Share sale was actually a fundraising activity for taxable supplies

In Hotel La Tour Ltd v HMRC [2021] TC08335, the First Tier Tribunal (FTT) found that the sale of a subsidiary was a means of fundraising that could be directly linked to future trading activities. This allowed the input VAT on associated professional fees to be reclaimed.

In 2017, Hotel La Tour Limited (HLT) sold the shares in its 100% subsidiary, Hotel La Tour Birmingham Limited (HLTB) and reclaimed the input VAT paid on the associated professional fees.

• HLTB owned and ran a luxury hotel in Birmingham. HLT provided management services to HLTB and owned the intellectual property surrounding the name 'Hotel La Tour'. The hotel building was leased by HLTB from a third party.
• The two companies formed a VAT group.
• The decision to sell the shares was taken as a way of financing another hotel opportunity in Milton Keynes as it was believed that the Birmingham hotel business could not be grown any further within the group.
• Professional fees of over £380,000 were incurred plus VAT of nearly £77,000 on a mix of agents, solicitors and Accountancy services.
• HMRC issued a decision disallowing the claim and an assessment based on the sale being an exempt supply as HLT was not carrying out any economic activity.
• HLT appealed to the FTT on the basis that:
  • The professional fees were incurred as part of the sales process which was to raise funds for the Milton Keynes business. There was a direct and immediate link between the sale (and VAT incurred) and the intention to make taxable supplies from the newly built hotel.
  • The management services provided by HLT did constitute an economic activity. This point was conceded by HMRC prior to the hearing.

The FTT concluded that the issues for determination were:

• Whether there was a direct and immediate link between the professional services and either an exempt supply of shares or taxable activities.
  • The FTT held that there was a direct and immediate link to taxable activities, as the purpose of the transactions as a whole was fund-raising and how the funds were to be used.
  • The only purpose for the sale was to fund the downstream taxable business of the Milton Keynes development.
  • The initial share disposal is to be disregarded and the use of professional services (whose only purpose was to maximise the funds raised by the sale) for that transaction does not break the link.
• Whether the existence of a VAT group meant the supply of shares was outside of the scope of VAT as opposed to an exempt supply.
  • This was an argument submitted to the hearing late and the FTT refused to allow it to be considered. The FTT did state that it would have been dismissed as the VAT grouping does not mean that transactions are ignored, simply allocated to the representative member.
• Whether the share sale should be treated as a Transfer of a going concern.
  • The FTT dismissed this argument. There was no transfer of HLT's management of HLTB and all relevant assets were held by HLTB.

The FTT allowed the appeal on the basis of a direct and immediate link between the sale of the shares and downstream taxable activities.

UPDATE: HMRC have been granted permission to appeal to the Upper Tribunal. Listed for hearing on 12, 13 or 14 June 2023.

Useful guides on this topic

Groups
What are the conditions for forming a VAT group? What rules apply once a VAT group is in place?

Transfer of a going concern (TOGC)
What is a TOGC? What conditions must be met? What are the consequences of a TOGC? What case law is there? 

Taking over a business (VAT traps)
If you start to run a similar business to one which operated from the same premises or if you take over an existing business you may need to consider VAT. This is even if the business you are taking over, or following, ceased trading or went bust.

How to appeal an HMRC decision (VAT)
Disagree with an HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External link

Hotel La Tour Ltd v HMRC [2021] TC08335