VAT & Deal Fees

The much-anticipated Supreme Court ruling in HMRC v Hotel La Tour Ltd has landed – but for many, this will be a disappointing verdict on VAT recovery for deal costs.

Hotel La Tour sold shares in a subsidiary (a VAT-exempt supply) to raise money for a new, fully taxable hotel project. They incurred significant professional fees for the sale and sought to reclaim the £600,000 of VAT on those costs. Their argument was simple: the ultimate purpose of the sale was to fund their taxable business, so you should be able to look through the transactions to follow this motivation, and the costs should be treated as a general business overhead, making the VAT recoverable.

The issue was so contentious that the case became a legal tug of war, with the decision flipping several times. The Supreme Court's decisive ruling, in what will be a final and unanimous judgment was to side with HMRC. The VAT on the professional fees is not recoverable.

The Court clarified the "direct and immediate link" test, establishing a clear two-stage approach:

● First, identify the immediate supply. Do the costs have a direct and immediate link to a specific outbound supply? Here, the fees for legal and financial advice were used to execute the share sale.

● Then, determine recoverability. Because the share sale is a VAT-exempt supply, the input VAT on costs directly linked to it cannot be recovered.

The Court held that the ultimate purpose of the fundraising is secondary. The objective link between the costs and the exempt share sale breaks the chain to the downstream taxable activity. The fees were a cost component of the share sale, not the new hotel.

This judgment significantly narrows the ability to recover VAT on costs related to share sales used for fundraising. If you incur costs to make an exempt supply of existing shares, the VAT is likely irrecoverable, regardless of what you plan to do with the money.

Please note that the devil is always in the detail, so if you are involved in a deal then please always take advice. There are still opportunities for both the buy side, and also for those raising new capital through the issuance of new shares.