UK: VAT costs deductible when professional fees directly linked to taxable sale (Supreme Court decision)
VAT incurred on expenditure is deductible only if it is “directly and immediately linked” to a taxable sale
The UK Supreme Court on December 17, 2025, addressed the deductibility of value added tax (VAT) costs incurred on professional fees related to the sale of shares.
The case information is: Commissioners for His Majesty's Revenue and Customs v. Hotel La Tour Ltd, UKSC/2024/0086
Facts
The taxpayer owned all shares in a company operating a luxury hotel in Birmingham and provided management services to this company for a fee. Planning to develop a new hotel, the taxpayer intended to finance the project by selling the hotel company and borrowing the remaining funds. To facilitate the sale, the taxpayer engaged various professional firms for services such as market research, financial modeling, and tax advice. The shares in the hotel company were sold in July 2017, and the proceeds were used to fund the project. At the time of the sale, both the taxpayer and the hotel company were members of the same VAT group.
HMRC disallowed the taxpayer’s claim to deduct VAT on the professional fees, arguing that the VAT related to an exempt transaction, the sale of shares. The taxpayer contended that the costs were connected to its general hotel business, which involved taxable sales.
Decision
The Supreme Court reaffirmed that VAT incurred on expenditure is deductible only if it is “directly and immediately linked” to a taxable sale, rather than an exempt sale. Importantly, VAT costs may also be deductible if they relate to the business as a whole, even without a direct link to a specific taxable sale, such as general overheads like electricity or stationery. Referencing the Court of Justice of the European Union (CJEU) decision in SKF (C-29/08), the court noted that VAT on services connected to a share disposal may be recoverable if there is a direct and immediate link to the taxpayer’s overall economic activities. It is for the courts to assess all circumstances and determine whether costs are attributable to the share sale or to the wider business. On the facts, the Supreme Court agreed with the Court of Appeal that the professional fees in question were incurred specifically for the share sale, not for the general business.
The court rejected arguments to refocus the test on the purpose of raising funds, clarifying that such references are simply another way of expressing the direct and immediate link test. The court cautioned that a purpose-based approach could create confusion and scope for manipulation. The taxpayer also argued that, as both entities were in a VAT group, management services should fall outside the scope of VAT, allowing recovery of VAT. The Supreme Court rejected this, confirming that VAT grouping is intended to simplify administration, not to confer additional reliefs or exemptions. Economic activity between group members remains relevant for VAT purposes.
KPMG observation
The case highlights the recurring issue of VAT recovery on deal fees and underscores that each case must be assessed based on all facts and circumstances. The UK Supreme Court’s reasoning suggests a nuanced interpretation of the CJEU’s SKF decision. While SKF recognized a right to deduct VAT on services related to a share disposal where there is a direct and immediate link to the taxable person’s overall economic activity, the UK Supreme Court emphasized that the core test remains whether the expenditure is linked to an exempt transaction or to the business as a whole. In this case, the court concluded that the professional fees were incurred specifically for the share sale, an exempt transaction.
Importantly, the court reaffirmed that VAT may be deductible even without a direct link to a specific taxable sale, such as for general overheads like electricity or stationery, provided the costs relate to the business as a whole. However, it rejected any shift toward a “purpose-based” test, warning that such an approach could create uncertainty and opportunities for manipulation. This decision could signal divergence between UK and EU VAT interpretations post-Brexit. It will be interesting to see whether the CJEU continues its recent taxpayer-friendly trend on deal fee recovery or aligns more closely with the UK Supreme Court’s analysis.
For more information, contact a KPMG tax professional:
Philippe Stephanny | philippestephanny@kpmg.com
Chinedu Nwachukwu | chinedunwachukwu@kpmg.com