A recent Upper VAT Tribunal may impact businesses considering selling shares, or those that have previously sold shares, to raise funds for their business activities.
The Tribunal has recently agreed with an earlier VAT Tribunal decision that VAT can be recovered on professional services fees associated with a sale of shares (which is VAT exempt) if the ultimate purpose of the share sale is to raise funds for another taxable activity.
Hotel La Tour Ltd (HLT) owned a 100% subsidiary Hotel La Tour Birmingham (HLTB), which owned and operated a luxury hotel. HLT and HLTB were part of a VAT group with HLT as representative member.
HLT planned to build a new hotel and a decision was taken that the Birmingham hotel was not part of the group’s future plans. The shares were then sold in the Birmingham company and the proceeds were used to build a new hotel.
HLT incurred approximately £80k in VAT on professional fees and reclaimed this amount. This was initially rejected by HMRC on the basis that this was directly related to a sale of shares (which is VAT exempt).
The initial Tribunal confirmed that VAT can be recovered where there is a direct and immediate link between goods and services received, and the goods and services provided by the business as part of its trade. The input VAT is part of costs constituting general overheads when the transaction is part of the ultimate economic purpose of the business.
In this recent decision, the Upper Court confirmed that the ultimate purpose of the transactions was to raise funds, which would be used to make future taxable supplies (hotel services) and that the VAT on the professional fees was recoverable.
It is likely that HMRC will appeal the decision to the Supreme Court as this represents a major shift in the treatment of professional fees where there is a sale of shares. Any business that has been in this position and can demonstrate that a sale of shares was a fundraising activity to finance a taxable activity would be advised to revisit their VAT recovery position and submit a protective claim if VAT was previously not recovered or denied by HMRC. Also, any future share sales or business restructuring should consider the positive impact this case could have for VAT recovery on share sale costs.
If you would like further information or would like to discuss the potential implications for your business, get in touch with Iain Masterton, Director of VAT at CT: Advisors at iain.masterton@ct.me.
Author: Iain Masterton, CT: VAT
