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Suitcase in a bedroom | AccountingWEB | HMRC books a win in Hotel La Tour case
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HMRC books a win in Hotel La Tour case

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After two losses, HMRC has now secured a win via the Court of Appeal in respect of the Hotel La Tour Ltd VAT case.

24th May 2024
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As previously covered, Hotel La Tour Ltd (HLT) incurred expenses in connection with the disposal of shares in a subsidiary, Hotel La Tour Birmingham Ltd (HLTB). HMRC refused to allow HLT to recover the input VAT incurred and the case passed through the first tier tribunal (FTT) and the upper tribunal (UT), both of which found in HLT’s favour.

HLT had used the funds raised by the share sale to partially fund the development of a new hotel. The expenses had purportedly been incurred in order to obtain the best selling price for the shares and maximise the available funds for the development.

The FTT (and UT) had applied a two-stage test and found that while the expenses directly related to the exempt share sale (stage one), the funds had been raised for the larger purpose of a downstream taxable activity (stage two). This meant that the input VAT was recoverable.

Grounds for appeal

HMRC appealed against this decision to the court of appeal on the grounds that the two-stage approach had been incorrectly applied by the FTT and UT.

HLT disagreed and also advanced a further argument that as HLT and HLTB were in a VAT group, intra-group supplies of management services should be ignored, meaning the sale of the shares was outside the scope of VAT.

Two-stage test

HMRC submitted that the tried and tested approach in matters such as this was based on BLP Group plc vs Customs & Excise Commissioners and Skatteverket vs AB SKF, namely to first consider whether the inputs could be directly attributed to a specific supply and if, and only if, this was not possible to consider stage two.

As there was a direct link to the exempt disposal of the shares, there was no need to continue to stage two and consider the downstream supplies.

HLT accepted the facts as presented by HMRC, but argued that in circumstances where the share sale was undertaken to increase capital for the benefit of the business as a whole, the modified approach adopted by the FTT and UT was correct.

Discussion

HLT’s reading of SKF implied that the exempt share sale could be ignored and the inputs treated as general overheads in a fundraising situation. The CoA could not find a clear reference to such a rule, rather it found that input tax connected to a share sale may have a direct link either to the share sale or the business as a whole.

Following on this, the CoA considered that since the BLP case there had been a change in approach, including that inputs incurred in connection with a share sale are no longer necessarily directly attributable to that disposal. Rather they, again, may be directly linked to the economic activity as a whole.

The CoA therefore agreed with HMRC that the UT had failed to apply the direct and immediate link test correctly and should not have disregarded the existence of the exempt share sale. The CoA considered passing the case back to the FTT, but determined it could decide the case itself, finding that the input VAT was directly linked to the exempt share sale and any downstream supplies were irrelevant.

However, this was subject to HLT’s additional argument regarding intra-group supplies.

VAT group

Payments arising merely from the ownership of shares do not generally constitute an economic activity, making them outside the scope of VAT.

However, where a financial holding in a company is accompanied by involvement in the management of that company, the income could be considered to be within the scope of VAT. Management fees were paid by HLTB to HLT, seemingly meeting this condition.

HLT argued that as the management charges were intra VAT group they should be disregarded, meaning the disposal of the shares did not fall within the scope of VAT and forcing the two-stage approach to proceed to stage two. This would then match the inputs to the general taxable supplies of HLT.

The CoA was willing to consider this argument, over HMRC’s objections, but was not persuaded that the intra-group transactions should be ignored for these purposes. HLT had supplied management services to HLTB and was therefore engaged in an economic activity. The fact that these supplies were disregarded for VAT purposes did not mean they did not occur.

The share sale was therefore an (exempt) economic activity able to be directly linked to the inputs as above.

Conclusion

The VAT found to be irrecoverable amounted to £76,822.95; whether this is enough for HLT to attempt to appeal to the Supreme Court remains to be seen.

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