mergers and acquisitions is notoriously bumpy. The issue raised in this case is only one of the potential pitfalls those involved in mergers and acquisitions might encounter. All businesses, whether buying or selling, should consider their VAT position as early as possible in the planning stage of any significant transaction.