VAT on deal costs

No special rules for input tax recovery on fundraising costs

Hotel La Tour had wanted to expand its business and build and operate a new hotel. To help raise the necessary funds, Hotel La Tour had decided to sell its shares in a subsidiary. Hotel La Tour had engaged several advisers for this purpose and subsequently sought to recover the VAT it was charged on the professional fees as input tax. The business had argued that the professional fees were linked to its taxable income generated by its hotel business, because the funds from the sale of shares were used to build and operate a new hotel.

The First-tier Tribunal and Upper Tribunal had agreed with Hotel La Tour to effectively look through the fundraising activity. The Court of Appeal, however, had followed HMRC’s argument that there could only be a direct link to either the share sale or the overall business activity. In other words, as it had already been determined that there was a direct link to the share sale, this was the end of the analysis. As the sale of shares was exempt, the input tax was not recoverable.

The Supreme Court has now upheld the Court of Appeal’s decision and confirmed that there is no special VAT treatment for input tax incurred for fundraising transactions. The judgment contains useful analysis of the relevant (and in this case still binding) decisions of the European Court of Justice, particularly when addressing some of the inherent ambiguities. It also provides insightful guidance on VAT concepts such as the meaning of a ’direct and immediate link’ when trying to establish which specific transactions a business’s inputs relate to.

However, despite the clarity provided to a certain extent, there will always be a degree of interpretation required and the fact that this case had to travel up to the Supreme Court illustrates that VAT recovery on deal costs remains a complex area and that careful planning at the outset of any envisaged transaction continues to be key. It should also be noted that where input tax relates to a sale of shares to a buyer established outside the UK, different VAT rules apply, and the input tax is recoverable.

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