UK Court of Appeal refused input tax recovery for a holding company which raised funds for a taxable activity by means of sale of shares
The Court of Appeal reversed FTT’s and UTT’s decisions that linked the input VAT with intended taxable activities to reject input tax recovery incurred on fees on an exempt share sale
Hotel La Tour Limited (HLT) was a member of a group, which provided hotel services, and was the representative member of a VAT group it had formed with its subsidiary (HLTB), to which it provided management services.
In 2017, HLT sold its shares in HLTB, with the intention of using the proceeds of the sale to develop a new hotel. HLT sought repayment of the input tax incurred in paying for the services of marketing agents, solicitors and accountants who were involved in the share sale on the basis that the costs were incurred for the purpose of the intended taxable activity, but HMRC refused the claim on the grounds that the services had a direct and immediate link to the exempt sale of shares which could not be disregarded.
HLT appealed successfully before the First Tier Tribunal (FTT) and also won before the Upper Tribunal (UT), but the Court of Appeal allowed HMRC’s appeal and held that the input tax incurred had a direct and immediate link with the exempt sale of shares and thus the input tax was irrecoverable. Although, following SKF, it is possible for inputs to be treated as overheads, in this case, there was a link to an exempt supply. The Court of Appeal also held that the share sale was conducted as part of HLT’s economic activity (which could not be disregarded due to VAT group fiction) and was an exempt supply.
Key takeaway
This is an important decision. The previous decisions of the FTT and UT downplayed the ECJ decision in BLP C4-94 where the intervening exempt sale of shares had meant the input VAT on costs was irrecoverable. This decision means that all circumstances need to be considered in deciding whether there is a link between inputs and the business as a whole, or to an immediate exempt supply. The case may be appealed to the Supreme Court.
