VAT on deal costs

In the case of Hotel La Tour Ltd (Hotel La Tour) the Court of Appeal found in favour of HMRC and held that a business is not entitled to input tax deduction in respect of professional services received in relation to a sale of shares. It was irrelevant that the sale of shares was a fundraising activity of an otherwise fully taxable hotel business.

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 First-tier Tribunal and Upper Tribunal had agreed with Hotel La Tour to effectively look through the fundraising activity. Hotel La Tour 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 Court of Appeal, however, 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.

The Court of Appeal ruled out any special VAT treatment for fundraising transactions, thereby acknowledging that fully taxable businesses will inevitably be hit with irrecoverable input tax in these circumstances. If this outcome was unwelcome from a tax policy perspective, the Court suggested that any remedy could only be delivered via parliament and not via the courts.

As Hotel La Tour may still appeal to the Supreme Court, businesses should keep any protective claims under review. This litigation is a reminder that VAT recovery on deal costs remains a potentially difficult area and that careful planning at the outset of any envisaged transaction continues to be key.

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