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VAT on deal costs

Input tax incurred in relation to a sale of shares recoverable in certain circumstances

The input tax recovery on deal cost has long been a contentious issue

The recent Upper Tribunal decision in Hotel La Tour Ltd (Hotel La Tour) upheld the First-tier Tribunal decision that a business is entitled to input tax deduction in respect of professional services received in relation to a sale of shares in certain circumstances.

Hotel La Tour wanted to expand its business and build and operate a new hotel. To help raise the necessary funds, Hotel La Tour 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.

There is no question that input tax on costs that directly relate to an exempt sale of shares is generally irrecoverable. The dispute was about whether these costs did in fact have a direct and immediate link to the sale of shares only as HMRC contended. Hotel La Tour argued that, ultimately, 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.

On this occasion the courts agreed with the taxpayer, but it is worth noting that the decision is highly fact specific. In particular, Hotel La Tour could evidence the intention and the actual use of the proceeds from the share sale for its hotel business and the related taxable supplies. The professional fees were not factored in when negotiating the price for the shares but were found to be cost components of the taxable hotel related income instead.

Whilst this decision should be good news for businesses, we understand that HMRC is appealing this decision to the Court of Appeal. It will be interesting to see whether the Court of Appeal will agree that it is possible to effectively look through fund raising transactions and focus on a business’s general economic activities for the purpose of establishing the required link of the input tax incurred to taxable supplies.

Any business that already had significant amounts of input tax restricted under similar circumstances to Hotel La Tour should therefore review whether a protective input tax refund claim going back up to four years could be submitted. Similarly, any business intending to engage in fund raising transactions should review any potential input tax recovery.

If you would like to discuss any of the above, please speak to your usual Blick Rothenberg contact or Antje Forbrich using the form below.

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Antje Forbich 2023
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