Hotel La Tour Supreme Court Ruling: Final Confirmation On VAT Recovery For Share Sale Adviser Fees – Sales Taxes: VAT, GST

In a unanimous judgment, the UK Supreme Court has given final
confirmation that VAT incurred on adviser fees connected with an
exempt share sale is not recoverable, endorsing the Court of
Appeal’s strict application of the “direct and immediate
link” test. The decision brings finality to an area that had
generated uncertainty following earlier tribunal decisions.

The case concerned Hotel La Tour Ltd (HLT), which sold the
shares in its subsidiary, Hotel La Tour Birmingham Ltd (HLTB), an
entity owning a hotel. The sale was undertaken to raise funds for
the development of a new hotel business that would carry on VATable
activities. In connection with the share sale, HLT incurred VAT on
a range of professional services, including legal, financial, tax
and commercial advice aimed at identifying buyers and maximising
sale proceeds.

HLT sought to recover the input VAT on those adviser fees,
arguing that the costs were sufficiently linked to its wider
VATable activities. HMRC disagreed, contending that the costs were
directly attributable to the VAT exempt sale of shares and that the
VAT was therefore irrecoverable.

A high-level summary of the Supreme Court’s decision is set
out below. For further detail on the background and earlier
decisions, please see our prior UK Tax Round Up.

The Supreme Court confirmed that the correct approach to
determining input VAT recovery is a strict two-stage test. The
first question is whether the costs have a direct and immediate
link with a specific transaction constituting an economic activity.
Only if no such link can be identified should consideration be
given to whether the costs instead relate to the taxpayer’s
general economic activity. In doing so, the Court expressly
rejected the “modified approach” previously adopted by
the First-tier Tribunal and Upper Tribunal, under which VAT
recovery had been permitted by reference to the intended use of the
share sale proceeds.

Applying that analysis, the Supreme Court agreed with the Court
of Appeal that the adviser fees incurred by HLT had a direct and
immediate link with the exempt sale of the HLTB shares. As a
result, the VAT incurred on those fees was not recoverable and it
was unnecessary to consider any wider connection with HLT’s
taxable activities. The Court also rejected arguments based on VAT
grouping and the Kretztechnik case, confirming that
disregarded intra-group supplies do not alter the character of a
share sale or the attribution of costs incurred in carrying it out.
The judgment therefore closes the door on arguments that adviser
costs incurred on an exempt share sale can be treated as general
overheads simply because the sale is undertaken to fund taxable
activities.

The decision confirms that VAT recovery on adviser fees incurred
in connection with a share sale will be determined primarily by the
nature of the transaction giving rise to the costs, rather than the
commercial purpose of the transaction or the use of the sale
proceeds. While the scope for VAT recovery in this context remains
narrow, careful scoping of adviser mandates may still be important
to ensure that costs genuinely attributable to taxable activities
are not inadvertently treated as part of an exempt share sale. For
businesses undertaking share disposals, the judgment underscores
the importance of early VAT analysis, as irrecoverable VAT on
adviser fees should be factored into transaction planning and
pricing from the outset.

Hotel La Tour Supreme Court Ruling: Final
Confirmation on VAT Recovery for Share Sale Adviser Fees

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