In this article, David Reaney and Emma Robinson explore the Supreme Court judgement in Commissioners for His Majesty's Revenue and Customs v Hotel La Tour Ltd (UKSC/2024/0086) which was published on 17 December 2025.
Overview
The issue of VAT recovery on costs associated with M&A activities has long been an area of interest for HMRC and taxpayers, and the VAT exemption for transactions in shares has been a key factor in making the VAT recovery position complicated. The VAT exemption, and related VAT recovery treatment, doesn’t take into account the purpose of the sale of shares and that has been explored by the courts in this case.
In 2015, Hotel La Tour Ltd (‘HLT’) developed and constructed a new hotel in Milton Keynes. To finance the purchase, it sold the shares in its wholly owned hotel operator subsidiary Hotel La Tour Birmingham Ltd (‘HLTB’). During the sale of HLTB, HLT incurred professional fees on which it recovered just under £80,000 of VAT. The entitlement of HLT to recover this VAT was the subject of the appeal, as the sale of shares was a VAT exempt supply.
This case has attracted a lot of attention both within the sector and more broadly due to the principles considered by the courts in relation to input tax recovery.
Lower court decisions - FTT, UT and COA
First Tier Tribunal (‘FTT’)
The key subject discussed at the FTT was whether the VAT on professional costs incurred with respect to the sale of shares in HLTB was directly attributable to the VAT exempt supply of shares or whether it could be seen as attributable to HLT’s taxable activities, i.e., the provision of hotel accommodation.
The FTT looked to recent caselaw which included the Supreme Court decision in 2019 of Frank Smart. This case looked at fundraising costs and held that how the fundraising costs would ultimately be used should be considered. Therefore, the FTT considered the purpose behind the share sale by HLT which was ultimately to build, develop and manage the new hotel in Milton Keynes. HLT had evidence to show that the funds used from the share sale in HLTB were to be used wholly and exclusively for the purpose of the new Milton Keynes hotel.
Therefore, the FTT concluded that the VAT incurred on the professional fees of the share sale were general overheads of the business and therefore recoverable.
HMRC did not accept this position and appealed to the Upper Tribunal.
Upper Tribunal (‘UT’)
The UT dismissed HMRC’s appeal and believed that the FTT had come to the correct conclusion. HMRC were allowed to appeal to the Court of Appeal.
The Court of Appeal (‘COA’)
The COA allowed HMRC’s appeal and ultimately ruled in favour of HMRC. The COA held, based on normal VAT rules (as opposed to the purpose of the transaction), that the professional costs had a direct and immediate link to the VAT exempt share sale and therefore, VAT recovery was not possible for HLT.
This left HLT with one final option, appeal to the Supreme Court, and so it did just that.
The Supreme Court
On 17 December 2025, The Supreme Court (‘SC’) dismissed HLT’s appeal against the COA decision and ruled in favour of HMRC. It agreed with the COA that the VAT incurred on professional costs attributable to the VAT exempt sale of shares should not be deductible by HLT.
This decision serves as a reminder of the strictly applied VAT recovery rules and their interpretation. It emphasised the need to focus on the direct attribution of costs and not the wider business intentions.
The SC decision provides a level of clarity on a much-debated question of VAT recovery on costs incurred that are attributable to a share sale. It is now clear that when considering if VAT recovery is possible, we must examine the link between the costs incurred and the transaction itself and it is not possible to look through this and consider the ultimate use of the sales proceeds.
Specified supplies
Whilst the courts’ rulings have provided clarity on the VAT recovery position where there is a domestic UK sale of shares, businesses should be aware that there is a specific piece of VAT legislation (The Value Added Tax (Input Tax) (Specified Supplies) Order 1999) that allows VAT recovery on certain supplies which would be treated as VAT exempt if supplied in the UK (such as a share sale) where the recipient of the supply is a non-UK customer.
Therefore, if a business is selling shares to a non-UK customer, VAT recovery may be possible, subject to the normal rules of input tax deduction.
For completeness, the specified supplies order also covers supplies such as insurance and other financial services.
Actions for businesses now
The VAT recovery rules for both buying and selling shares are complex. There are a number of exceptions and nuances evidenced in the volume of caselaw over the last decade.
Timing is an important factor, and advice should be sought early in the transaction process as there it may be possible to take steps to make VAT recovery possible.
Given the specified supplies point noted above, it is important to identify the purchaser of the shares and understand where the purchaser is established. It is also important to understand when in the process the identity of the purchaser (and nature of the transaction) became clear.
If the purchaser is established outside of the UK, VAT recovery may be possible under the specified supplies order and additional thought to optimum structuring (as per the below) may not be required.
For all transactions, we recommend the following points are considered as part of the transaction process:
- Identify the purchaser and its place of establishment.
- Evaluate the materiality of costs incurred and consider which entity is going to be incurring the VAT on professional costs e.g., HoldCo, BidCo, OpCo.
- Assess the VAT recovery position under the existing structure and if there is an appropriate link between the costs being incurred and taxable supplies being made for example, a management activity.
If you have been involved in any share sales over the last four years, we recommend a review is undertaken to identify if there is an opportunity to recover input tax on costs incurred in previous transactions. This will be particularly attractive where the sale of shares was to a non-UK customer.
This article originally appeared in TaxPoint, Chartered Accountants Ireland (January 2026) and is reproduced here with their kind permission.
Get in touch
If you have been involved in any share sales over the last four years, we recommend a review is undertaken to identify if there is an opportunity to recover input tax on costs incurred in previous transactions. This will be particularly attractive where the sale of shares was to a non-UK customer.
Contact our Indirect Tax team for an initial conversation. We'd be delighted to hear from you.