In the case of Commissioners for His Majesty's Revenue & Customs v Hotel La Tour Ltd [2025]) the Supreme Court has upheld the Court of Appeal (CoA) decision confirming that VAT incurred in connection with a disposal of shares in a subsidiary cannot be recovered from HM Revenue & Customs (HMRC) where the costs on which such VAT was incurred, had a direct and immediate link with an exempt share sale.
Hotel La Tour Ltd (HLT) disposed of a subsidiary which owned and operated a luxury hotel in Birmingham to which it provided management services. It sought to recover VAT on professional fees incurred by it in connection with the marketing and sale of the subsidiary. HLT's argument was that because the sale of the subsidiary was part of its overall economic activity and to enable it to raise funds for a new hotel development, the supplies from which would be taxable for VAT purposes, it should be allowed to recover such VAT. HMRC disagreed and refused recovery of the VAT. HMRC eventually accepted that HLT provided sufficient management services to the company being sold to constitute an economic activity but, it considered that the VAT on the professional fees was incurred in connection with an exempt sale of shares and therefore determined that it was irrecoverable.
VAT is recoverable if directly and immediately linked with a taxable transaction or, if no such link exists, with the taxpayer's overall taxable economic activity.
The First-tier Tribunal (FTT) and the Upper Tribunal (UT) agreed with HLT and allowed it to recover the VAT. Both Tribunal's considered that because the share sale was a fund-raising transaction, the direct and immediate link test was modified such that the use of services for a transaction which was either exempt from VAT or outside the scope of VAT, did not prevent the recovery of VAT on the professional fees if the objective evidence showed that the purpose of the fund-raising was to fund HLT’s economic activity and the funds were later used for taxable supplies.
The CoA unanimously overturned both rulings. HLT appealed to the Supreme Court.
The Supreme Court held that the direct and immediate test had not been modified for share sales or fund-raising transactions to focus on the relevant transaction's ultimate purpose; purpose was relevant only if VAT was incurred before a business' taxable activities commenced. Although HLT's ultimate purpose in selling the subsidiary was to raise funds for its proposed new development, the court decided that because the professional fees on which the VAT was incurred had a direct and immediate link with the sale of the subsidiary and the sale was an exempt supply for VAT purposes, such VAT was irrecoverable.
The Supreme Court did not consider that VAT grouping should affect the outcome of the case. Counsel for HLT had also sought to argue that because HLT and the subsidiary were in a VAT group, the management services provided by HLT should be disregarded which meant that the sale of shares should be treated as an out of scope, non-economic VAT activity. Consequently, it was necessary to “look through” the share sale and treat the VAT on the professional fees as being incurred for (and having a direct and immediate link with) HLT’s general business, the supplies of which were all taxable. The Supreme Court, like the CoA, did not consider this to be the effect of the VAT grouping rules. It confirmed that the statutory fiction created by these rules were designed to simplify and facilitate tax collection, not confer tax exemption or relief. Although members of the same VAT group, HLT and its subsidiary retained their own identities and HLT was engaged in managing its subsidiary and that amounted to an economic activity.
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