UK Upper Tribunal allows input tax deduction on costs related to sale of shares in subsidiary on the basis of the fundraising purpose of transaction

Hotel La Tour Ltd (HLT) was a holding company which held the entire share capital in a subsidiary (HLTB). HLTB owned a hotel and HLT provided management services to it.

HLT decided to fund the construction of a new hotel by selling its shares in HLTB. HMRC disallowed the input tax on professional advisory services to HLT on the basis that the services related to the making of an exempt supply, being the sale of the HLTB shares.

As the sale proceeds were to be used to fund the new hotel and the costs of professional advisors’ fees were not incorporated in the price of HLTB’s shares, but paid from the proceeds of the sale, the UK FTT allowed the input tax deduction for HLT.

The Upper Tribunal (UT) also upheld UK FTT’s decision and dismissed HMRC’s 2-stage tests which suggested that the consideration of ultimate business purpose is irrelevant if there is a direct and immediate link to a taxable/exempt transaction.

Key takeaway

Where businesses have sold or intend to sell shares to fund other taxable activities, then as per this decision, the business can potentially recover VAT on costs incurred on share sales. Businesses that have not claimed input VAT recovery on such transactions may consider putting in protective claims with HMRC.

Reference: Hotel La Tour Upper Tier tribunal decision