Hotel La Tour Ltd sold shares in its subsidiary to fund a new hotel project and sought to deduct VAT on professional fees incurred for the sale. The Supreme Court held the input VAT was not deductible because the fees were directly and immediately linked to the exempt share sale, not to HLT’s general taxable hotel business.
Background
Hotel La Tour Ltd (‘HLT’) was a holding company that owned all the share capital of Hotel La Tour Birmingham Ltd (‘HLTB’), which operated a luxury hotel in Birmingham. HLT provided HLTB with management services for remuneration. In mid-2015, HLT decided to construct a new hotel in Milton Keynes at a cost of approximately £34.5 million, to be financed by selling HLTB. HLT engaged various professionals – for market research, financial modelling, shortlisting buyers, and tax compliance advice – incurring total fees of £382,900 plus VAT of £76,823. The shares in HLTB were sold in July 2017 and the net proceeds were used to fund the Milton Keynes project. HLT and HLTB were members of the same VAT group under section 43 of the Value Added Tax Act 1994 (‘VATA’) at the time of the share sale.
HLT sought to deduct the input VAT on those professional fees from its output VAT. HMRC disallowed the deduction on the grounds that the relevant output transaction — the sale of the shares — was an exempt supply under article 135 of the Principal VAT Directive (‘PVD’), and that the input VAT was directly and immediately linked to that exempt transaction rather than to HLT’s taxable hotel business.
The Issue(s)
The Supreme Court identified the following principal issues:
- Whether the ‘cost components’ test — examining whether input costs were incorporated into the price of the shares — determined the direct and immediate link between inputs and the share sale.
- Whether the fact that the share sale was exempt from VAT (rather than outside its scope entirely) meant the inputs must be treated as directly and immediately linked to the share sale and hence not deductible.
- Whether the purpose of the share sale being to raise funds for HLT’s overall taxable business modified the ‘direct and immediate link’ test so as to link the inputs with the general business rather than the specific exempt transaction.
- Whether VAT grouping under section 43 VATA meant the management services between HLT and HLTB should be disregarded, thereby rendering the share sale out of scope rather than exempt.
The Court’s Reasoning
The ‘cost components’ test
Lady Rose, delivering the unanimous judgment, held that the First-tier Tribunal and Upper Tribunal had erred in relying on the fact that the price of the shares was set without taking into account the costs of the professional services. Citing Volkswagen Financial Services (UK) Ltd v Revenue and Customs Comrs (Case C-153/17), the Court confirmed that the concept of inputs being ‘cost components’ does not require an examination of the pricing structure of the output supply. Lady Rose endorsed Advocate General Kokott’s reasoning in C&D Foods:
It should be noted, however, that the wording of the Court, according to which the expenditure incurred must be included in the price of the holding or the shares, does not mean that an actual increase in the price is necessary or, for example, that a specific sum would have to be imposed onto the selling price.
Exempt versus out of scope share sales
Lady Rose conducted a detailed analysis of the CJEU case law, including BLP Group plc, Abbey National, Kretztechnik, and SKF. She acknowledged that the CJEU in SKF had accepted the possibility that inputs might have a direct and immediate link with the taxable person’s general business rather than the share sale even where the share sale is exempt, in the interests of fiscal neutrality. However, she rejected the proposition that SKF established that exempt share sales should always be treated identically to out of scope share sales for input deduction purposes:
What SKF decides is that one does not argue backwards from the fact that the share sale is within scope but exempt in order to conclude that the inputs must be directly and immediately linked with the share sale. … One must still argue forwards from an analysis of the connection between the inputs and the share sale to decide whether they are directly and immediately linked to that sale or to the general business.
Lady Rose also emphasised that the principle of fiscal neutrality is a principle of interpretation, not a substantive rule of law that can override express legislative provisions, citing Deutsche Bank:
That principle is not a rule of primary law which can condition the validity of an exemption, but a principle of interpretation, to be applied concurrently with the principle of strict interpretation of exemptions.
The ‘fund-raising’ or ‘purpose’ modification
HLT argued that the objective purpose of the share sale — to raise funds for its taxable hotel business – meant the direct and immediate link was with the overall business. Lady Rose firmly rejected any such modification of the direct and immediate link test for fund-raising transactions. She held that the CJEU’s references to the ‘purpose’ of a transaction are simply a further formulation of the direct and immediate link test, not a departure from the consistent case law that the purpose of a particular exempt transaction cannot affect input deductibility:
I reject the submission that there is any modification of the direct and immediate link test in the case of a share sale.
The Court also rejected HLT’s reliance on the Supreme Court’s earlier decision in Frank A Smart & Son Ltd v Revenue and Customs Comrs. Lady Rose held that Lord Hodge’s references to ‘purpose’ in that case concerned the time lag between incurring inputs and the commencement of economic activity, not a general principle that the purpose of fund-raising determines the direct and immediate link.
VAT grouping
HLT’s alternative argument was that since HLT and HLTB were in the same VAT group, the management services between them should be ‘disregarded’ under section 43(1)(a) VATA. If disregarded, there would be no basis for treating the share sale as within the scope of VAT, and it would instead be out of scope — meaning the inputs could be linked to HLT’s general taxable business.
Lady Rose rejected this argument. She held that the statutory fiction created by VAT grouping does not have the effect of making the share sale out of scope. Although members of the same VAT group, HLT and HLTB retained their individual identities and economic activity was still taking place between them. The test for VAT group eligibility is distinct from the test for whether a parent is involved in the management of a subsidiary so as to make a share sale part of an economic activity. Nothing in the CJEU case law suggested that VAT grouping should disapply the Larentia + Minerva principles:
It certainly would be a significant blow to fiscal neutrality if those principles were disapplied and if the parent and subsidiary happened, at the time of the share sale, to be eligible to be members of the same VAT group according to whether their Member State had decided to implement article 11.
Practical Significance
This decision confirms that where a parent company sells shares in a subsidiary to which it has provided management services for remuneration, professional fees incurred in connection with that exempt share sale will ordinarily be directly and immediately linked to that exempt transaction, and the input VAT will not be deductible. The fact that the proceeds of the share sale are used to fund the parent’s taxable business does not modify the ‘direct and immediate link’ test. Nor does VAT grouping render the share sale out of scope so as to permit input deduction. The decision is significant for holding companies and corporate groups undertaking restructuring funded by share disposals, as it confirms that ‘sticking’ (irrecoverable) input VAT may arise even for fully taxable traders. The Court acknowledged this consequence but held it was a matter of tax policy rather than judicial interpretation.
Verdict: The appeal was dismissed. The Supreme Court upheld the Court of Appeal’s decision that the input VAT of £76,823 incurred by Hotel La Tour Ltd on professional fees for the sale of its shares in HLTB was not deductible, as the fees were directly and immediately linked to the exempt share sale and not to HLT’s general taxable hotel business.
Source: Commissioners for His Majesty’s Revenue and Customs v Hotel La Tour Ltd [2025] UKSC 46
