Anyone working in the world of VAT will be delighted to know that the Court of Appeal has recently released its decision on the ongoing saga of Hotel La Tour and VAT recovery.
For the benefit of those not in the VAT world or those not familiar with the background Hotel La Tour (HLT) is a holding company that is owned by Hotel La Tour Birmingham (HLTB). The two companies were in a VAT group with HLT as the representative member. HLT made taxable supplies to HLTB of management and IP.
Moving on… HLT decided to sell its shareholding of HLTB in order to raise capital to fund a new project in Milton Keynes. In order to ensure it received the highest return possible on the sale, HLT appointed a number of professionals for their services such as marketing and negotiation as well as lawyers and accountants (not us we would add!).
The cost of those professional services attracted VAT which HLT recovered on the basis the sale of shares was only carried out to raise funds for the wider taxable purpose of the business, being the downstream supplies of management and IP, which would be made to the new project in Milton Keynes.
Therefore, it asserted, there was a direct link between the costs incurred and future taxable supplies, entitling it to VAT recovery on those deal costs.
Subsequently, HMRC challenged the right to deduct this VAT on the basis that it related directly to an exempt sale of shares by HLT and that “looking through” to the future intention of the business is not the correct approach in the present case.
First-tier Tribunal & Upper Tribunal
The FTT and UT held in favour of HLT, relying on previous decisions in SKF and Frank A Smart, concluding that, when fundraising via share sales, it is the objective purpose of raising those funds which needs to be considered, rather than the exempt sale itself.
In a number of situations which involve fundraising, caselaw dictates the way in which the fundraising is carried out is disregarded and it is the ultimate purpose of raising those funds which is examined. This has been considered in a number of high-profile VAT cases over the years in both the UK and EU.
However, HMRC appealed to the Court of Appeal on the basis that there was a direct and immediate link between the costs incurred on professional fees and the exempt disposal of shares. HMRC argued that it was, therefore, not necessary to consider the intended taxable supplies in the future as the direct and immediate link is already made to the exempt disposal of shares.
VAT Recovery – What was the Court of Appeal decision?
Unfortunately, The Court of Appeal has sided with HMRC in its decision, concluding that the costs incurred on professional fees should be treated as relating directly to the exempt sale of shares by HLT, rather than “looking through” to the future taxable supplies which the funds were raised to support.
Rather than following the decisions relied upon by the FTT and UT to justify VAT recovery, the Court of Appeal concluded that the decisions in Frank A Smart and SKF (among others) which permit VAT recovery on certain deal costs do not preclude the necessary consideration of whether the costs incurred relate directly to an exempt sale of shares before considering the future taxable activities.
RPGCC Comment
We asked Alex, our VAT Manager for his thoughts on the case and this is what Alex said.
“We would envisage that this VAT decision will be appealed to the Supreme Court and we will monitor the situation closely. However, if the decision is not appealed then it is a disappointment for taxpayers incurring VAT on deal costs to support an otherwise fully taxable business.
This is a highly complex area of the VAT law which is constantly evolving. Anyone that has ever entered into a deal such as this will know that no deal is perfect and that no two deals look the same. As the caselaw shows, the specific facts of each case need to be considered on a case-by-case basis. Whilst this decision is a blow to taxpayers incurring VAT on deal costs, all hope is certainly not lost for VAT recovery”.
If your business is issuing or selling shares, options, convertible loan notes, debentures or other forms of security in order to raise funds, it is essential that you take tax advice at the outset to ensure that the position is compliant and optimised for tax. VAT rulings can be expensive and difficult to overturn. Please contact Alex, Kelly our VAT Partner, or indeed any member of the RPGCC team to discuss the best course of action for raising funds to support new projects. We are a full-service firm and our VAT, Tax and Corporate Finance teams would be happy to assist.
