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Hotel la Tour Milton Keynes | accountingweb | VAT: Hotel la Tour wins at UT

No room for HMRC’s arguments in Hotel la Tour case


HMRC lost at the upper tribunal, which found Hotel la Tour Ltd could recover the VAT it incurred on professional fees associated with selling a subsidiary to a UK buyer.

9th Aug 2023
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As previously reported, Hotel La Tour Limited (HLT) was the holding company for Hotel La Tour Birmingham Limited (HLTB). HLTB operated as an upmarket hotel in Birmingham with HLT providing management services and key personnel. The key facts of the case, as originally heard by the first tier tribunal (FTT), remain undisputed.

In 2015 HLT decided to construct a new hotel in Milton Keynes (above). In order to finance this development, it was decided that HLTB would be disposed of, and the proceeds used to partly fund the construction costs of the new Milton Keynes hotel. The project was expected to cost £34.5m and HLT received roughly £16m in the form of cash and agreements by the purchaser to discharge loans on HLT’s behalf. The remaining £18.5m was funded by a bank loan, on the proviso that the £16m be used in priority to the loaned funds.

In order to obtain the best price for the shares, HLT incurred professional fees relating to marketing, strategic advice and tax support. The VAT on these costs amounted to £78,822.95 and this was included on HLT’s September 2017 VAT return, leading to a repayment due of £68,883.

Repayment claim

HMRC disputed this repayment claim and, after various exchanges between HLT and HMRC, the matter was passed to the FTT.

Three points were raised.

  1. Were the fees in question directly and immediately linked to HLT’s exempt share sale or its taxable activities?
  2. As HLT and HLTB were in a VAT group, could the share sale be outside the scope of VAT?
  3. Was the share sale a transfer of going concern (ToGC)?

Point 2 was not considered by the FTT as it was raised out of time, and the share sale was found not to be a ToGC. 

With regard to point 1, HLT argued that the fees in question were incurred in order to provide more funds for it to carry out its main taxable activity. HMRC countered by saying this was not the case and that the share proceeds were in fact used for non-taxable activities, such as the repayment of group loans.

Ultimately, the FTT agreed with HLT that, although a direct link to an exempt supply existed, as this was a fundraising situation, the downstream taxable activity gave a direct and immediate link between the fees and the supply. The appeal was allowed.

Grounds for appeal

HMRC then sought and obtained permission to appeal to the upper tribunal (UT) on the following grounds:

  1. The FTT had erred in law and applied the wrong test regarding the existence of a direct and immediate link between the fees and the share sale.
  2. The decision was contrary to binding authority.

HMRC agreed that both its grounds of appeal were interlaced and so could be addressed together. 

The cornerstone of HMRC’s argument was the Court of Justice of the European Union (CJEU) decision in BLP Group plc vs Customs & Excise Commissioners. In BLP, the taxpayer had sold shares to pay off debts created from taxable transactions and recovered VAT on expenses relating to the sale.

The CJEU had found that where a taxable person incurred costs in respect of an exempt transaction, such VAT was not deductible even if the ultimate purpose of the transaction was to carry out a taxable transaction.

Older and wiser

HMRC argued that a two-step approach was needed, based on the Skatteverket vs AB SKF case. Firstly, could the inputs be directly and immediately linked to an output? Secondly, and only if step 1 was not met, was there a direct and immediate link to a general economic activity?

Therefore, where a direct link to an exempt supply existed, as in this case, HMRC argued that a link to a general economic activity was irrelevant.

The UT rejected HMRC’s arguments on the basis that BLP no longer reflected the CJEU’s stance on such matters, citing several CJEU cases where the ultimate economic purpose of the relevant expenditure had been considered. Further, the UT felt that HMRC had incorrectly interpreted the two-step test in SKF as, no matter how it read the decision, it could not agree with HMRC’s position.

No fault

The UT therefore found no fault with the FTT’s approach or findings and found in favour of HLT, dismissing HMRC’s appeal.

The potential treatment of the share sale as being outside the scope of VAT due to the grouped nature of HLT and HLTB had been raised again, however the UT were satisfied they had already disposed of the appeal and so the VAT group argument did not need to be considered.

Replies (2)

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By Jason Croke
10th Aug 2023 11:06

It does somewhat run a coach through a fundamental aspect of VAT, that being input tax being directly linked to the making of taxable supplies, but also it does make sense.

I'm sure HMRC will seek a further appeal on this, else it leaves a door open for the scope of input tax to become more wider or whenever fund raising is actioned to finance a future taxable activity and I'm specifically thinking about charities where HMRC's stance has been that fund raising activities are not directly linked to the making of taxable supplies for example and have denied input tax recovery.

Also, corporates who have performed similar transactions to HLT (selling assets to finance elsewhere), could potentially put a retrospective claim in - via the usual 4 year disclosure window - where the business may have not reclaimed input tax on the basis it would not be allowed....well maybe now it can be.

Thanks (2)
By mikejlee
12th Aug 2023 13:11

I would have thought that the sale was simply for the benefit of the taxable trade/business of HTL and the input vat would therefore be deductible. The funding issue is simply incidental to the main purpose of the transactions.

Thanks (0)