Commissioners for HMRC v Hotel La Tour Ltd

Input tax on services used in an exempt share sale is irrecoverable where those services have a direct and immediate link with the sale. A fundraising purpose does not create a special exception or permit the sale to be disregarded. The ordinary either/or analysis remains: the input is attributed either to particular taxable outputs or, where no such attribution is established, to the taxable person’s economic activity as a whole as an overhead. Fiscal neutrality does not alter the consequence of an exempt supply. The fact that costs are met from sale proceeds or incorporated into output prices is relevant evidence, but is not a substitute for the direct-and-immediate-link test. A VAT-grouping fiction simplifies accounting and does not erase underlying management activity.

HMRC appealed from the decision of the Upper Tribunal, which had dismissed HMRC’s appeal from the First-tier Tribunal: [2023] UKUT 00178 (TCC) and [2021] UKFTT 0451 (TC). Hotel La Tour Ltd, the representative member of a VAT group, managed a hotel subsidiary and sold its shares to fund another taxable hotel development. It claimed input VAT on marketing, legal and accounting services incurred for the sale.

The tribunals held that the services had a direct and immediate link with the company’s wider taxable activities under a modified fundraising approach. The appeal concerned the correct treatment of the exempt share sale, the effect of VAT grouping, and whether the grouping argument could be raised by Respondent’s Notice.

1. Appeal allowed. The Upper Tribunal had failed to apply the ordinary direct-and-immediate-link test and had wrongly disregarded the exempt share sale. The Court of Appeal declined to remit the matter because the relevant facts had already been found.
2. Under the VAT rules, input tax is deductible where the inputs have a direct and immediate link with taxable output transactions. Alternatively, where no such direct attribution exists, the inputs may be general overheads linked to the taxable person’s economic activity as a whole. These are alternative routes, not sequential rules giving priority to attribution to a particular supply. Inputs directly attributable to exempt or outside-scope supplies do not qualify for deduction.
3. The decision in SKF [2010] STC 419 did not create a special fundraising exception or require an exempt share sale to be disregarded. It left the domestic court to determine objectively whether the inputs were linked to the exempt sale or to the wider business. The decision in BLP [1996] 1 WLR 174 remained good law. The direct-and-immediate-link test had not been replaced by a test based solely on where costs were incorporated into prices.
4. On the facts, the marketing, solicitors’ and accountants’ services were used in the process of selling the shares. They were cost components of, and directly and immediately linked with, the exempt share sale. The input VAT was therefore irrecoverable. Fiscal policy could not justify a different result.
5. The statutory fiction in s 43 of the Value Added Tax Act 1994 simplified VAT accounting but did not erase the underlying management activity or amalgamate the group members’ businesses. HLT’s management of HLTB therefore remained economic activity bringing the share sale within the scope of VAT as an exempt supply. Alternatively, s 43(1)(b) treated HLT as making HLTB’s taxable hotel supplies, producing the same conclusion.
6. The VAT-grouping argument was properly admitted by Respondent’s Notice. It was a pure point of law, caused no prejudice, and required no permission in the circumstances.

1. Court of Appeal (Civil Division): allowed HMRC’s appeal and held that the input VAT was irrecoverable: [2024] EWCA Civ 564.
2. Upper Tribunal (Tax and Chancery Chamber): dismissed HMRC’s appeal from the First-tier Tribunal: [2023] UKUT 00178 (TCC).
3. First-tier Tribunal: allowed Hotel La Tour Ltd’s appeal against HMRC: [2021] UKFTT 0451 (TC).