Hotel La Tour – Final decision concerning VAT on transaction costs

Who this will interest: UK businesses incurring VAT on share transaction costs

Key point(s): the Supreme Court has ruled that VAT on costs related to the sale of shares is not recoverable.

Essentia’s take: A setback for companies restructuring or fundraising through share sales due to the court taking a literalist stance that costs of these sales are non-deductible due to share sales’ exempt status, rather than looking through this to the general business reasons why the funds are being raised.

Action points: Businesses should carefully review any transaction costs they might have incurred and ensure they have been correctly categorised. VAT on costs with a directly and immediate link to an exempt supply (such as sale of shares) will not be recoverable however other costs related to the general activity of the business may still be recoverable. VAT advice should be sought where it is not clear what the correct VAT treatment is.

A final decision in the Hotel La Tour case has recently been published by the Supreme Court in the UK. The decision rejects the view that VAT on costs associated to the sale of shares can be recovered. The First Tier Tribunal and then the Upper Tribunal had ruled in favour of the tax payer and many were of the view that such costs should be recoverable in some circumstances. However, the Court of Appeal rejected the previous rulings and the Supreme Court has now upheld their decision which marks the end of the Hotel La Tour saga.

Facts of the case

HLT is a group of companies established and VAT registered in the UK that operates hotels. In 2015 HLT decided to develop a new hotel in Milton Keynes. To fund the development it decided to sell one of its hotels. The hotel was operated by one of its subsidiaries and HLT engaged various advisors (legal and tax specialists, marketing advisors, etc) throughout the process of selling the shares in the subsidiary that owned the hotel.

Under existing VAT rules the sale of shares is VAT exempt without a right of deduction for any associated costs. However, HLT argued that although the rules stated such costs are not recoverable, in their particular case the funds resulting from the sale of the shares were used to develop a new hotel which would then generate taxable supplies.

In other words those costs were in fact related to a fundraising activity which happened to involve the sale of shares, an exempt activity. However, the fundraising itself was an activity related to the development of the future hotel and the general activity of the business, rather than the exempt sale of shares. Using this argument HLT had won the FTT and Upper Tribunal decisions.

The Court’s decision

The Court of Appeal and the Supreme Court however rejected this view and decided that costs were in fact directly and immediately linked to the exempt sale of the shares, not to fundraising or other general activity carried out by HLT.

Although VAT recovery on exempt sale of shares is now back where it was before the HLT case started the case has added useful information concerning the logic behind the exemption for the sale of share.

What does it mean to businesses

The takeaway from this decision is that it is important to understand the economic substance of the transactions that are taking place but also of the costs incurred by a business. Whether a particular cost is directly and immediately linked to an exempt supply (and therefore non-recoverable) or to the more general activity undertaken by the business (and therefore recoverable in full or partially) is very important as it can lead to significant VAT savings.

Businesses incurring transaction costs as a result of reorganisations should ensure they are properly reviewed and document as the VAT treatment in such cases can be complex.