The Commissioners for HMRC v Hotel La Tour Ltd

Input VAT on professional services used for an exempt share sale may be deductible where the sale is an objectively established fund-raising transaction for a taxable economic activity. The tribunal must determine whether the costs are incorporated in the price of the shares or are cost components of downstream taxable transactions.

The fact that the services facilitate the share sale does not itself break the direct and immediate link. The later use of the funds for taxable supplies, and the objective purpose of raising them, are material. BLP Group Plc v Customs & Excise Commissioners [1996] 1 WLR 174 is no longer a complete statement of the relevant CJEU jurisprudence.

HMRC appealed from the First-tier Tribunal’s decision of 3 December 2021 allowing Hotel La Tour Ltd's appeal against an assessment denying input VAT of £76,822.95.

HLT sold the shares in its subsidiary and incurred marketing, legal and accountancy fees in doing so. It sold the subsidiary to raise funds for the construction of a new hotel. HLT provided taxable management services before the sale and the tribunal found that the sale proceeds were used for the new hotel development.

The central issue was whether the professional services had a direct and immediate link with the exempt sale of shares or with HLT’s downstream taxable economic activities.

1. Appeal dismissed. The First-tier Tribunal correctly held that HLT could deduct the VAT on the professional services.

2. The CJEU jurisprudence has developed since BLP Group Plc v Customs & Excise Commissioners [1996] 1 WLR 174. A share sale which is exempt because the seller manages the subsidiary may receive the same input-tax treatment as an analogous share transaction outside the scope of VAT. Fiscal neutrality requires attention to the ultimate economic purpose of the expenditure.

3. The correct inquiry in a fund-raising case is objective. A deduction may be available where the purpose of raising funds is to finance taxable economic activity, the funds are used for taxable supplies, and the costs are components of downstream taxable activities rather than of the price of the shares. The use of professional services in the initial fund-raising transaction does not, without more, break the chain.

4. The First-tier Tribunal correctly applied that modified approach. The share sale was objectively undertaken to finance the Milton Keynes hotel development, which HMRC accepted was taxable activity. The professional costs were not incorporated in the market price of the shares. Paying them from the sale proceeds instead reduced the funds available for the taxable development, so they were costs of the downstream taxable activities.

5. The tribunal did not need to decide HLT’s VAT-group argument. Its conclusions on the direct and immediate link disposed of both grounds of appeal.

• Upper Tribunal (Tax and Chancery Chamber): HMRC’s appeal was dismissed in [2023] UKUT 178 (TCC).

• First-tier Tribunal: On 3 December 2021, the FTT allowed HLT’s appeal against HMRC’s decision and assessment denying input-tax deduction.