VAT recovery on the costs of a sale of a subsidiary

The Court of Appeal has recently issued it's decision in the VAT case of Hotel La Tour concerning VAT recovery on the costs of selling shares in a subsidiary, to raise funds to build a new hotel. The court decided that the professional fees incurred by the hotel chain had a “direct and immediate” link to the initial sale of the shares, a VAT exempt supply on which VAT is not recoverable. 

Hotel La Tour Ltd is a holding company which provides management services to other group companies that operate a chain of hotels. Each hotel was owned and run by a subsidiary company. In 2015 Hotel La Tour decided to build a new hotel in Milton Keynes, partly financed by the sale of one of its existing hotels in Birmingham. The shares in the subsidiary that owned the Birmingham hotel were sold in 2017.

Hotel La Tour recovered VAT input tax of £76,000 on professional services (marketing, legal, tax) related to the sale of the shares, which HMRC disallowed.  Hotel La Tour appealed and won at the First Tier and Upper Tribunals, but these decisions were recently overturned by the Court of Appeal.

The VAT question at the heart of the issue is whether these professional costs had a direct and immediate link to the supplies to be made at the new hotel (an onward taxable sale) or whether they were linked to the sale of the shares (a VAT exempt sale).

The VAT impact of this decision is not limited to the hotel industry but could apply to any business which incurs VAT on the costs of selling a subsidiary to raise funds for another business activity. 

Recovery of VAT incurred on the costs of mergers, acquisitions and raising finance is complicated. We recommend that a business considers the VAT impact as soon as possible at the planning stage, before the transaction is made.   

To discuss this in further detail, please get in touch with one of our Indirect Tax Services team members.