When might VAT be recoverable in connection with selling shares in the UK?
The UK’s FTT has decided that VAT incurred in selling shares may be recoverable if the proceeds will be used to support continuing taxable business
The UK’s FTT has decided that VAT incurred in selling shares may be recoverable
The UK First-tier Tribunal’s (FTT) decision in Hotel La Tour (UK FTT 451), which was released in December 2021, is the latest answer to the question of whether there are situations in which VAT on costs incurred in selling shares may be recoverable. Businesses which carry on taxable activities for VAT purposes and have reinvested proceeds from selling shares into their continuing business activities should consider whether they were entitled to recover VAT incurred on the costs involved in selling the shares. If so, it may be possible to submit a claim to HMRC for under-recovered VAT, subject to the usual four-year time limit.
Hotel La Tour Ltd (HLTL) was a holding company that owned and supplied management services to a subsidiary which owned and operated a hotel in Birmingham. HLTL’s management decided it wanted to develop a new hotel in Milton Keynes. To finance the new development, HLTL’s management decided to sell the subsidiary that owned the Birmingham hotel and borrow the remainder. In doing so, HLTL incurred just over £76,000 of VAT on various costs connected to the sale which were mainly the fees of professional advisers.
If you took a poll of tax advisers before the decision, many of them would probably have said that HLTL was not entitled to recover that VAT because it was incurred for the purposes of making an exempt supply, namely the sale of shares to a UK-based purchaser. That would be a reasonable assumption given the European Court of Justice’s (ECJ’s) 1995 judgment in BLP which concluded that a business could not ‘look through’ an exempt transaction and determine VAT recovery based on how the proceeds will be used.
However, the Tribunal decided in Hotel La Tour that the VAT was in fact recoverable because the costs were incurred in raising finance to develop a new hotel and therefore the costs had a direct and immediate link to the general business activities of HLTL. The fact that the finance was generated by selling shares did not break that link and because HLTL was a fully-taxable business (ignoring the exempt share sale as it was incidental to HLTL’s main activities), the VAT incurred was recoverable in full.
This is not such a surprising outcome in light of the ECJ’s judgment in AB SKF back in 2009 which came to a similar conclusion in similar circumstances. We can also infer that the decisions in both Hotel La Tour and AB SKF would almost certainly have been different if the proceeds generated from selling shares had been used to pay dividends to shareholders or perhaps even simply to pay off a loan, given the ECJ’s 2019 judgment in C&D Foods Acquisitions.
So how significant is the Hotel La Tour decision? As an FTT decision, it is not binding on any other UK Tribunal or Court and it doesn’t arrive at a conclusion that is particularly different to that of AB SKF. On the other hand, the Tribunal placed significant weight on the UK Supreme Court’s 2019 decision in Frank A Smart which concluded that VAT was recoverable on costs connected to acquiring farm subsidies. This could be useful to help support an argument that VAT is recoverable.
At the very least, Hotel La Tour is a timely reminder that it may be possible to recover VAT in connection with selling shares if the funds raised will be used to support the seller’s continuing taxable business activities.