A recent case has opened the door for potential reclaims of overpaid VAT and we would advise businesses to consider if they can capitalise on this ruling.

HMRC v Hotel la Tour Ltd [2023]UKUT178

Hotel La Tour concerns VAT recovery in relation to professional fees incurred as part of an exempt sale of shares.

It is a well-established principle in VAT that recovery of input tax in relation to exempt supplies is only possible in limited situations. This recent ruling has potentially extended the scope to include scenarios such as those of Hotel La Tour.

Background

Hotel La Tour owned a subsidiary business that owned and operated a luxury hotel, and it provided management services to the subsidiary with both being in a VAT group together.

As part of growth plans for the business, a new hotel was to be constructed at another location which required significant capital investment. The decision was taken to sell the subsidiary business with the specific purpose of utilising the funds to construct and then manage the new hotel.

Significant professional fees were incurred in the arrangement of the sale of the subsidiary company shares, and Hotel la Tour claimed the VAT incurred on the basis that the sale of the company shares was intended to raise funds to invest in downstream taxable supplies.

Perhaps unsurprisingly, HMRC disagreed citing that the VAT incurred related to an exempt share sale and was non-recoverable. The First Tier Tribunal found for Hotel la Tour, allowing the input tax recovery on the grounds that there was a direct and immediate link between the VAT incurred and the taxable supplies to be made in the future.

HMRC appealed to the Upper Tribunal, but it too found in favour of the taxpayer and refused HMRC’s appeal to disallow input tax recovery on professional fees relating to the share sale. In doing so, the Upper Tribunal made reference to earlier CJEU case law and more recent UK case law from the Supreme Court (Frank A Smart & Son [2019] BVC37). The specific facts in this case and the evidence retained and presented were vital to the success of the claim.

Next steps

HMRC may yet appeal this decision, but in the meantime there is a window of opportunity for businesses to consider their own position and lodge protective claims for overpaid tax from within the last four years.

Equally, where a business is considering the sale of a subsidiary company in the future, this case demonstrates the importance of retaining evidence of board meetings, minutes, and discussions concerning the use of funds raised.

If you would like to discuss your own position please do get in touch.