Taxpayer Succeeds In Upper Tribunal Case Providing Opportunities For Increased Vat Recovery On Transaction And Corporate Restructuring Costs

The recent Upper Tribunal (UT) decision in the case of The Commissioners For His Majesty’s Revenue And Customs v Hotel La Tour Ltd [2023] UKUT 00178 (TCC) upheld the First-tier Tribunal (FTT) decision in 2021. Both Tribunals’ decisions were in favour of the taxpayer on the core issue of whether the sale of shares by an active holding company, which were demonstrably intended to generate proceeds to reinvest into a taxable business, constituted overhead costs of the business. As a result, the VAT incurred on sell-side costs was recoverable. 

In particular, the UT considered whether the costs incurred on Hotel La Tour Ltd (HLT)’s disposal of its subsidiary were directly and immediately linked to an exempt share sale (with no right to recover input VAT); or directly and immediately linked to HLT’s wider taxable business (via the VAT group), on the basis that the shares were sold to raise funds to build a new hotel and make downstream taxable supplies. 

The recovery of VAT on transaction costs is a contentious area for VAT and subject to HMRC scrutiny. This case emphasises the benefit of ensuring intentions are well documented in the event that HMRC should challenge the position.

The case will be of interest to other taxable businesses either intending to divest or dispose of a subsidiary company as a capital raising exercise or have already done so within the last 4 years. There is an opportunity here to support VAT recovery in relation to future sales and consider the scope for retrospective claims where VAT has previously been blocked from recovery. 

WHAT WERE THE CIRCUMSTANCES OF THE CASE?

HLT was a holding company and representative member of a VAT group which owned 100% of the share capital of Hotel La Tour Birmingham Ltd (HLTB), a member of the same VAT Group. HLT provided management services to HLTB which in turn operated a luxury hotel in Birmingham. In order to fund the construction of a new hotel in Milton Keynes, alongside a bank loan, HLT decided to sell HLTB. 

The sale completed in 2017 and HLT removed HLTB from the VAT group. The development of the Milton Keynes hotel began and the FTT found, as a matter of fact based on the strong evidence provided, that all the proceeds from the sale of HLTB were used towards funding the development/ construction. 

However, the issue arose when HLT sought to recover VAT of c.£70K on professional fees incurred in relation to the sale within its September 2017 VAT return. HMRC subsequently challenged the recovery of this input tax and raised a VAT assessment on the basis that the costs had a direct and immediate link to an exempt supply of a sale of shares, rather than looking through the transaction as a means of funding downstream making taxable supplies by the VAT group. 

WHY DID HMRC TAKE THE VIEW THAT THE COSTS WERE IRRECOVERABLE?

HMRC’s long-standing approach, supported by the Court of Justice of the European Union (CJEU) judgment in BLP Group PLC (C-4/94) (BLP) , has been that the sale of shares is exempt for VAT purposes. Consequently, any VAT incurred on costs that can be directly attributed to an exempt supply, is irrecoverable. HMRC’s position, based on the BLP judgment, is that this should not be modified even where the purpose of the sale is to fundraise for a taxable activity. HMRC argued that the services were: 

“…purchased in order to maximise the price of the shares; funded by the proceeds of the sale rather than by the profits of any taxable output transaction; and the profits of the sale were used for purposes including paying off HLTB’s loan.” 

The FTT agreed that the proceeds of the sale were used to purchase the services but noted that this meant that the amount available for taxable transactions reduced, hence the services were a cost of the taxable transactions. 

Nevertheless, HMRC appealed to the UT and contended the FTT had applied the wrong test to determine whether there was a direct and immediate link between the services and the sale of shares. 

WHY DID THE FTT AND UT AGREE WITH THE TAXPAYER?

The FTT explored the case law available, in particular how the CJEU and UK Courts had moved away from the now 28-year-old BLP judgment, and ultimately disagreed with HMRC’s view of the law that the VAT recovery position should not be modified for fundraising transactions, i.e. a look through is possible. 

Both the FTT and UT cited the more recent case law which enabled VAT recovery in relation to transactions that were outside the scope of UK VAT, on the basis that the costs constituted general overheads of the taxable business. Overall, the UT recognised that the distinction should not be whether the share sale is exempt or outside the scope of VAT; the concern is, on the basis of evidence provided and facts found by the FTT, the ultimate purpose of the share sale and whether this is to support the wider economic activity of the business.

The downstream taxable activity of HLT (i.e., the construction, development, and management of the Milton Keynes hotel) was never in dispute based on the facts agreed between the parties and found by the FTT and thus, the UT dismissed HMRC’s appeal. 

WHAT CAN SELLERS DO TO ENSURE THEY MAXIMISE VAT RECOVERY ON SELL-SIDE COSTS?

Recovery of VAT on sell-side costs is a contentious area of VAT and may continue to be so. However, the decision of the UT has precedent value and provides an insight into steps to take for best practice, particularly in documenting a sufficient audit trail or defence file.

Currently, the prudent position on recovery of VAT on sell-side costs is that VAT is irrecoverable and costs should be grossed up to include irrecoverable VAT for the purposes of working capital. HMRC guidance does provide an exception in the following statement, however we note this guidance appears inconsistent and does not have force of law: 

“The VAT on costs incurred by the target of an acquisition, such as vendor due diligence costs, may also be deductible provided it can be shown that the target is the recipient of the supplies in question and those supplies were received for the purposes of the business carried out by the target.”

Generally, this guidance is used to seek VAT recovery on costs where it can be demonstrated that the services purchased provide an ‘enduring benefit’ to the entity/ entities being sold (the Target), where the Target is receiving and using such services. VAT recovery on costs incurred only for the purpose of the sale, for example data room costs and legal fees in relation to the sale and purchase agreement, is typically blocked in full. 

This case provides another option whereby the ability to track the use and intention of the funds/proceeds, to the extent they will be reinvested back into the business, could enhance the VAT recovery position for businesses. 

IS THERE ANYTHING ELSE TO CONSIDER IN RELATION TO VAT RECOVERY ON SELL-SIDE COSTS?

We note that VAT recovery on transaction costs is, and will continue to be, an area subject to challenge by tax authorities in the UK and EU and case law. Only last month, the Dutch Court ruled that private equity investment funds are not entitled to recover VAT on such costs. 

Whilst this particular case of HLT may not be relevant to private equity funds in the UK, on the basis that this was corporate acquisition, it is important to understand the guidance and case law available in this area, to ensure VAT leakage is minimised. To the extent that certain actions are taken in a timely manner, and sufficient documentary evidence is obtained at relevant stages, VAT recovery on at least a portion of sell-side costs may be achievable for taxable businesses. 

The A&M Indirect Tax team has a wealth of experience in this area to support businesses in getting everything in place and present a sufficient basis for recovery to HMRC.

HOW CAN A&M HELP?

The outcome of this case could have a significant impact for corporate clients involved in the divesting of entities in the corporate group by way of selling of shares to fund the wider business activity. The fact pattern appears to be one that can capture a wide range of businesses that could benefit from increased VAT recovery, therefore raising increased capital to reinvest as intended. 

We see this opportunity applying not only to businesses considering prospective restructuring, divesting or disposing of companies to raise funds in the future, but also retrospectively by reviewing the VAT recovery position on historic transactions.

To the extent sell-side costs have been incurred and recovered within the last 4 years (i.e., the VAT statute of limitations) there is now scope to put in place a defence file to support VAT previously recovered. Alternatively, there may also be scope to submit a claim for VAT that was not previously recovered, and as a result of the principles of case, it may now be possible to do so. 

Please contact Mairead Warren de Burca , Mark McKay , or your regular A&M contact, to discuss further.

USEFUL HMRC LINKS

VIT40600 - When is VAT recoverable by holding companies - HMRC internal manual - GOV.UK (www.gov.uk)  

Related Insights

Transaction & Corporate Restructuring – Opportunity for increased VAT recovery on costs

Dutch court rules that a private equity investment fund is not entitled to VAT recovery on transaction costs  

hotel la tour v hmrc

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Input VAT and share sales to raise funds

Input VAT incurred in connection with an exempt sale of shares to raise funds for a taxable business could be attributed to that taxable business.

The Upper Tribunal has endorsed the approach of the FTT in Hotel La Tour Ltd concerning the attribution of input VAT on costs associated with an exempt disposal of shares made for the purposes of raising funds for the broader taxable business: HMRC v Hotel La Tour Ltd [2023] UKUT 178. Provided that such costs do not form a cost component of the exempt supply of shares, there will be a direct and immediate link to the wider taxable activities enabling the input VAT to be recovered.

The Upper Tribunal considered that the FTT had applied the correct principles in considering that earlier case law, and in particular the 2019 Supreme Court decision in Frank A Smart , meant that it was possible to ignore the chain-breaking effect of the exempt supply of shares in a "fundraising" scenario such as this.

Hotel La Tour Ltd (HLT) was a holding company and owned the whole of the share capital of a subsidiary, HLTB, with which it formed a VAT group. HLTB owned and operated a hotel and HLT provided HLTB with management services.

In 2015, HLT decided to construct and develop a new hotel in Milton Keynes. It was anticipated that this would cost approximately £34.5m. Various finance options were considered but, ultimately, the preferred option was to sell HLTB and to borrow the remainder. Accordingly, HLT sought to obtain the highest price possible for the shares. It was clear from board meeting minutes that from the outset the proceeds of sale of HLTB were to be used to fund the Milton Keynes Development. HLTB was eventually sold in 2017, raising approximately £16m from both the purchase price of the shares and repayment of debt from HLTB. HLT then commenced the development of the hotel in Milton Keynes.

In the course of the sale of HLTB, HLT incurred significant professional fees including VAT on those fees. It sought to deduct that VAT but HMRC took the view that the VAT was directly and immediately linked with the exempt sale of shares in HLTB and denied deduction.

The FTT accepted HLT's appeal, holding that it was possible to ignore the chain-breaking effect of the exempt supply of shares in a "fundraising" scenario such as this, provided that the relevant costs were not incorporated in (and thus a cost component of) the initial exempt transaction.

Decision of the Upper Tribunal

Before the Upper Tribunal, HMRC argued that the correct approach to cases such as this, following the various CJEU and domestic cases, was a two stage approach:

  • Stage 1: was there an output transaction to which the inputs were directly and immediately linked
  • Stage 2: only if not, then consider whether there is a direct and immediate link to the general economic activity.

In particular, HMRC relied on the CJEU decision in BLP (where the CJEU held that there was no entitlement to an input VAT deduction on a share sale even where the ultimate purpose was the carrying out of taxable transactions) and Kretztechnik (which allowed a direct and immediate link to the wider business only where the intermediate transaction (an issue of shares) was outside the scope of VAT).

In a admirably concise decision, the Upper Tribunal has rejected HMRC's arguments and endorsed the approach of the FTT in this case. In particular, the Upper Tribunal agreed that it was clear from later decisions of the CJEU such as SKF and Sveda that the CJEU had moved away from the chain-breaking approach originally set out in BLP . Indeed, this had been recognised in recent decisions of the UK courts, such as Associated Newspapers [2017] STC 843 and Frank A Smart & Son [2019] UKSC 39.

The Upper Tribunal's analysis of the development of the CJEU's reasoning and jurisprudence since BLP was as follows:

  • first, in Kretztechnik the CJEU concluded that it was possible to recover input tax as a general overhead in circumstances where that input tax had been incurred in relation to a transaction which was outside the scope of VAT
  • next, in SKF the CJEU grappled with the situation where essentially the same transactions could be either (1) outside the scope of VAT (sale of shares by pure holding company) or (2) exempt from VAT (sale of shares by holding company providing management services) but there was potentially a right to deduct input tax in (1) in accordance with Kretztechnik but, according to BLP , there was no right to deduct input tax in (2). The CJEU applied the principle of fiscal neutrality to extend the same treatment to what would otherwise be an exempt transaction (which would break the chain between the supply of services and a taxpayer's general economic activities). It did so by taking account of the ultimate economic purpose of the transaction.

This was why later UK cases had suggested that the CJEU had moved away from any disregard of the ultimate economic purpose of the expenditure and called into question the BLP decision.

The Upper Tribunal also noted that the approach put forward by HMRC was essentially the same approach put forward by the Advocate General in SKF and that the CJEU had rejected that approach.

In SKF , the CJEU held that the question whether VAT on the relevant costs were to be attributed to the immediate share sale transaction or the downstream transactions was to be determined by reference to whether the taxable inputs were incorporated into the price of the shares or amongst the cost components of the downstream transactions. On this point, the Upper Tribunal commented that "it would be unusual to see such costs being reflected in the price paid for the shares in a standard share sale agreement. This would particularly be the case where the price is ascertained by common share valuation techniques used for private companies, such as a multiple of earnings or net asset value. It would rarely be the case that the price of shares in a standard arm's length share sale would be determined on a "cost plus" basis (i.e. a margin above cost) or for the costs of the sale to be specified as a component of the price. Although the costs of fees incurred in relation to the disposal may (but not necessarily will) be paid out of the proceeds of sale, in most cases it is unlikely that the price itself will be influenced by the professional fees incurred by the seller."

As a result, the Upper Tribunal held that the FTT had been correct in its approach when it applied a modified approach adopted by the CJEU in SKF and as interpreted by the Supreme Court in Frank A Smart to the use of services for a fund raising transaction which is either outside the scope of VAT or exempt from VAT. In those circumstances, the intermediate transaction would not prevent a deduction of input VAT if the purpose of the fund-raising was to fund downstream economic activities (based on objective evidence), the funds are later used for taxable supplies and the cost of the services are cost components of the downstream taxable activities.  

The decision to ignore the chain-breaking effect of an exempt sale of shares in this case and accept that the application of the direct and immediate link test is to be modified in fundraising cases directly follows from the later decisions of the CJEU (such as SKF ) as applied by the 2019 judgment of the Supreme Court in Frank A Smart . Once that principle was accepted, it appeared clear on the evidence that the ultimate purpose of the sale was to raise funds from the taxable development and operation of a new hotel in Milton Keynes.

It should be noted that it is important that there is objective evidence as to the purpose of the fundraising activities. VAT is not a tax that operates according to the subjective intent of the taxpayer and as such there must be objective evidence that the funds raised are to be used for a wider economic activity in order to invoke the principle in this case

Although it was unnecessary to do so, the FTT also considered (and rejected) an alternative arguments put forward by HLT in this case. HLT argued that since it was VAT grouped with HLTB, the supplies of management were ignored and there was no economic activities carried out. As such, the sale of the shares was outside the scope of VAT rather than exempt and there was no exempt transaction to break the chain. The FTT rejected this argument on the basis that whilst the supplies between the VAT members were to be disregarded for VAT purposes, the existence of the activities as a whole were not. This was clear from cases such as  Intelligent Managed Services Ltd v HMRC . This argument was not considered by the Upper Tribunal.

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This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.

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hotel la tour v hmrc

Hotel granted the luxury of VAT recovery on a sale of shares to raise funds

11 january 2022.

Businesses involved in mergers and acquisitions are accustomed to jumping through the necessary hoops to confirm that they are entitled to recover VAT on the costs of acquiring a new subsidiary. However, a recent tribunal appeal has looked at a corporate finance transaction from the seller’s point of view, considering whether a holding company was eligible to reclaim VAT incurred in the course of selling the shares of a subsidiary company to a new owner. 

The Hotel La Tour case

Hotel La Tour Ltd is the holding company of a corporate group that operates a chain of luxury hotels, each of which was owned and run by a subsidiary company. In 2015, Hotel La Tour decided to build a new hotel in Milton Keynes, with the project to be financed by selling its existing hotel in Birmingham. The shares in the subsidiary that owned that hotel were eventually sold to an unrelated buyer in 2017.

A dispute arose with HMRC over Hotel La Tour’s entitlement to recover VAT of £76,000 that it had incurred on various professional services related to the sale of those shares, including the fees of its marketing agent, solicitor and tax advisers. HMRC disallowed VAT recovery on the basis that the professional services were used to make a supply of shares, on which VAT is not deductible because it is a VAT exempt supply. Hotel la Tour appealed, arguing that the fees were in fact the costs of raising funds to create the new hotel, which would be a taxable business for VAT purposes.

The First-tier Tax Tribunal has now found in favour of Hotel La Tour, deciding that the VAT was recoverable because there was a direct and immediate link between the costs incurred and its taxable business of building, developing and the eventual management of the new hotel in Milton Keynes. That link was not broken by the exempt share sale – for the professional fees to be attributable to the sale of the shares, the tribunal ruled that there must be a ‘cost component’ of the price of the shares. However, according to the tribunal, that was not the case here, because the shares were sold at their open market value, which was not influenced by how much Hotel La Tour had spent on the professional costs of the deal. Instead, the objective purpose of incurring the cost of the services was to raise funds to pay for the development of the Milton Keynes hotel.

What does this mean for other businesses?

The impact of this decision is not restricted to the hotel sector and could potentially allow any business to recover VAT on the costs of selling a subsidiary to raise funds to pursue another business activity that is taxable for VAT purposes. However, HMRC is very unlikely to accept the tribunal’s findings and may decide to appeal to the Upper Tribunal. The outcome was based on some new and relatively untested European case law that emerged just before the UK left the EU, so this issue may lead to a long and complex litigation before the position is firmly settled.

For now, businesses which did not claim VAT on the cost of a sale of shares in similar circumstances over the last four years should study the Hotel La Tour decision, look out for news of a further appeal and consider whether they should submit a protective claim to HMRC.

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HOTEL LA TOUR VAT CASE: INPUT TAX RECOVERY ALLOWED ON COSTS OF DISPOSAL OF SUBSIDIARY - JULY 2023

By Steve Chamberlain

July 27, 2023

Share article:

Since we first reported on this case in January 2022 HMRC has lost its Appeal to the Upper Tribunal. See here .

HMRC persisted in its argument that where funds are being raised for a specific purpose, it is not possible to look at the eventual purpose of the fundraising, when deciding whether VAT recovery on the costs of raising those funds is possible. Rather, you only look at the immediate supply to which a cost is linked. The sale of shares is VAT exempt, so according to HMRC, VAT on the fees charged by advisors working on the sale can only be exempt input tax.

The UT disagreed. One factor is that shares usually have a market value. In this case, HLT couldn’t increase the price for the shares to include the costs of paying its professional advisors. These costs therefore reduced the net proceeds of the sale, meaning that less was available to fund the downstream activities. The professional fees were thus “cost components” of the downstream activities, not the sale of the shares.

HMRC has yet to comment on its loss, and may Appeal further. But any business affected by this decision needs to bear in mind that potential claims are restricted to four years. Thus, waiting until the dust has finally settled could lead to a viable claim being out of time.

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Breaking the Chains: Landmark Tribunal Ruling Expands VAT Recovery Opportunities for Taxpayers

Glyn Edwards · September 13th 2023 · read

In a highly significant decision, the Upper Tribunal has dismissed HMRC’s appeal against the taxpayer’s First-tier Tribunal success in the case of HMRC v Hotel La Tour Limited [2023] UKUT 178.

The Facts of the Case

Hotel La Tour Ltd (“HLT”) incurred fees for professional services in respect of a sale of shares in its subsidiary Hotel La Tour Birmingham Ltd “HLTB”). HMRC disallowed HLT’s input tax claim on the basis that the sale of shares in HLTB was an exempt supply and the VAT on the professional services was directly and immediately linked therefore to the exempt sale of shares. HLT’s successful argument was that the relevant services were directly and immediately linked to HLT’s downstream taxable activities.

In 2015, HLT decided to construct and develop a new hotel in Milton Keynes, costing approximately £34.5 million. That construction was partly financed by the sale of HLTB - the proceeds of the sale were to be used to fund the Milton Keynes development. HLT engaged various companies to provide professional services, with a view to obtaining the highest sale price available, which would provide for the largest sum possible to pay towards the Milton Keynes development.

The Decision

The judgment challenges HMRC’s traditional view of input tax, which is that it must always be attributed to the first output in a chain and that, if the first output is VAT exempt, then the input tax is non-recoverable. That view has leant heavily on a very old judgment of the European Court of Justice in the case of BLP Group plc v Customs and Excise Commissioners - [1995] . HMRC still refer to that case in their guidance manuals for officers stating that “it confirmed that, as VAT is a transaction-based tax, the ultimate purpose of a business is irrelevant so it is only the immediate supply to which any input is a cost component that matters.”

That guidance is proven to be incorrect by the judgment of the Upper Tribunal in Hotel La Tour, which specifically stated that:

“….subsequent decisions of the CJEU had called the BLP decision into question in the light of its developing jurisprudence attributing input expenditure on the raising of capital to the general overheads of an undertaking. Although not formally overruled, the BLP decision can no longer be regarded as representing a complete statement of the CJEU’s jurisprudence in this area”.

Opportunities for Taxpayers

Whilst the decision might be appealed by HMRC, other taxpayers should take immediate action to consider whether they might benefit from this decision as potential claims are restricted to four years. The opportunity may be wider than cases on all fours with HLT and may expand to create VAT recovery whenever fund raising supports downstream taxable activities. This could have a positive impact, for example, on the charity sector, who have traditionally not been entitled to any VAT recovery on the costs of fund-raising events.

To discuss the issue further, please contact Glyn Edwards.

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Share sale was actually a fundraising activity for taxable supplies

In Hotel La Tour Ltd v HMRC [2021] TC08335 , the First Tier Tribunal (FTT) found that the sale of a subsidiary was a means of fundraising that could be directly linked to future trading activities. This allowed the input VAT on associated professional fees to be reclaimed.

In 2017, Hotel La Tour Limited (HLT) sold the shares in its 100% subsidiary, Hotel La Tour Birmingham Limited (HLTB) and reclaimed the input VAT paid on the associated professional fees.

  • HLTB owned and ran a luxury hotel in Birmingham. HLT provided management services to HLTB and owned the intellectual property surrounding the name 'Hotel La Tour'. The hotel building was leased by HLTB from a third party.
  • The two companies formed a VAT group .
  • The decision to sell the shares was taken as a way of financing another hotel opportunity in Milton Keynes as it was believed that the Birmingham hotel business could not be grown any further within the group.
  • Professional fees of over £380,000 were incurred plus VAT of nearly £77,000 on a mix of agents, solicitors and Accountancy services.
  • HMRC issued a decision disallowing the claim and an assessment based on the sale being an exempt supply as HLT was not carrying out any economic activity.
  • The professional fees were incurred as part of the sales process which was to raise funds for the Milton Keynes business. There was a direct and immediate link between the sale (and VAT incurred) and the intention to make taxable supplies from the newly built hotel.
  • The management services provided by HLT did constitute an economic activity. This point was conceded by HMRC prior to the hearing.

The FTT concluded that the issues for determination were:

  • The FTT held that there was a direct and immediate link to taxable activities, as the purpose of the transactions as a whole was fund-raising and how the funds were to be used.
  • The only purpose for the sale was to fund the downstream taxable business of the Milton Keynes development.
  • The initial share disposal is to be disregarded and the use of professional services (whose only purpose was to maximise the funds raised by the sale) for that transaction does not break the link.
  • This was an argument submitted to the hearing late and the FTT refused to allow it to be considered. The FTT did state that it would have been dismissed as the VAT grouping does not mean that transactions are ignored, simply allocated to the representative member.
  • The FTT dismissed this argument. There was no transfer of HLT's management of HLTB and all relevant assets were held by HLTB.

The FTT allowed the appeal on the basis of a direct and immediate link between the sale of the shares and downstream taxable activities.

UPDATE: HMRC have been granted permission to appeal to the Upper Tribunal. Listed for hearing on 12, 13 or 14 June 2023.

Useful guides on this topic

Groups What are the conditions for forming a VAT group? What rules apply once a VAT group is in place?

Transfer of a going concern (TOGC) What is a TOGC? What conditions must be met? What are the consequences of a TOGC? What case law is there? 

Taking over a business (VAT traps) If you start to run a similar business to one which operated from the same premises or if you take over an existing business you may need to consider VAT. This is even if the business you are taking over, or following, ceased trading or went bust.

How to appeal an HMRC decision  (VAT) Disagree with an HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External link

Hotel La Tour Ltd v HMRC [2021] TC08335

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FTT Hotel la Tour Limited – December Tribunal Confirms VAT incurred on costs of selling a subsidiary is recoverable

The First Tier 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.

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 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.  Its judgement was supported by cases in the Court of Justice as well as the Supreme Court to the effect that fiscal neutrality allowed it to look through the exempt share sale to the future intended taxable income streams, so the VAT was recoverable.

Source  Grant Thornton

hotel la tour v hmrc

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V@ Update – January 2022

Published on 27 January 2022

Welcome to the January 2022 edition of RPC's V@, an update which provides analysis and news from the VAT world relevant to your business.

  • HMRC has published Revenue and Customs Brief 15 (2021): Repayment of VAT to overseas businesses not established in the EU and not registered in the UK . The brief explains the outcome of the review of the policy, which was outlined in Revenue and Customs Brief 10 (2021) , issued in July 2021 (which we reported on in the July 2021 edition of V@ ). The change allows overseas (non-EU established) businesses to claim VAT refunds where they have been experiencing difficulties in obtaining a certificate of status, where the delay is due to the official authority dealing with a rare and exceptional one-off event, for example a global pandemic.
  • HMRC has published a Summary of Responses in relation to its Call for Evidence on Simplifying the VAT Land Exemption, made in May 2021. The Call for Evidence sought views on the current VAT rules relating to land and property and explored potential options for simplifying them. In response to the evidence received, HMRC has set up a working group with the aim of producing guidance for HMRC compliance officers, which will also provide some certainty for businesses.
  • HMRC has published Revenue and Customs Brief 1 (2022): reviewing how to claim VAT when charging electric vehicles for business purposes . HMRC is considering the situation where an employee is reimbursed by their employer for the actual cost of electricity used in charging an electric vehicle for business purposes. HMRC is, amongst other things, considering a number of simplification measures which it is hoped will reduce administrative burdens in terms of accounting for VAT on private use. The Brief indicates that, once HMRC's review is completed, HMRC will publish guidance confirming its policy.

Case reports

Ventgrove – Court of Session decides that no VAT is due on payment under a lease break clause In Ventgrove Ltd v Kuehne + Nagel Ltd [2021] CSOH 129, the Court of Session held that a payment made by a tenant, Kuehne + Nagel Ltd ( KNL ), to its landlord, Ventgrove Ltd ( VL ), to exercise an option to end the lease, was not subject to VAT. KNL had exercised a break option to terminate its lease. The lease required KNL to make a payment to VL, plus any VAT "properly due" on such amount. KNL did not include an amount of VAT in its payment and VL argued that the lease was not validly terminated as (1) it had opted to tax; and (2) HMRC had changed its policy on termination payments and now considered such payments to be subject to VAT. The Court of Session held that the lease had been validly terminated as no VAT was in fact properly due on the break clause payment. This was because:

  • at the time the break option had been exercised, HMRC had updated its guidance ( Revenue and Customs Brief 12 (2020): VAT early termination fees and compensation payments ), such that the change of policy had been postponed indefinitely;
  • HMRC's policy on termination payments, prior to publication of Brief 12, was based on the decision in Lloyds Bank plc v Customs and Exercise Commissioners (VATD 14181). There had been no further relevant case law on the issue. The judgments of the Court of Justice of the European Union ( CJEU ) which had influenced HMRC in the run-up to publication of Brief 12 were, in the view of the Court of Session, not in point, as the CJEU's judgments concerned payments that amounted to compensation for failure to complete a minimum contractual term. In this case, the minimum period under the lease had already expired by the time KNL exercised the break clause; and
  • the requirement for KNL to pay to VL any VAT "properly due" on the break payment did not provide VL with a means to frustrate the exercise of the break option.

Why it matters : The Court commented that there had been no case in which a court or tribunal had considered whether the exercise of an option to terminate within an original lease was a taxable transaction. This case therefore represents a significant development in this area of VAT law. It is particularly notable that the Court commented that the CJEU cases of MEO (Case C-295/17) and Vodafone Portugal (Case C-43/19) are not directly in point, given these cases underpin the (currently postponed) change of policy set out in Revenue and Customs Brief 12 (2020). The judgment can be viewed here .

Mandarin Consulting – UT decides that evidence of place of supply is inadequate In Mandarin Consulting Ltd v HMRC [2021] UKUT 292 (TCC), Mandarin Consulting Ltd ( Mandarin ) supplied career coaching and support services to students of Chinese origin (the Services ), which would be outside the scope of VAT if supplied to persons whose usual residence was outside the EU. Mandarin did not take the steps required by Council Implementing Regulation 282/2011/EU (the Implementing Regulation ) to establish the usual residence of its customers before the time it made supplies to them. The First-tier Tribunal ( FTT ) decided that these failings precluded Mandarin from establishing that its supplies were outside the scope of VAT. We reported on the decision of the FTT in the July 2020 edition of V@ . Mandarin appealed to the Upper Tribunal ( UT ). The UT concluded that the decision of the FTT contained an error of law, on the basis that, even though Mandarin did not satisfy the requirements of Article 23 of the Implementing Regulation, it was entitled nevertheless to seek to establish that its customers had their usual residence outside the EU. The UT decided that, when doing so, Mandarin was not limited to evidence that it gathered at, or before, the time of supply and there was no limitation in principle on the nature of evidence that Mandarin was entitled to deploy in support of its claim. The UT regarded the error of law as material to the FTT's decision and therefore set the FTT's decision aside (under section 12, Tribunals, Courts and Enforcement Act 2007). The FTT had found that the services Mandarin was supplying constituted the services of consultants, falling within Article 59, Principal VAT Directive ( PVD ) rather than educational services falling within Article 54. This conclusion was not appealed to the UT. Because Mandarin was supplying consultancy services, its services were treated by Article 59 as supplied where the recipients of those supplies, who were non-taxable individuals, had their permanent address, or usually resided. Accordingly, establishing the place of supply of Mandarin’s consultancy services involved determining (i) who the recipients of those services were; and (ii) where those recipients had their permanent address or usually resided. The answer to issue (i) changed over periods relevant to the dispute, largely because, from July 2016 onwards, Mandarin contracted with students’ parents, rather than with students themselves (which the FTT found was the position until July 2016). The UT was not satisfied that Mandarin could demonstrate, on the evidence that was before the FTT, that supplies to all of its students were made outside the EU pursuant to Article 59, PVD. The UT therefore remade the FTT's decision to leave the result unchanged in relation to periods prior to July 2016. Why it matters : This decision serves as a cautionary tale regarding the need to obtain and keep appropriate documentary evidence to support the place of supply for VAT purposes. If Mandarin had been able to provide evidence in support of its claim that the Services were outside the scope of VAT, it may have avoided a substantial VAT bill. The decision can be viewed here .  Hotel La Tour – FTT decides that VAT on professional fees in connection with a share sale is recoverable as input tax In Hotel La Tour Ltd v HMRC [2021] UKFTT 451 (TC), the FTT held that VAT incurred by a seller, Hotel La Tour Ltd ( HLT ), on professional fees in connection with the sale of its subsidiary, Hotel La Tour Birmingham Ltd ( Target ), was recoverable as input tax. HLT had provided management services to Target and the two companies formed part of a VAT group. Target owned and operated a luxury hotel and the purpose of the sale of Target was to fund the acquisition and development of a new hotel by HLT. HMRC refused HLT's claim for the input VAT which HLT incurred on the relevant professional fees, on the basis that the sale of Target was an exempt supply for VAT purposes. HMRC argued that the share sale (an exempt transaction) severed the required "direct and immediate" link between the input tax that was being claimed and HLT's taxable activities. Following Frank A Smart & Son Ltd v HMRC [2019] UKSC 39, the FTT noted the general position that there is a difference between the "initial fundraising transaction" (the fundraising activity, or sale, itself) and the "downstream transactions" (the activities the funds raised were to be used for; here, the acquisition and development of a new hotel). Further, the FTT found that the share sale did not break the chain, following Frank , which was authority that input tax incurred on costs associated with a share disposal will be deductible if:

(a) the sale is a fundraising transaction objectively entered "for the purpose of an economic activity";

(b) the funds are used for taxable supplies; and (c) the costs on which the input tax was incurred are not incorporated into the share price on sale, but are cost components of downstream taxable supplies (this will be satisfied even where the relevant costs are incurred to maximise the sale price).

The FTT found that, objectively ascertained, the purpose of the share sale of Target was to fund HLT's taxable general activities, namely the construction and future management of a new hotel. The FTT observed that it was crucial that HLT's financial position was that it could not afford to develop the new hotel without selling Target. There was no suggestion that the net proceeds of the sale would be used for any other purpose.

The FTT noted the professional fees were not incorporated in the price of Target's shares. The professional fees were paid out of the share sale proceeds. The fees could therefore be regarded as a "cost component" of HLT's taxable activities (construction of the new hotel) and not a "cost component" of the exempt share sale. Why it matters : In cases where VAT recovery is a major concern, this case provides some helpful guidance on the appropriate way to draft share sale documentation in order to maximise VAT recovery. The decision can be viewed here .

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Weekend Money: Britons turning backs on traditional weddings - here's what they're doing instead

The Money blog is your place for consumer news, cost of living advice and the latest on the economy. We'll be back with live updates on Monday but for now you can read our weekend features and listen to a Daily podcast on the UK housing crisis below.

Saturday 23 March 2024 10:44, UK

Weekend Money

  • Britons turning their backs on traditional weddings - here's what they're doing instead
  • ISA deadline approaching - here's what you need to know
  • Landlords selling up will pay more capital gains tax from April - despite 'cut'
  • Listen to the Daily podcast above and  tap here  to follow wherever you get your podcasts

Best of the week

  • A bacterial infection and gangsters: The story of olive oil's 110% price rise
  • Your guide to buying healthier supermarket bread
  • Money Problem : The car I bought was advertised as ULEZ compliant but isn't
  • Special report : The town that ran out of homes
  • Will you actually save money if you turn the TV off at the switch?

By Emily Mee, Money team

Heather-Anne Horton was having recurring nightmares before her big wedding. 

She and her fiance Josh had booked a manor house in the UK for their wedding, along with a band, caterers, florist and cake. 

Although she knew she wanted to marry Josh, in her nightmares it would get to the big day and she would realise she'd forgotten to write her vows in all the stress of planning everything, financial worries and pressure from some family members. 

So when Josh told her he was feeling anxious about standing up in front of 70 people to read their vows, they agreed: "What are we doing? Let's just not do this. This is crazy." 

They cancelled their big wedding (losing a few deposits in the process) and decided on exactly what they wanted: a beach wedding, just the two of them, in Mauritius. 

It seems they are part of a growing trend. 

Data shared with the Money blog shows Pinterest searches for elopement inspiration and small budget weddings have been "soaring" over recent months. 

Aside from saving money, Heather-Anne says choosing to elope has taken the pressure off - and now she feels "100% relief".

The couple will be getting married barefoot in the sand with a treehouse dinner by candlelight afterwards, and after that they will be spending 10 days on safari in South Africa for their honeymoon. 

And despite the fact they're staying in five-star resorts and haven't "skimped out", they're spending half as much money - £15,000 instead of £30,000. 

Wedding planner Georgie Mitchell from Georgina Rose Events  says she is seeing more and more couples opting for "low-key" weddings, whether it's to save money or just because they have different priorities. 

"There are huge pressures to spend lots of money on one day, but unfortunately the tradition of parents paying is definitely decreasing and therefore couples have to foot the bill – and not many young couples have £30,000 lying around!" she says. 

She doesn't think big weddings will die out - "I think for every couple opting for a smaller wedding, you'll have one that will be even bigger and more expensive" - but there is a trend towards couples doing their big day "how they want".

This was the case for Zoe Ashbridge-Law and her husband Stew, who had always known they didn't want a traditional wedding. 

Zoe says she hated the thought of doing a first dance, while Stew is "quite introverted" so found the thought of doing a speech "nerve-wracking". 

"We were trying to avoid paying for a day that actually wouldn't bring us any joy," Zoe says. 

They've been cycling around the world since 2019, writing for their blog Road to Frame  - and it was during their trip around New Zealand that they decided to get married.

Their wedding day in October 2023 cost them £2,226.

"I was worried about it maybe feeling a bit soulless without family being there, but the opposite was true. It was really meaningful," says Zoe. 

The couple told their families the weekend after the wedding, and although they had felt "waves of guilt" at the time they were "shocked at just how happy everyone was". 

Overall, they say it was well worth it to do what they wanted - and it saved them a lot of money in the process. 

Eloping for your wedding doesn't have to mean going abroad - it can also just be about having a very select few people at the ceremony.

For Chris and Becky Lockyer, their decision to keep their wedding small was down to finances. 

"We originally were planning on having the traditional wedding and having the big ceremony and the big party. We even picked our venue and everything and we were dead set," says Becky. 

"Then the more we looked into it and the more we priced it up, we were like 'this is crazy, it's so, so expensive'." 

They decided to have a two-witness wedding in the local council office on a Wednesday morning, followed by a three-course meal at the pub with their two families. 

All in all, the day cost them less than £500 - a far cry from the £13,000 budget they were originally looking at. 

"I think more and more people are going our route because everything is more expensive now, and I think young people are more interested in putting down roots and buying houses and travelling and setting down those more long-term goals," says Becky. 

"The reason we got married is because we love each other and you don't have to spend thousands of pounds to do that."

The deadline for using your annual ISA allowance is 5 April.

Here's a breakdown of what you need to know...

What is an ISA and how do they work?

An ISA, or individual savings accounts, allows you to save money without having to pay tax on any interest gained.

Every tax year you can put up to £20,000 into your ISA or ISAs.

The tax year runs from 6 April to 5 April.

So, if you want to maximise your tax-free savings and you have the money, make sure you've deposited your full £20,000 by 5 April before we start all over again on 6 April.

What types of ISAs are there?

Just like any savings account, you put money into a cash ISA and let it accrue tax-free interest.

Some are instant access while others require you to lock money in for a certain period of time in order to get higher interest rates on your savings.

Stocks and Shares ISA

These allow people to invest in funds (shares or bonds) from companies.

With this one, you need to look at it as a medium to long-term commitment and experts suggest you should put money away for a minimum of five years to reap the benefits.

It is important to note there is always an element of risk when it comes to investing in stocks and shares.

Innovative finance ISA

This involves investing your money through an online portal and loaning this money to borrowers or businesses.

The interest rates on these types of ISAs are higher but your money is at risk because it is not protected by the Financial Services Compensation Scheme (FSCS).

Lifetime ISA

The LISA is a good option for anyone aged between 18 and 39, as you can deposit up to £4,000 a year and you'll receive a government bonus of 25% on each deposit, which you can keep as long as you use the proceeds to buy your first house – or until you are aged at least 60 as a retirement pot.

What do you need to do now?

If you are unsure about whether you have any ISA allowance left for this tax year, check with your provider.

The deadline for using your allowance this year is midnight on 5 April and after that you will get a new allowance for the next tax-year (2024-2025).

You cannot roll over any unused allowance so it is important to utilise your full £20,000 yearly allowance if you can.

Almost all landlords who sell up from April will pay more capital gains tax, research by Hamptons International suggests - despite a cut revealed by the chancellor earlier this month.

That's because the cut is outweighed by the shrinking of the "tax free allowance" rate, announced by Jeremy Hunt last year.

Back then, the chancellor more than halved this allowance to £6,000 - and it's falling again to £3,000 from 6 April, dragging more sellers into paying capital gains.

It's a similar story to the national insurance cut - which for many has been outweighed by the freezing of personal tax allowances (the amount you can earn before paying income tax or the higher rate of income tax).

All lower-rate sellers and 89% belonging in a higher tax-rate group will see their capital gains tax bill rise from 2022 levels, it is claimed.

"The chancellor made it clear he was hoping to encourage landlords to sell up and add new housing supply into the market," said Aneisha Beveridge from Hamptons. 

But "most landlords leaving the market this year will end up paying more tax than two years ago, not less".

A big week of financial news is over - so let's take stock.

On Wednesday we learned that inflation dropped more than expected, from 4% to 3.4%, in February.

But the next day the Bank of England said it still wanted to see more evidence it could get to, and stick around, its 2% target before lowering the interest rate   from the 16-year high of 5.25%.

The rate was held on Thursday for another six weeks at least.

Markets are still expecting a first cut - one of perhaps three this year - in June. No big changes there.

The cautious tone from BoE governor Andrew Bailey was maintained - but he let slip under questioning that market expectations were "reasonable".

For now, though, mortgage rates remain fairly static. As of Thursday, the average two-year fixed was 5.81% and for five years 5.39%, according to Moneyfacts. These are averages, so many buyers and those remortgaging will be able to secure lower rates  - in the 4-5% range.

Savers , meanwhile, have been urged to act now while rates remain high.

Adam Thrower, head of savings at Shawbrook Bank, said: "Another unchanged base rate means savers can continue to benefit, but only if they take advantage of the higher rates still on offer. 

"Many are still potentially missing out by not knowing what interest, if anything, they are being paid on their savings. 

"Our research found that two in five (40%) savers don't know how much money from interest they're earning each year on their savings. It is vital savers know this so they can see if there are better options elsewhere."

Here's some of the best savings rates available...

On the wider economy, Andrew Bailey said the technical recession seen at the end of 2023 appeared to be "subsiding". 

We also got official data on the UK housing market this week.

Office for National Statistics figures showed the average UK house price fell by an estimated 0.6% in the year to January 2024, taking the average price of a home in the UK to £282,000.

The average private rent was £1,238 in February - £102 higher than 12 months earlier.

The average monthly private rent was highest in Kensington and Chelsea (£3,248) and lowest in Dumfries and Galloway, Scotland (£472).

Excluding London, the local area with the highest average private rent in February was the city of Bristol (£1,734).

The Money blog is your place for consumer news, economic analysis and everything you need to know about the cost of living - bookmark news.sky.com/money.

It runs with live updates from Monday to Friday - while on Saturdays we scale back and offer you a selection of weekend reads.

Check them out this morning and we'll be back at the start of next week with rolling news and features.

The Money team is Emily Mee, Bhvishya Patel, Jess Sharp, Katie Williams, Brad Young and Ollie Cooper, with sub-editing by Isobel Souster. The blog is edited by Jimmy Rice.

A warning has been issued over a proposed merger between Vodafone and Three. 

The £15bn deal would create the UK's largest mobile phone network if given the go ahead, but the Competition and Markets Authority has said it could lead to customers facing higher prices and reduced quality.  

"Whilst Vodafone and Three have made a number of claims about how their deal is good for competition and investment, the CMA has not seen sufficient evidence to date to back these claims," Julie Bon, phase one decisionmaker for the case at the CMA, said. 

"Our initial assessment of this deal has identified concerns which could lead to higher prices for customers and lower investment in UK mobile networks." 

Retail sales flatlined in February as "extremely" wet weather put off shoppers from heading to the high street.

There was 0% growth in the sector last month, according to new figures from the Office for National Statistics (ONS) on Friday.

It said a good performance for clothes shops and department stores was offset by falls in food and fuel sales, possibly because of rising prices at the pumps.

However, it appears the weather also had a major impact as consumers shunned in-person stores in favour of online shopping.

You can read more here ...

Mobile networks will have to send roaming alerts to customers travelling abroad and provide information about the charges that apply under new regulator rules. 

Ofcom has said the regulations will help better protect mobile users against unexpected roaming charges. 

It comes after it found the quality of the information being provided can be "inconsistent and unclear" and 19% of customers were unaware of the extra charges. 

The new rules, which will come into force from 1 October, will require providers to give "clear, free to access information, so customers can make informed decisions about whether - and how - to use their mobile phone abroad". 

Uswitch has welcomed the news, but said there was "virtually nothing to stop providers from charging enormous sums" for using a phone abroad. 

"While we support these new rules, including roaming alerts and clear information on costs, they fall vastly short of the protections that consumers had come to expect," it said. 

"They will only come into force from October, so those travelling abroad this summer will still need to take extra precautions to avoid any surprises." 

The new England football kit has been making headlines this week for two reasons - its expensive price tag and its version of the St George's Cross. 

Here's what you need to know: 

An "authentic" version of the shirt costs £124.99 for adults and £119.99 for children, while a "stadium" version is £84.99 and £64.99 for children.

The high price makes it the most expensive football shirt in the country.

Last year, an adult stadium shirt cost £74.95 while a child's top cost £59.95. 

Nike, the designer of the kit, also made some changes to the St George's Cross that has sparked debate. 

The traditional red cross was tweaked and features purple and blue stripes.

The company dubbed it "a playful update" to the shirt ahead of Euro 2024, inspired by the training kit worn by England's 1966 World Cup winners.

A Nike spokesperson previously said: "The England 2024 home kit disrupts history with a modern take on a classic.

"The trim on the cuffs takes its cues from the training gear worn by England's 1966 heroes, with a gradient of blues and reds topped with purple.

"The same colours also feature an interpretation of the flag of St George on the back of the collar."

Prime Minister Rishi Sunak warned against "messing with" the national flags, saying they are "a source of pride, identity, who we are and they are perfect as we are". 

Responding to the Nike redesign, former England goalkeeper Peter Shilton, the country's most capped men's player, said he was against the design and the price. 

Passport application fees are set to rise next month, the government has announced.

While the proposals still need to be scrutinised by parliament for approval, it is likely they will be passed. 

If approved, it will mark the second year in a row the prices have been hiked following a 9% increase in February 2023. 

They are set to rise by around 7% on Thursday 11 April. 

What are the new fees? 

Under the proposals, a standard online application made from within the UK will rise by £6 to £88.50 for adults and by £4 to £57.50 for children. 

A postal application will go up by £7 to £100 for adults and £69 for children. 

The one-week fast track service is also increasing by £11.50 for adults (£155) and £9.50 for children (£135.50). 

If you are applying from overseas, the price is rising to £101 for adults and £65.50 for children. 

Why are they rising? 

The Home Office said the new fees will help it better meet "the cost of delivering passport and associated operations, reducing reliance on funding from general taxation". 

"The fees contribute to the cost of processing passport applications, consular support overseas, including for lost or stolen passports, and the cost of processing British citizens at UK borders," it said on the government website. 

"The increase will also help enable the government to continue improving its services." 

Is it worth renewing early? 

MoneySavingExpert says it is worth renewing early to avoid the increased rates - but only if you have less than 10 months left on your current passport. 

The time left on it your passport is no longer added on to the expiry date of your new passport.

A standard adult passport lasts for 10 years and used to cost £72.50 – which works out to around 60p per month of ownership, it said. 

This means you would save money by renewing early - but if it is valid for longer than 10 months, then you might be worse off. 

Basically, the closer your passport is to expiring, the more it's worth renewing before the new fees kick in.

Looking for a last minute Easter weekend break away? Helpfully, Which? has put together a list of the cheapest destinations for holiday cottages. 

The consumer champion found there are more than 14,000 properties still available to rent over the Bank Holiday weekend. 

Booking now will cost an average of £800 for a week's stay, it added. 

The cheapest region was found to be Shropshire, with the average holiday cottage costing a huge £400 less than a week in the most expensive area - the Outer Hebrides. 

Here are the destinations Which? found to be the cheapest: 

Nationwide has apologised after all payments in and out of customer accounts were delayed this morning. 

The issue, which has since been resolved, had affected the building society's faster payments system. 

Some users had complained online that they hadn't received their wages, and had been unable to pay their bills.

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hotel la tour v hmrc

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  • Revenue And Customs v Hotel La Tour Ltd (VAT - sale of shares - proceeds of sale used to fund taxable activities) Upper Tribunal (Tax and Chancery Chamber) Jul 24, 2023
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Revenue And Customs v Hotel La Tour Ltd (VAT - sale of shares - proceeds of sale used to fund taxable activities)

Neutral Citation: [2023] UKUT 178 (TCC)

Case Number: UT/2022/000031

UPPER TRIBUNAL

(Tax and Chancery Chamber)

The Rolls Building, London

VAT - sale of shares - proceeds of sale used to fund taxable activities - input tax incurred on sale of shares - whether a direct and immediate link to the taxable activities - yes - appeal dismissed

Heard on:  13 June 2023

Judgment date: 24 July 2023

MR JUSTICE ZACAROLI

JUDGE GUY BRANNAN

THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS

HOTEL LA TOUR LTD

Representation:

For the Appellants:       Isabel McArdle, Counsel, instructed by the General Counsel and Solicitor to His Majesty’s Revenue and Customs

For the Respondent:     Michael Firth, Counsel.

Introduction

1.             The Appellants (“HMRC”) appeal against a decision of the First-tier Tribunal (“FTT”) (Judge Richard Chapman QC and Ms Gill Hunter) issued on 3 December 2021 (“the Decision”) allowing the appeal of Hotel La Tour Ltd (“HLT”) against a decision of HMRC dated 26 June 2018 and a corresponding assessment. HMRC’s decision and assessment were issued on the basis that HLT was not entitled to an input deduction in respect of certain services supplied to HLT because, in HMRC’s view, they were directly and immediately linked to HLT’s exempt supplies, viz the sale of shares in its subsidiary, Hotel La Tour Birmingham Limited (“HLTB”).

2.             HLT, however, maintains that the relevant services were directly and immediately linked to HLT’s taxable supplies because the shares in HLTB were sold in order to raise funds for the building of a new hotel in Milton Keynes. HLT further argues that because HLT and HLTB were in the same VAT group, the sale of the shares in HLTB is to be treated as outside the scope of VAT rather than as an exempt supply.

3.             The amount of VAT at stake is £76,822.

4.             HMRC appeal to this Tribunal with the consent of the FTT.

5.             For the reasons given later in this decision, we dismiss HMRC’s appeal.

Factual background

6.             The relevant facts, which were set out in [3]-[13] of the Decision, were not in dispute before the FTT and are summarised below. References in square brackets are references to the relevant paragraphs of the Decision, unless the context otherwise indicates. References to the CJEU or to “the Court” include references to the ECJ.

7.             HLT was a holding company and owned the entire share capital of HLTB. HLTB and HLT were members of a VAT group of which HLT was the representative member. HLTB owned and operated a luxury hotel in Birmingham. HLT provided HLTB with management services, which included the provision of key personnel, such as the general manager of the hotel.

8.             HLT also owned certain intellectual property, including the “Hotel La Tour” name, which HLTB was permitted to use.

9.             In 2015, HLT decided to construct a new hotel in Milton Keynes which was anticipated to cost approximately £34.5 million. In order to finance this development, it decided to sell HLTB and to borrow the shortfall from a bank. It was considered that HLTB’s business had reached the stage where it could grow no further.

10.         HLT sought the highest price possible for the shares in HLTB and it was clear that the proceeds of sale were to be used to fund the development of the Milton Keynes hotel.

11.         On 17 May 2017, HLT agreed heads of terms with a purchaser (“the Purchaser”) for the purchase of the shares in HLTB. The sale was completed by a share purchase agreement dated 21 July 2017 (“the SPA”). The SPA provided:

(1)          HLT agreed to transfer the whole of its shares in HLTB to the Purchaser.

(2)          The consideration for the purchase of shares was £4,812,231.24, subject to adjustments in completion accounts.

(3)          The Purchaser undertook to put HLTB in funds to discharge its loan to HLT (£12,179,678.66) and to discharge a sum owing to a bank (£13,496,714) immediately after completion.

12.         The completion accounts resulted in the consideration for the purchase of the shares being adjusted to £4,635,132.09. The sale was completed on 21 July 2017 and on that date HLTB was removed from HLT’s VAT group.

13.         The net amount received by HLT under the SPA was approximately £16 million (the consideration for the purchase of the shares and the repayment of HLT’s loan to HLTB, less the cost of the sale including the fees for professional services).

14.         HLT engaged various advisers to provide professional services (“the professional services”) to assist in the sale of HLTB, including market research, buyer shortlisting, financial modelling and tax compliance. This was with a view to obtaining the highest sales price available, which would provide for the largest sum possible to pay towards the development of the Milton Keynes hotel. HLT incurred the following professional fees in the total amount of £382,899.51 plus VAT of £76,822.95:

(1)          Marketing agents’ fees of £255,000 plus VAT of £51,267.19.

(2)          Solicitors’ fees of £115,399.51 plus VAT of £23,055.76 for strategic advice and conveyancing costs.

(3)          Chartered accountants’ fees of £12,500 plus VAT of £2,500 in respect of tax support in respect of the sale of the shares in HLTB.

15.         HLT commenced building the Milton Keynes hotel. As at 16 January 2020 £3 million of the £16 million (referred to in paragraph 13 above) had been utilised in the development of the Milton Keynes hotel. The arrangement with the bank funding was that the remainder of the £16 million was to be used before the bank loan could be drawn down. It was anticipated that this would take place before March 2021. The FTT concluded that the whole of the £16 million had been used towards the development of the Milton Keynes hotel.

16.         HLT filed its 09/17 VAT return on 2 November 2017 seeking repayment of £68,883. This included the above-mentioned professional fees.

17.         On 23 November 2017, HMRC commenced enquiries in respect of the 09/17 VAT return. This resulted in a decision letter dated 26 June 2018 which effectively disallowed the input tax in respect of the professional services. At that stage, HMRC were arguing that HLT was not carrying out an economic activity because the management services were provided by employees who were directors of both HLT and HLTB rather than being provided by HLT. After a review, the decision was upheld by a letter from HMRC dated 4 September 2018. However, in a letter dated 26 June 2019, HMRC accepted that sufficient management services were provided by HLT to constitute an economic activity carried on by HLT. HMRC maintained instead that the professional services which gave rise to the fees were used in making an exempt supply (sale of the shares in HLTB) rather than in making taxable supplies.

The FTT’s Decision

Direct and Immediate Link

18.         After reviewing the authorities, the FTT found at [35] that there was a direct and immediate link between the professional services and HLT’s downstream taxable general economic activities and that “the chain” was not broken by the sale of the shares in HLTB.

19.         In the view of the FTT at [36], the effect of  decision of the CJEU in Skatteverket v AB SKF  (Case C-29/08)  [2010] STC 419  (“SKF”) and of the Supreme Court in Frank A Smart & Son Ltd v Revenue and Customs Commissioners   [2019] UKSC 39 ,  [2019] 1 WLR 4849  (“Frank A Smart”) was that the relevant objective purpose was that of the fund-raising and the relevant use was the use of the funds. It was clear from the Frank A Smart decision at [65] (iv) that the use of professional services for the initial fund-raising transaction did not break the chain. However, the chain would be broken where the cost of the inputs was a cost component of the price of the shares in the initial transaction, referring to the judgment of Lord Hodge in Frank A Smart at [46] and [47]. The FTT noted at [37] that Lord Hodge at [38] treated the CJEU in Kretztechnik AG v Finanzamt Linz  (Case C-465/03) (“Kretztechnik”) as disregarding, in that case, the use of the services in the initial share transaction in fund-raising cases.

20.         The FTT also noted that Lord Hodge in Frank A Smart at [49] regarded the CJEU as having extended the same VAT treatment of share disposals outside the scope of VAT to those where the share disposals were exempt from VAT. Therefore, the relevant consideration in fund-raising cases was whether the services were incorporated into the prices of the initial share transaction or of the downstream transactions. At [39] the FTT considered that when analysing the cost components, the manner in which the assets and services were paid for was not determinative.

21.         At [40], the FTT agreed with HMRC that, in general, the necessary direct link (between the input transaction and the output transaction) existed if the services were part of the cost components of the person’s taxable transactions which used those goods and services and that this had a chain-breaking effect. However, the FTT disagreed with HMRC’s submission that this general position was not modified in fund-raising transactions. The FTT considered that it was clear from Frank A Smart that the general position was modified such that the use of services for a fund-raising transaction which was either outside the scope of VAT or exempt from VAT did not prevent deduction if (with all paragraph references to the judgment of Lord Hodge in Frank A Smart):

(1)          The purpose in fund-raising was to fund its economic activity [65(iv)]. This was to be ascertained from the objective evidence [65(iv)] and [65(vii)]. As Lord Hodge notes, “The ultimate question is whether the taxable person is acting as such for the purposes of an economic activity” [65(vii)]. The circumstances to be taken into account included the nature of the asset and the period between acquisition and use for the economic activity: [65(vii)].

(2)          The funds are later used for taxable supplies [65(iv)]. However, the right to deduct arises immediately, potentially resulting in a time lapse between deduction and use or retention of the right to deduct even if unable to use them in certain circumstances  [65(vi)] and [69].

(3)          The cost of the services are cost components of downstream activities which are taxable. The right to deduct will therefore be lost if the cost of the services are incorporated into the price of the shares sold in the initial transaction that is exempt or outside the scope of VAT [47] or of downstream activities which are exempt or outside the scope of VAT [65(v)]. If the downstream activities are a combination of taxable transactions, exempt transactions and transactions outside the scope of VAT, the inputs will have to be apportioned  [65(v)].

22.         At [41] the FTT agreed with HMRC’s submission that an objective assessment of the purpose of the fund-raising was required as distinct from the subjective intentions of HLT. The FTT considered that the chain would be broken if the costs of the professional services were a cost component of the fund-raising. However, the FTT did not accept that the use of the professional services for the fund-raising transaction prevented deduction.

23.         Applying those principles to the facts of the appeal, the FTT found at [43] that, objectively ascertained, the purpose of the share sale was to fund HLT’s taxable general activities, noting that HMRC appeared to accept, and the FTT agreed, that HLT was carrying out a downstream taxable business. HLT’s financial position was that it could not afford to develop the Milton Keynes hotel without entering into the SPA for the sale of HLBT. The FTT recognised that the SPA went beyond the mere transfer of the HLTB shares, because it included a means by which HLTB paid its inter-company loan to HLT and that HLTB paid its own indebtedness to a bank. It was, however, part of the fund-raising purpose, as was clear from the terms of the SPA and the terms of the completion accounts, that the terms of the transaction were intended to result in a total sum being paid to HLT on completion, either directly or by placing HLTB in funds to pay the inter-company debts to HLT. The FTT noted that there was no suggestion that the £16 million had any purpose other than the development of the Milton Keynes hotel. The use of the £16 million to pay for the costs of the sale was not a purpose in its own right; the overall purpose of the fund-raising was to result in monies being payable to HLT which could then be used for the Milton Keynes hotel development and any monies used for the costs of sale represented by the professional fees were to facilitate that purpose. Objectively analysed, the professional services were only necessary to facilitate the sale itself.

24.         At [44] the FTT noted HMRC’s valid submission that the professional services in respect of the professional fees were all part of the process of selling the shares in HLTB. However, this went to the question whether or not the professional services were used in the fund-raising transaction. Whilst the FTT agreed that they were so used, this did not prevent deduction.

25.         At [45], the FTT found that the £16 million was used in respect of the development of the Milton Keynes hotel. HMRC accepted that activities relating to the Milton Keynes hotel development constituted taxable activities.

26.         At [46] the FTT found that the cost of the professional services was not incorporated in the price of the shares sold in (and were not cost components of the price of the shares in) the initial transaction. The agreed evidence was that the HLTB shares were sold for the best price achievable in the market. The price was not increased in order to provide for the costs of the professional services and there was no allocation for such costs within the sale price. The FTT noted that although there was no requirement for such increased price or allocation in order for costs to be components of the price of the HLTB shares, the presence of such an increase or allocation would support the cost of the professional services being cost components of the initial transaction. Instead, the professional services were paid for out of the proceeds of sale, thus reducing the amount available for the taxable transactions and so being a cost of those taxable transactions. Further, the objective purpose of incurring the costs of the professional services was in order to raise funds to pay for the downstream transactions.

27.         Essentially, HLT’s argument was that the fact that HLT and HLTB were in the same VAT group meant that the supply of HLT’s management services to HLTB should be disregarded with the effect that there was no economic activity. Therefore, the sale of shares was outside the scope of VAT rather than being an exempt supply.

29.         Even if the FTT had allowed HLT to argue the VAT group argument, the FTT at [53] indicated that it would have dismissed it. The effect of the VAT grouping was to disregard supplies between members for the purposes of the VAT consequences that would otherwise arise out of those supplies. The FTT concluded at [56] that the separate businesses within the VAT group retained their individual entity. An economic activity was therefore still taking place as a matter of fact, albeit that the economic activity was treated for VAT purposes as if it was the economic activity of the representative member.

30.         At [57] the FTT considered that HLT’s argument (viz that the supplies were to be disregarded and so the economic activity was to be disregarded) overlooked the fact that the group members are still to be treated as having separate existence with transactions taking place. Because the transactions which constituted economic activity, that economic activity could not be ignored.

31.         On the basis of the first point raised, however, HLT’s appeal was allowed by the FTT.

Grounds of appeal

32.         Permission to appeal has been granted on the following grounds.

33.         The FTT erred in law and applied the wrong test for determining whether there was a direct and immediate link between the Services and the sale of the Shares.

34.         The Decision was contrary to binding authority.

35.         In particular, the FTT erred by:

(1)          Disregarding the use of the professional services entirely when determining whether they were a cost component of the supply of HLTB shares (Stage 1) or in HLT’s downstream taxable transactions.

(2)          Failing to draw a proper distinction between Stages 1 and 2, or to consider them in the proper order. In doing so, the FTT erred in law by:

(a)          predicating its analysis on the subjective intention of HLT and HLTB, as opposed to objective evidence;

(b)         mis-interpreting the SPA: The SPA, properly construed, did not disclose a purpose of funding taxable supplies only. Not only did the FTT reach a factual conclusion not open to it in relation to the objective purpose of the sale of Shares, but it reached that conclusion in support of a finding that there is no direct and immediate link between the professional services and the sale of the HLT shares (Stage 1), when it is irrelevant to Stage 1 and only relevant if Stage 2 is reached.

(3)          The effect of the supply of the HLT shares being used to fund repayment of loans shows that the cost of the professional services was not “solely attributable to downstream economic activities” and not “consequently are among only the cost components activities”.

(4)          Failing to recognise that Frank A Smart was a case concerning Stage 2.

(5)          Reaching a decision that was incompatible with the decision of the CJEU in BLP Group Plc v Customs & Excise Commissioners [1996] 1 WLR 174 (“BLP”)

Legislation

36.         Article 2(1)(c) of the Principal VAT Directive (“PVD”) provides for, amongst other things, the supply of services for consideration within the territory of a Member State by a taxable person acting as such to be subject to VAT. The definition of a “taxable person” appears in Article 9:

“1.     ‘Taxable person’ shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.”

37.         Article 168 provides for the right of a taxable person to deduct input tax insofar as goods and services are “used for the purposes of the taxed transactions of the taxable person”.

38.         These provisions were implemented in domestic legislation by section 24 of the Value Added Tax Act 1994 (“VATA”), the relevant sub-sections of which are as follows:

“(1)   Subject to the following provisions of this section, ‘input tax’, in relation to a taxable person, means the following tax, that is to say –

(a)     VAT on the supply to him of any goods or services; and

being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.

(2)     Subject to the following provisions of this section, ‘output tax’, in relation to a taxable person, means VAT on supplies which he makes.

39.           Article 135(1)(f) of the Principal VAT Directive provides that transactions in shares are exempt from VAT. This was implemented in domestic law by paragraph 1 of Group 5 to Schedule 9 of VATA as follows:

“6.     The issue, transfer or receipt of, or any dealing with, any security or secondary security being –

(a)     Shares …”

The relevant authorities

Decisions of the CJEU

40.         HMRC relied heavily upon the CJEU’s decision in BLP. In that case, the taxpayer had sold shares in a company to raise funds for the purpose of paying off debts incurred while making taxable transactions. The taxpayer then sought to recover the input tax associated with the sale of shares (charged by its bankers, solicitors and accountants) on the grounds that the VAT was linked to its taxable transactions. The taxpayer was carrying on an economic activity of supplying management services to its subsidiaries. The CJEU held that where a taxable person supplied services to another taxable person who used them for an exempt transaction, the latter person was not entitled to deduct the input of VAT paid, even if the ultimate purpose of the transaction was the carrying out of a taxable transaction.

41.         In Kretztechnik an Austrian company listed its shares on the Frankfurt stock exchange and incurred certain listing and other expenses on which VAT was charged. The company sought to recover this input tax. The CJEU reiterated its previous jurisprudence to the effect that the acquisition, holding and selling of shares do not amount to economic activity, before proceeding to hold that the same analysis also applied to the issue of shares. The issue of shares was, therefore, “outside the scope” of VAT. The Court held that because the share issue had been undertaken ‘in order to increase its capital for the benefit of its economic activity in general’, there was ‘a direct and immediate link with the whole economic activity of the taxable person’. The cost of the supplies received by the company were to be regarded as part of its overheads and thus as component parts of the price of its products. The input tax was therefore deductible provided that the whole of the company’s economic activity comprised taxable transactions.

42.         In Sveda (Case C-126/14), Iberdrola (Case C-132/16) and Hartstein-Industrie (Case C-528/19), the Court reiterated that if a non-economic activity was undertaken for the purposes of an economic activity, this created the link that was necessary to make any input VAT, incurred in relation to the non-economic activity, deductible.

43.         In the next decision of the CJEU, SKF, on which HLT particularly relied, the parent company of an industrial group, SKF, played an active role in the management of its subsidiaries and, thus, carried on an economic activity. It followed, therefore, that any sale of the shares in its subsidiaries would be an exempt transaction. As part of a proposed group restructuring, SKF intended to dispose of two companies (a wholly owned subsidiary and a controlled company which was in the past wholly owned by it), to which it had provided services subject to VAT. The proceeds of sale were to be used to finance other (taxable) activities of the group. The CJEU concluded that the principle of fiscal neutrality required that SKF had the right to deduct input tax incurred during exempt sales of shares. The Court said:

“33.By the disposal of all of its shares in the subsidiary and in the controlled company,  SKF brought to an end its holdings in those companies. That disposal, carried out in order to enable the parent company to restructure a group of companies, can be regarded as a transaction that consists in obtaining income on a continuing basis from activities which go beyond the compass of the simple sale of shares (see, to that effect,  Kretztechnik AG v Finanzamt Linz  (Case C-465/03)  [2005] STC 1118 ,  [2005] 1 WLR 3755 , para 20 and the case law there cited). That transaction has a direct link with the organisation of the activity carried out by the group and constitutes accordingly the direct, permanent and necessary extension of the taxable activity of the taxable person within the terms of the case law cited in para 31 of this judgment. Such a transaction consequently comes within the scope of VAT.”

44.         The Court continued:

65. Admittedly, the output transactions in shares in the cases which led to the above-mentioned judgments, unlike those in the main proceedings in the present case, were outside the scope of VAT. However, as is clear from the case law cited in paras 28 and 30 of this judgment, the main factor distinguishing the legal classification of those transactions from that of transactions which come within the scope of VAT but are exempt from it is whether the company which is liable to the tax is or is not involved in the management of the companies in which a shareholding has been taken.

66. However, if the right to deduct input VAT paid on consultancy costs relating to a disposal of shares which is exempted because of involvement in the management of the company whose shares are sold was not allowed, and if the right to deduct input VAT in respect of such costs relating to a disposal which is outside the scope of VAT was allowed on the ground that those costs constitute general costs of the taxable person, that would amount to treating objectively similar transactions differently for tax purposes, and would be an infringement of the principle of fiscal neutrality.

67. In that regard, the court has ruled that the principle of fiscal neutrality, which is a fundamental principle of the common system of VAT, precludes treating similar supplies of services, which are thus in competition with each other, differently for VAT purposes (see, inter alia,  Kingscrest Associates Ltd v Customs and Excise Comrs  (Case C-498/03)  [2005] STC 1547 , [2005] ECR I-4427 , para 41;  Turn-und Sportunion Waldburg v Finanzlandesdirektion für Oberösterreich (Case C-246/04)  [2006] STC 1506 , [2006] ECR I-589 , para 33; and  R (on the application of Teleos plc) v Revenue and Customs Comrs  (Case C-409/04)  [2008] STC 706 ,  [2008] QB 600 , para 59) and, further, precludes economic operators who carry out the same activities from being treated differently as far as the levying of VAT is concerned (see, inter alia,  Gregg v Customs and Excise Comrs  (Case C-216/97)  [1999] STC 934 , [1999] ECR I-4947 , para 20, and  Revenue and Customs Comrs v Isle of Wight Council  (Case C-288/07)  [2008] STC 2964 , [2008] ECR I-7203 , para 42).

68. It follows that, if the consultancy costs relating to disposals of shareholdings are considered to form part of the taxable person's general costs in cases where the disposal itself is outside the scope of VAT, the same tax treatment must be allowed if the disposal is classified as an exempted transaction.

69. That interpretation is borne out by the purpose of the common system introduced by the Sixth Directive, which is, in particular, to secure equal treatment for taxable persons (see, inter alia,  Muys' en de Winter's Bouw-en Aannemingsbedrijf BV v Staatssecretaris van Financiën (Case C-281/91) [1997] STC [1993] ECR I-5405 , para 14). That principle would be disregarded if the costs incurred by a parent company managing a group of companies in connection with a sale of shares which is part of its economic activity were to be taxable, while a holding company which carries out the same transaction outside the scope of VAT would be entitled to deduct VAT paid on the same costs by reason of the fact that those costs form part of the general costs of its overall economic activity.”

45.         The next relevant CJEU authority is its decision in 'Sveda' UAB v Valstybine mokesčių inspekcija prie Lietuvos Respublikos finansų ministerijos (Case C-126/14)  [2016] STC 447 (“Sveda”). The case concerned the recoverability of input tax on the supply of goods purchased in connection with the construction of a 'Baltic mythology recreational/discovery path'. The project was subsidised by the government of Lithuania on the basis that there would be free public access to it but Sveda intended to carry out some taxable economic activities at the discovery path in the form of the sale of food or souvenirs. The issue was whether the goods purchased for the construction of the path had a direct and immediate link with the economic activities or were cost components of the construction of the discovery path which was to be made available to the public free of charge.

46.         The Court looked for an objective link between the expenditure and the taxpayer's subsequent economic activity whilst making no distinction for these purposes between exempt and non-taxable supplies:

'22. In the present case, the referring court has described the expenses relating to the capital goods at issue in the main proceedings as being ultimately intended for carrying out the economic activities planned by Sveda. According to that court's findings, supported by objective evidence from the file it submitted, the recreational path concerned may be regarded as a means of attracting visitors with a view to providing them with goods and services, such as souvenirs, food and drinks as well as access to attractions and paid-for bathing.

23. Therefore, it would appear from those findings that Sveda acquired or produced the capital goods concerned with the intention, confirmed by objective evidence, of carrying out an economic activity and did, consequently, act as a taxable person within the meaning of art 9(1) of the VAT Directive.

29. It is apparent from the case law of the court that, in the context of the direct-link test that is to be applied by the tax authorities and national courts, they should consider all the circumstances surrounding the transactions concerned and take account only of the transactions which are objectively linked to the taxable person's taxable activity. The existence of such a link must thus be assessed in the light of the objective content of the transaction in question (see, to that effect, judgment in  Finanzamt Köln-Nord v Becker (Case C-104/12) (21 February 2013, unreported), paras 22, 23 and 33 and the case law cited).

30. The findings of the referring court establish that, in the case in the main proceedings, the expenditure incurred by Sveda as part of the construction work on the recreational path should come partly within the price of the goods or services provided in the context of its planned economic activity.

31. The referring court nevertheless harbours doubts as to whether there is a direct and immediate link between the input transactions and Sveda's planned economic activity as a whole, owing to the fact that the capital goods concerned are directly intended for use by the public free of charge.

33. First, in no way does it follow from the order for reference that the making available of the recreational path to the public is covered by any exemption under the VAT Directive. Second, given that the expenditure incurred by Sveda in creating that path can be linked, as is apparent from para 23 of this judgment, to the economic activity planned by the taxable person, that expenditure does not relate to activities that are outside the scope of VAT.

34. Therefore, immediate use of capital goods free of charge does not, in circumstances such as those in the main proceedings, affect the existence of the direct and immediate link between input and output transactions or with the taxable person's economic activities as a whole and, consequently, that use has no effect on whether a right to deduct VAT exists.

35. Thus, there does appear to be a direct and immediate link between the expenditure incurred by Sveda and its planned economic activity as a whole, which is, however, a matter for the referring court to determine.'

Decisions of the UK courts

47.         These decisions of the CJEU have received recent consideration from the UK courts.

48.         In Associated Newspapers Ltd v HMRC [2017] STC 843 (“Associated Newspapers”) the Court of Appeal considered whether the issue of vouchers gave rise to a right to deduct input tax in circumstances where the taxpayer purchased vouchers from retailers and intermediaries which were then gratuitously distributed by the taxpayer to its customers. In dismissing the taxpayer’s appeal, Patten LJ (with whom Black and Jackson LJJ agreed) reviewed the CJEU authorities, including SKF and Sveda, and said:

“ [47] It seems to me that the CJEU has clearly moved away in these recent decisions from any disregard of the ultimate economic purpose of the relevant expenditure in considering whether it should be treated as linked to the taxpayer's wider economic activities. This is not a question of subjective intent but requires an objective analysis in terms of the taxpayer's identifiable economic activities of why the input supplies were acquired. Although there must, I think, be some evidence that the cost of the input supplies was passed on as part of the cost of the supplies which the taxable person subsequently makes, the absorption of those costs as part of the expenditure of running the business is not to be ignored merely because they also facilitated the making of supplies which in themselves were either exempt or outside the scope of the PVD.”

49.         In Frank A Smart & Son Ltd  [2019] UKSC 39 , the Supreme Court considered the taxpayer’s acquisitions of units under the single farm payment (SFP) scheme. HMRC had denied an input deduction for the VAT incurred on the acquisition of SFP units on the basis that this was a non-economic activity which merely enabled the taxpayer to claim subsidies. However, the taxpayer argued that the SFP units related to its holding of land which, in turn, improved its overall (taxable) farming business; in other words, the taxpayer’s inputs had a direct and immediate link to its overall taxable activity. The Supreme Court dismissed HMRC’s appeal, upholding the decision of the Court of Session. Lord Hodge delivered the judgment of the Court, with the remaining justices concurring.

50.         Lord Hodge referred to SKF and observed at [41] that “the CJEU has called into question its ruling in  BLP in the light of its developing jurisprudence attributing input expenditure on the raising of capital to the general overheads of an undertaking”. Lord Hodge then summarised the CJEU’s case law at [65]:

“(iii)  Summary of the case law

[65]   I derive the following propositions which are relevant to this appeal from the case law:

(iv)    Where the taxable person acquires professional services for an initial fund-raising transaction which is outside the scope of VAT, that use of the services does not prevent it from deducting the VAT payable on those services as input tax and retaining that deduction if its purpose in fund-raising, objectively ascertained, was to fund its economic activity and it later uses the funds raised to develop its business of providing taxable supplies. See, for example, Abbey National, paras 34—36; Kretztechnik, paras 36—38; Securenta, paras 27—29 and SKF, para 64. The same may apply if an analogous transaction involving the sale of shares is classified as an exempt transaction: SKF, para 68.

(vi)  The right to deduct VAT as input tax arises immediately when the deductible tax becomes chargeable: article 167 of the PVD, Securenta, paras 24 and 30 and SKF, para55. As a result, there may be a time lapse between the deduction of the input tax and the use of the acquired goods or services in an output transaction, as occurred in Sveda. Further, if the taxable person acquired the goods and services for its economic activity but, as a result of circumstances beyond its control, it is unable to use them in the context of taxable transactions, the taxable person retains its entitlement to deduct: Midland Bank, paras 22 and 23.

(vii)   The purpose of the taxable person in carrying out the fund-raising is a question of fact which the court determines by having regard to objective evidence. The CJEU states that the existence of a link between the fund-raising transaction and the person’s taxable activity is to be assessed in the light of the objective content of the transaction: Sveda, para 29; Iberdrola  [2017] BVC 39 , para 31. The ultimate question is whether the taxable person is acting as such for the purposes of an economic activity. This is a question of fact which must be assessed in the light of all the circumstances of the case, including the nature of the asset concerned and the period between its acquisition and its use for the purposes of the taxable person’s economic activity: Eon Aset Menidjmunt OOD v Direktor na Direktsia “Obzhalvane i upravlenie na izpalnenieto” - Varna pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite (Case C-118/11) [2012] STC 982 , para 58; Klub OOD v Direktor na Direktsia “Obzhalvane i upravlenie na izpalnenieto” - Varna pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite (Case C-153/11) [2012 ]STC 1129, paras 40—41 and a, para 21.”(emphasis added)

Submissions and discussion

51.         Ms McArdle, appearing for HMRC, accepted that HMRC’s two Grounds of Appeal were strongly interrelated and were best addressed together.

52.         Ms McArdle submitted that the facts of the present appeal were on all fours with those in BLP. She submitted that the direct and immediate link test was satisfied where the inputs were cost components of output transactions and “used for the purposes of transactions” (Article 168 PVD). There was a right to deduct input tax in one of two situations: either there was a direct and immediate link through the use of inputs in a specific taxable transaction or, instead, there was a direct and immediate link to the use of inputs in the general taxable supplies made by the business. There could not be a direct and immediate link of an input in its entirety both to specific transactions and to general activities.

53.         There was, on Ms McArdle’s case, a two-stage approach:

(1)          Stage 1 - the Tribunal was required to ask whether there was an output transaction or transactions (i.e. a taxable or exempt supply falling within the scope of VAT) to which the inputs were directly and immediately linked; and

(2)          Stage 2 - only if there was no direct and immediate link to an output transaction in the scope of VAT was it necessary to consider whether there was a direct and immediate link to general economic activity.

54.         Ms McArdle derived this two-stage approach from her interpretation of the following passages in SKF:

“60 It follows that whether there is a right to deduct is determined by the nature of the output transactions to which the input transactions are assigned. Accordingly, there is a right to deduct when the input transaction subject to VAT has a direct and immediate link with one or more output transactions giving rise to the right to deduct. If that is not the case, it is necessary to examine whether the costs incurred to acquire the input goods or services are part of the general costs linked to the taxable person’s overall economic activity. In either case, whether there is a direct and immediate link will depend on whether the cost of the input services is incorporated either in the cost of particular output transactions or in the cost of goods or services supplied by the taxable person as part of his economic activities.” (Emphasis added)

55.         The words “If that is not the case” signified the need, according to Ms McArdle, to perform the two-stage test. First, it was necessary to ask if there was a use of the inputs in a specific transaction and only if that test was not satisfied was it possible to go on to address the second question of the use of the inputs in the overall economic activity. Ms McArdle noted that there was a finding of fact at [44] of the Decision that the professional services were used in the exempt share sale.

56.         It was noteworthy, in Ms McArdle’s submission, that the CJEU at [61]-[62] had observed that the national court had found that the inputs were “directly attributable” to the sale of shares, but also “part of the general costs”. The CJEU, Ms McArdle argued, emphasised that there could be only one direct and immediate link to the whole input when the alternatives are a specific transaction, on the one hand, and the general business activity on the other. The Court said:

“61 In the present case, the referring court describes the costs linked to the services acquired by  SKF, first, as ‘directly attributable’ to the disposal of shares and, second, as forming part of the general costs associated with  SKF’s overall economic activities.

62 In that regard, it must be held that it is not possible from the case-file submitted to the Court to determine whether those costs have a direct and immediate link, within the meaning of the case-law cited in paragraphs 57 and 58 of this judgment, with the envisaged share disposals or with  SKF’s overall economic activity, given that, according to the referring court, the purpose of those transactions was to secure funds to finance other activities of the group. In order to establish whether there is such a direct and immediate link, it is necessary to ascertain whether the costs incurred are likely to be incorporated in the prices of the shares which  SKF intends to sell or whether they are only among the cost components of  SKF’s products.”

57.         The Court’s comments at [66]-[68] in respect of fiscal neutrality, Ms McArdle contended, had to be understood in their proper context. Fiscally neutral treatment only came into play when Stage 2 was engaged i.e. where there was no direct and immediate link between inputs and a specific transaction but, rather, where it had been established that the inputs were part of a taxable person’s general costs.

58.         Ms McArdle said that the Supreme Court in Frank A Smart had expressly cited the two-stage approach at [49]. In that case, there could never be satisfaction of the Stage 1 test because of the absence of an exempt or taxable transaction with a direct and immediate link to the inputs. It followed, therefore, that the decision in that case was authority only in relation to the Stage 2 approach and it had to be read as applying the SKF reasoning at Stage 2.

59.         We reject these submissions.

60.         It seems clear to us that the reasoning and jurisprudence of the CJEU has evolved considerably since BLP. First, in Kretztechnik the CJEU concluded that it was possible to recover input tax as a general overhead in circumstances where that input tax had been incurred in relation to a transaction which was outside the scope of VAT. Next, in SKF the CJEU grappled with the issue of fiscal neutrality in circumstances where essentially the same transactions could be either:

(1)          outside the scope of VAT (e.g. where a holding company, which did not provide management services to its subsidiary and therefore did not carry on an economic activity, sold the shares in the subsidiary) or

(2)          exempt from VAT (e.g. where a holding company, which did provide management services to its subsidiary and therefore was carrying on an economic activity, sold the shares in the subsidiary)

but there was potentially a right to deduct input tax in (1) in accordance with Kretztechnik but, according to BLP, there was no right to deduct input tax in (2).

61.         Far from restricting the right of input tax recovery to transactions within (1) above, the CJEU applied the principle of fiscal neutrality to extend the same treatment to what would otherwise be an exempt transaction (which would break the chain between the supply of services and a taxpayer’s general economic activities). It did so by taking account of the ultimate economic purpose of the transaction. As Patten LJ observed in Associated Newspapers at [47]:

“The CJEU has clearly moved away in these recent decisions from any disregard of the ultimate economic purpose of the relevant expenditure in considering whether it should be treated as linked to the taxpayer's wider economic activities.”

62.         Similarly, Lord Hodge commented at [41] in Frank A Smart, that subsequent decisions of the CJEU had called the BLP decision into question in the light of its developing jurisprudence attributing input expenditure on the raising of capital to the general overheads of an undertaking. Although not formally overruled, the BLP decision can no longer be regarded as representing a complete statement of the CJEU’s jurisprudence in this area.

63.         Moreover, we accept the submission made by Mr Firth, appearing for HLT, that the CJEU in SKF was addressing the distinction between a transaction which is exempt and one which is outside the scope of VAT and that this distinction is one which arises, in Ms McArdle’s terms, at Stage 1 and not Stage 2. Stage 2 is not concerned with whether a share sale is exempt or outside the scope. It concerns the taxpayer’s general economic activity rather than the share sale. No matter how we read the decisions in SKF and Sveda (and their interpretation by the Supreme Court in Frank A Smart) we cannot give them the limited application for which Ms McArdle contends.

64.         As Mr Firth observed, the Supreme Court at [42] noted that in SKF the CJEU rejected the “chain breaking” effect (i.e. that an exempt transaction breaks the chain between a supply and the taxable person’s taxable economic activities) as being applicable to a fund-raising transaction. Lord Hodge said:

“[42] In his opinion, Advocate General Mengozzi endorsed the distinction which Advocate General Jacobs made in  Abbey National between the chain-breaking effect of an exempt transaction and the absence of such an effect where the fund-raising transaction is outside the scope of VAT (paras 69 and 79). He opined (para 89(3)) that where the taxable person acquires supplies of services in order to carry out a share disposal which is an exempt transaction, he does not have the right to deduct input VAT on those services, even when the disposal of shares is a transaction which contributes to the restructuring of the taxable person's industrial activities.”

65.         We agree with Mr Firth’s submission that the approach of the Advocates General is, in substance, the approach which HMRC urge us to adopt in this appeal. However, the Supreme Court held that the CJEU had rejected this approach in SKF. At [43] Lord Hodge said:

“[43] The CJEU disagreed with his conclusion in relation to an exempt transaction involving a sale of shares in circumstances which were analogous to the facts of the case and held (para 73) that there was a right to deduct input VAT paid on services acquired for the purposes of a disposal of shares 'if there is a direct and immediate link between the costs associated with the input services and the overall economic activities of the taxable person'. It held that the referring court should take account of all the circumstances surrounding the transactions to determine whether the costs incurred were likely to be incorporated in the price of the shares sold or whether they were among only the cost components of transactions within the scope of the taxable person's economic activities.”

66.         In SKF the CJEU at [62] and [73] instructed the national court to determine this question by reference to whether the taxable inputs were likely to be incorporated in the price of the shares or whether they were among the cost components of the downstream taxable transactions of the taxpayer. In our view, it would be unusual to see such costs being reflected in the price paid for the shares in a standard share sale agreement. This would particularly be the case where the price is ascertained by common share valuation techniques used for private companies, such as a multiple of earnings or net asset value. It would rarely be the case that the price of shares in a standard arm’s length share sale would be determined on a “cost plus” basis (i.e. a margin above cost) or for the costs of the sale to be specified as a component of the price. Although the costs of fees incurred in relation to the disposal may (but not necessarily will) be paid out of the proceeds of sale, in most cases it is unlikely that the price itself will be influenced by the professional fees incurred by the seller.

67.         In our view, the FTT was correct when it applied what Lord Hodge referred to at [46] as the modified approach adopted by the CJEU in SKF as interpreted by the Supreme Court in Frank A Smart. The key passage in the Decision is at [40] (which we have set out, mostly verbatim, at paragraph 21 above).

68.         We consider that this passage correctly states the law. It discloses no error. Furthermore, we also consider that the FTT’s application of these principles to the facts of the present appeal at [41]-[46] to be unimpeachable.

69.         After the hearing, HMRC supplied us with a copy of the Swedish court’s decision in SKF, following the decision of the CJEU, together with an unofficial translation.  We do not, however, find the Swedish court’s decision on the facts of that case to be of assistance here. It does not, in our judgment, impact on the legal principles to be derived from the CJEU decision in SKF or the Supreme Court decision in Frank A Smart.

70.         Our conclusion on Grounds 1 and 2 is sufficient to dispose of this appeal. It is therefore unnecessary to address the VAT group argument raised by HLT.

71.         Accordingly, we dismiss HMRC’s appeal.

Release date: 24 July 2023

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