A recent case has opened the door to potentially reclaiming VAT on professional services incurred on share sales. This is significant for businesses that couldn't previously recover VAT on professional fees.
This article explores the implications of this case. We also talk about how this could allow you to make a claim against HMRC for under recovered VAT.
Hotel La Tour Ltd was a holding company of a group which operated luxury hotels. Each hotel was operated by a separate subsidiary.
In 2015 they planned to build a new hotel in Milton Keynes, using the proceeds from the sale of an existing Birmingham hotel. Various professional services, like marketing agents costs, solicitors fees, and tax adviser fees were incurred in respect of which the VAT payable was £76,000.
HMRC initially denied VAT recovery, arguing that these services were linked to an exempt supply of shares, which could not allow for VAT recovery. Hotel La Tour disagreed, arguing that the fees were essential for raising funds for their new taxable business venture, the Milton Keynes hotel.
The First-tier Tax Tribunal ruled in favour of Hotel La Tour, allowing them the VAT recovery.
The decision hinged on the direct and immediate link between the incurred costs and the company's taxable business of developing and managing the new Milton Keynes hotel. The primary reason for incurring costs being to secure funds for this specific purpose.
HMRC appealed to the Upper Tier Tribunal, maintaining that VAT recovery should only apply to the immediate supply linked to the costs and not in relation to fundraising. According to HMRC as the sale of shares is VAT-exempt, it was obvious that on advisory fees linked to the sale recoverable.
The Upper Tier Tribunal disagreed with HMRC. They considered that shares typically have a market value. In Hotel La Tour's case, they couldn't increase the share price to cover their professional advisory costs. Consequently, these costs reduced the net proceeds from the share sale, leaving less capital for subsequent activities. This led to the professional fees being seen as "cost components" of the subsequent activities rather than the sale of shares.
This decision extends well beyond the hotel industry. It could potentially allow any business to reclaim VAT on professional services associated with selling a subsidiary. This in turn allowing them to finance another taxable business endeavor. However, it's important to note that HMRC has not yet commented on this case. They might choose to appeal further, leading to prolonged and complex legal battles.
Businesses affected by this ruling should be aware that potential claims are time-limited to four years. They should consider submitting a protective claim to HMRC to ensure their claims remain valid and don't expire.
This situation could significantly impact businesses looking to recover previously disallowed VAT. Thankfully, the final outcome depends on HMRC's response and potential future legal developments.
If you think this could be relevant to you, we are here to help, please get in touch.
