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VAT recovery on deal costs – selling shares to fund ‘downstream’ taxable activity

BDO investigates the latest ruling

VAT recovery on professional fees relating to raising funds for a business has been a much-debated topic over the years. There are many ways in which a business can raise funds, from raising business loans to selling assets, which could include shares in subsidiaries. There have been numerous cases taken to the VAT Courts on the VAT recovery of costs associated with this topic. A recent case heard at the First Tier Tax Tribunal has addressed the question of whether VAT on the costs of selling shares in a subsidiary to fund future development of the business elsewhere is recoverable.

The facts Hotel La Tour Ltd (HLT) was the parent company operating a subsidiary Hotel La Tour Birmingham Ltd (HLTB). HLT had formed a VAT group with HLTB and acted as the representative member. HLTB owned and operated a luxury hotel in Birmingham under the name “Hotel La Tour”. HLT provided HLTB with management services and owned the right to the name “Hotel La Tour” together with other intellectual property (the domain name for the Hotel La Tour website, the Hotel La Tour logo, and agreements with two online booking agencies).

In 2015, HLT decided to construct and develop a new hotel in Milton Keynes at an estimated cost of £34m. Various options were considered to raise funds but ultimately the preference was to sell the shares in HLTB and to borrow the remainder from a bank (clear from board meeting minutes): the FTT has accepted as fact that the whole of the net proceeds received from the sale of the shares in HLTB were used or are planned to be used towards the Milton Keynes hotel. HLT claimed the VAT on its costs of selling HLTB, but HMRC denied the recovery on the basis that the sale of the shares was an exempt supply, and one cannot look beyond this immediate supply (based on precedent authority of the European Court of Justice in a case BLP from 1995).

The FTT decision The key issue in the case is whether the services and the professional fees on which VAT was paid are directly and immediately linked to HLT’s exempt supply of the shares or instead related to its downstream taxable activities.

The FTT held that more recent caselaw including the 2019 Supreme Court decision of Frank A Smart had indicated a different approach should be applied to fundraising costs, which requires an objective assessment of the intended use of the funds. The means of how those funds are obtained, whether it be a loan or by disposing of shares, should not impact the VAT recovery. However, this is not the case when the costs of the professional services are cost components of the share price (and the VAT then would be irrecoverable).

In this case, the FTT held, looking at objective evidence, that the purpose of the share sale was to fund HLT’s taxable downstream business activities - building, development and management of the Milton Keynes Development and evidence showed that the funds had been used wholly for this purpose. Additionally, the FTT held the costs were not cost components of the price of the shares but were instead business overheads. Therefore, the VAT incurred on fees related to selling the shares was recoverable.

Alternative arguments put forward by HLT to support VAT recovery (around VAT grouping and a potential transfer of a going concern (TOGC)) were dismissed by the FTT.

Next steps It is not yet clear whether HMRC will appeal the case to the Upper Tribunal or issue a Revenue & Customs Brief on the relevant issues but, nevertheless, groups that have sold subsidiaries to raise finance for their wider business in the past four years should now consider whether VAT on costs of the sale have/could be recovered by the group.

Issues to consider include:

  • What were the costs of the sale transaction and was VAT reclaimed?

  • What were the sale proceeds intended to be used for and actually used for?

  • If they were used to fund your general downstream business, VAT may be deductible – but this is much less likely if your wider business involves making exempt supplies (if you make some exempt and some taxable supplies, then apportionment of the recovery may be required).

  • Use of the funds does not need to be immediate – a development project over several years (as in this case) could qualify.

It may be possible to file a claim for input tax that has been incurred in the past four years. Please note that any claim would need to be supported by documentary evidence that the purpose of the share sale was to fund downstream taxable activities.


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