Commissioners for His Majesty's Revenue and Customs v Hotel La Tour Ltd

Input VAT is deductible where the input has a direct and immediate link with taxable transactions or, if no specific transaction supplies the relevant link, with the taxable person’s economic activity as a whole. The classification of a specific transaction as exempt does not itself determine the attribution exercise.

The test requires an objective assessment of all the circumstances. It is neither a pricing inquiry nor modified merely because a share sale raises funds for a taxable business. The purpose for which the proceeds are used is generally irrelevant. Professional services used to effect an exempt share sale are not deductible where they are directly and immediately linked to that sale. VAT grouping does not erase the underlying economic activity between group members for this purpose.

Hotel La Tour Ltd incurred VAT on professional services used to sell its wholly owned hotel-operating subsidiary. The net proceeds financed a new hotel project. The company and its subsidiary belonged to the same VAT group, and the parent supplied the subsidiary with management services for remuneration.

The First-tier Tribunal allowed the deduction: [2021] UKFTT 451 (TC). The Upper Tribunal dismissed HMRC’s appeal: [2023] UKUT 178 (TCC). The Court of Appeal reversed those decisions, holding that the services were directly and immediately linked with the exempt share sale: [2024] EWCA Civ 564.

The Supreme Court considered whether attribution depended on the pricing of the shares, the exempt rather than out-of-scope status of the sale, its fund-raising purpose, or the parties’ membership of a VAT group.

1. Appeal dismissed unanimously. Lady Rose, with whom Lord Briggs, Lord Hamblen, Lord Leggatt and Lord Richards agreed, held that the disputed input VAT was not deductible. The professional services were used to effect the sale and were directly and immediately linked with that exempt transaction, rather than with the taxable hotel business as a whole.
2. The direct and immediate link test requires consideration of all the circumstances and the objective content of the transactions. An input may be linked to a specific output transaction or, where no such link exists, to the taxable person’s overall economic activity. If the specific transaction is exempt, input VAT directly and immediately linked to it is not deductible.
3. The description of an input as a “cost component” does not require proof that its cost was mathematically incorporated into the output price. The First-tier Tribunal and Upper Tribunal therefore erred by relying on the fact that the shares were sold at the best market price without an addition for professional fees. The relevant inquiry is the objective economic connection, not the trader’s pricing structure.
4. Skatteverket v AB SKF did not establish that inputs associated with an exempt share sale must be attributed to the general business. It established only that exempt status does not determine attribution automatically. The court must reason forwards from the connection between the input and the transaction. Fiscal neutrality is a principle of interpretation and cannot override an express exemption.
5. There is no special modification of the direct and immediate link test for fund-raising transactions. The objective purpose for which sale proceeds are raised or later used does not generally determine attribution. Intention is relevant where expenditure precedes a future taxable activity, because it may establish the link with that future activity. That timing principle did not apply here.
6. The disregard required by section 43(1)(a) of the Value Added Tax Act 1994 did not make the management services disappear when deciding whether the share sale formed part of economic activity. VAT grouping preserves the members’ individual identities and is intended to simplify tax administration, not to confer an exemption or alter the conditions for taxable status. The remunerated management activity accordingly brought the share disposal within the VAT regime, where it was exempt under article 135(1)(f) of the Principal VAT Directive.

1. United Kingdom Supreme Court: Dismissed Hotel La Tour Ltd’s appeal and affirmed the Court of Appeal’s conclusion that the disputed input VAT was not deductible: [2025] UKSC 46.
2. Court of Appeal: Allowed HMRC’s appeal and held that the inputs were directly and immediately linked with the exempt share sale: [2024] EWCA Civ 564.
3. Upper Tribunal (Tax and Chancery Chamber): Dismissed HMRC’s appeal and upheld attribution of the inputs to the company’s taxable general economic activities: [2023] UKUT 178 (TCC).
4. First-tier Tribunal (Tax Chamber): Allowed the taxpayer’s appeal, holding that the fund-raising purpose and general-business connection permitted deduction: [2021] UKFTT 451 (TC).