Upper Tribunal confirms VAT incurred on costs of selling a subsidiary is recoverable.

Aidan Lyons
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The Upper Tribunal has found in the case of Hotel la Tour, that VAT incurred on professional fees associated with selling a subsidiary to a UK buyer is recoverable. This decision upholds the previous findings of the First Tier Tribunal.

Hotel la Tour needed funds to invest in a new hotel in Milton Keynes. Its directors decided the hotel it operated through a subsidiary in Birmingham had reached the stage where it could not grow any further, so put it up for sale. The intention was to sell the shares, obtain funds to pay off the loan secured against the hotel, and borrow additional funds for the new hotel development. The sale of the shares was completed successfully, and the new owner was allowed to continue to use the Hotel la Tour name for a limited time.

The holding company and its subsidiary were VAT registered together as a VAT group and originally reclaimed the VAT incurred on professional fees, but HMRC rejected the claim, and the dispute proceeded to the First Tier Tribunal. The First Tier Tribunal found in favour the hotel group, saying that the VAT had been incurred for the purposes of the downstream taxable activities of running the new hotel in Milton Keynes. HMRC appealed to the Upper Tribunal. The Upper Tribunal agreed with the First Tier Tribunal, confirming that the input VAT was recoverable.

This judgement was supported by precedent cases in the Court of Justice of the European Union and the Supreme Court, to the effect that a VAT exempt sale of shares to raise funds does not necessarily “break the chain” linking input VAT to taxable business activities where:

  1. The purpose in fund-raising was to fund its economic activity (to be ascertained from objective evidence).
  2. The funds are later used for taxable supplies.
  3. The cost of the services are cost components of downstream activities which are taxable.


Similar to the previous decision, the Upper Tribunal decision runs contrary to HMRC’s current policy that input VAT incurred on costs relating to a UK share sale cannot be recovered, due to a “direct and immediate link” to a VAT exempt transaction. The Upper Tribunal found that in certain “fund-raising” scenarios this policy ought not to apply; such that input VAT recovery is possible. This is an important case for businesses that have restricted input VAT claims when costs have been incurred in selling shares in subsidiaries and this confirms the potential for additional claims of input VAT incurred over the last 4 years, in the right circumstances.  This decision may also have wider implications where VAT has not been recovered in other fund raising scenarios and these should also be reconsidered.

If you are in this position, we would be delighted to discuss this with you.