Background
Hotel La Tour Ltd owned shares in various subsidiary companies. Each subsidiary owned and operated a different luxury hotel.
The shareholder, Hotel La Tour Ltd, sold shares in its “Birmingham” subsidiary for £4.6m.
Professional fees of £459,722.46 were incurred during this process, including VAT of £76,822.95. The shareholder claimed this VAT from HMRC.
HMRC rejected the claim, but the First-tier Tribunal and the Upper Tribunal both allowed the VAT to be recovered.
The issue
The sale of company shares is exempt, which prevents the recovery of VAT on attributable costs. HMRC rejected the claim by the shareholder on these grounds.
The shareholder contended that the professional fees had a direct and immediate link to its wider business purposes, a taxable activity, justifying its recovery of the VAT paid to the professional advisers.
The First-tier Tribunal determined the facts and applied legal principles established by precedent cases. It concluded that the professional fees were attributable to the wider taxable business purpose (“downstream activities which were taxable”) and therefore the shareholder was entitled to make its input tax claim.
The Upper Tribunal agreed with this decision.
Conclusion and next steps
Hotel La Tour’s case is one in a long history of disputes between HMRC and the parties buying or selling shares in a business, as to whether VAT in professional fees is claimable. This is a vexed area, but case law now suggests that careful steps can produce valuable results.
In this case, HMRC’s focus was the immediate transaction (an exempt sale of shares). The shareholder’s focus was the wider business purpose (taxable supplies of hotel accommodation). Distinguishing one potential focus from the other can be a delicate process.
It is now encouraging to shareholders that both Tribunals (First-tier and Upper) have been able to find, if the facts are sufficiently clear and the costs are suitably linked to the wider business’ taxable supplies, shareholders can justify claiming the VAT incurred on professional fees.
At the time of writing, HMRC has lodged a further appeal to the Court of Appeal, but shareholders should now be considering whether to claim VAT on the costs incurred in selling their business, in order to avoid falling out of time to do so. Claims should be considered whether the share sale is currently still in hand or whether it took place in the past four years.
Shareholders preparing to makes sale in future should now be considering how they will evidence their own plans with respect to the business sale. Professional fees can be significant, as can the VAT incurred. Taking some simple steps can greatly improve a shareholder’s justification for recovering that VAT.
If you have any queries or would like to know more, we would be delighted to discuss. Please contact Kevin Hall, VAT Partner at Wright Hassall: 01926 884623 or kevin.hall@wrighthassall.co.uk.
