VAT recoverability ruling underlined by Supreme Court decision

The Supreme Court has upheld a decision (pdf, 44pp/423kb) that HM Revenue and Customs (HMRC) was right to disallow VAT deductions incurred from fees paid during the process of selling the shares in a company. 

The ruling means companies which had hoped to try and claim back VAT from professional services relating to fundraising activities will now have to reevaluate their claims and VAT returns.

Eloise Walker, a corporate tax expert with Pinsent Masons, said the court’s decision would have been of little surprise

“It was always unlikely the taxpayer would succeed once the Court of Appeal stamped firmly on the FTT and the UT’s misapplication of the appropriate case law tests to return the position to that favoured by HMRC,” she explained.

“Most protective claims made in hope when the UT decision came out will now be facing failure and businesses should consider carefully whether to continue pursuing them.”

The original case came about after luxury hotel operator Hotel La Tour Limited (HLTL) sold off one of its subsidiaries in Birmingham to fund the development of a new hotel property in Milton Keynes.

In the process of the share sale, it incurred £382,900 on professional fees for lawyers, accountants and marketing. HLTL had sought to recover the VAT of £76,823 on these fees, which HMRC refused.

Originally both the First Tier Tribunal (FTT) and Upper Tribunal (UT) had ruled in favour of the hotel group being allowed to recover its VAT but, in May 2024, the Court of Appeal overturned those decisions, ruling that the input VAT was irrecoverable.

VAT recovery works on the general principle that VAT incurred by a company on goods or services used for their taxable activities can be recovered, but VAT on goods or services used for exempt activities is effectively a cost of the company.

HLT had argued that the marketing, legal and tax advice on selling shares were linked to the overall business activities of the company, but the Court of Appeal decided that they represented an “objective economic link” to the exempt share sale. That decision has been upheld by the Supreme Court. 

In the judgment, delivered by Lady Rose, the court wrote: “The Court of Appeal was correct to reject the FTT and UT’s application of the case law, in so far as they relied on the way in which the price of the shares in HLTB was fixed in order to reject the possibility of there being a direct and immediate link between the inputs and the share sale.

“The ‘costs component’ concept in the direct and immediate link is not the test applied by the CJEU, despite its use of that phrase. There is no reason why one should examine whether the professional fees were included in the calculation of the price charged for the shares when one does not do so for any other kind of transaction.”

Pinsent Masons VAT specialist Bryn Reynolds added: “It is reassuring that the merest hint in the Court of Appeal judgment that VAT incurred in relation to transfers of going concern could also be affected has not been developed further in this decision and that the Supreme Court has provided a clear statement that where costs relate to an outside the scope transaction then the inputs can be attributed to the overall business.

“It is likely that advisors will seek to make a distinction between services directly connected to a share sale and any wider business advice or consultancy services they provide.”