A company could not recover input VAT incurred in connection with selling shares in its subsidiary. There was a direct and immediate link with an exempt supply.

In HMRC v Hotel La Tour Ltd [2024] EWCA Civ 564, Hotel La Tour Ltd (HLT) owned a 100% subsidiary, Hotel La Tour Birmingham Ltd (HLTB), which owned and operated a luxury hotel.

  • HLT provided Management services to HLTB. Both companies formed a VAT group.
  • HLT made the decision to build a new hotel in Milton Keynes. This coincided with the conclusion that the Birmingham hotel could not be grown as a business any further within the group.
  • As a result, the shares in HLTB were sold and the proceeds were used to fund the Milton Keynes build.
  • Professional fees of approximately £383,000 were incurred in respect of the share sale, along with approximately £77,000 of Input VAT, that HLT reclaimed.
  • HMRC refused the input VAT claim on the basis that the sale of shares was exempt from VAT: it broke the direct and immediate link to taxable supplies.
    • HLT argued that the services received on the share sale were directly and immediately linked to its downstream taxable activities: the development and operation of the Milton Keynes hotel, which was financed by the sale of shares.
  • HLT Appealed to the First Tier Tribunal (FTT) which found in HLT’s favour. The FTT concluded that the exempt transaction did not break the direct and immediate link.
  • HMRC subsequently appealed to the Upper Tribunal (UT), which upheld the FTT’s decision: the purpose of the transaction was fundraising, and those funds were later used to make taxable supplies.
  • HMRC Appealed to the Court of Appeal (CoA).

The CoA found that:

  • The UT failed to apply the ‘direct and immediate link’ test and erred in disregarding the existence of the exempt share sale.
    • Consideration should only have been given to whether there was a direct and immediate link between the services and HLT’s general (downstream) taxable activity had there been no direct and immediate link between the services and the exempt sale of shares.
  • The input VAT in question had a direct and immediate link with HLT’s exempt supply of shares in HLTB
    • The FTT had found as fact that the inputs (marketing costs, solicitors’ and accountants’ fees) were part of the process of selling the shares.
    • The inputs were used in, were cost components of, and were directly and immediately linked with, the exempt share sale.
    • This meant the input VAT was not recoverable, owing to the ordinary rules of VAT.
  • This position was not altered due to HLT and HLTB being in a VAT group.
    • HLT argued that due to the existence of the VAT group, its intra-group management services should be disregarded, giving the result that HLT was not engaged in any economic activity.
    • HLT then argued that the share sale was outside the scope of VAT, meaning that the associated inputs would be treated as general overheads and therefore deductible because the group as a whole was making wholly taxable supplies.
    • The CoA rejected this argument. HLT supplied management services to HLTB as a matter of fact, meaning it was engaged in economic activity. In consequence, the share sale, being part of HLT’s economic activity, was an exempt supply.

The appeal was allowed.

Useful guides on this topic

Input VAT: What constitutes a valid claim (& VAT invoice)?
What is Input VAT? Who can claim it? What is needed for a valid claim? What needs to be included on a VAT invoice and can you make a claim without one?

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

Management re-charges (holding companies)
When are intercompany charges subject to VAT? What rate of VAT applies to an intercompany charge? Is an intercompany charge a supply for VAT? Is there VAT on an intercompany payment for group relief? 

External link

HMRC v Hotel La Tour Ltd [2024] EWCA Civ 564