Share sale costs - can VAT on deal costs now be reclaimed?
As any VAT expert will tell you, VAT on costs can only be reclaimed where the costs have a direct and immediate link with a particular taxable supply, so where the costs relate to exempt activities or are not at all related to a taxable business activity, then the VAT on these costs is not reclaimable. This principle has been subject to much debate and litigation over the years resulting in the evolution of this basic concept and additional complexity for businesses having to decide how much VAT is deductible on restructuring and deal costs.
The recent Upper Tribunal case of HMRC v Hotel La Tour (‘HLT’) has shed some further light on this complex area and may provide a basis for businesses that have made share disposals, to revisit the value of VAT restriction they applied at the time.
HLT was the parent company operating a wholly owned subsidiary, Hotel La Tour Birmingham Ltd (‘HLTB’). Both HLT and HLTB were part of a VAT group with HLT as representative member. HLTB owned and operated a hotel and HLT provided it with management services.
In 2015, HLT decided to develop a new hotel for an estimated cost of £34m and set out to raise funds to do so. After due consideration, it was decided that this would be best achieved by selling its shares in HLTB and to borrow the remainder. It was accepted by HMRC that the proceeds received from the share sale HLTB were to be used towards developing the new hotel.
HLT reclaimed the VAT it incurred on the cost of selling its shares in HLTB, but HMRC denied the recovery on the basis that the costs related to the exempt sale of the shares, and that it is not possible to look beyond this immediate supply when attributing the costs.
The First Tier Tribunal (‘FTT’)
The FTT held that various caselaw, including the Supreme Court decision of Frank A Smart, suggested that a more objective assessment of the intended use of the funds should be taken, and how those funds are obtained - from loans or from share sales - should not necessarily impede VAT recovery.
With this in mind, and in light of the reliable, objective evidence on hand that the aim of the share sale was to raise funds for HLT’s development of a new hotel, the FTT concluded that the costs incurred on the share disposal were business overheads of HLT and VAT deductible.
The Upper Tribunal (‘UT’)
HMRC appealed the FTT decision on the grounds that the share sale costs could only be seen to have a direct and immediate link with HLT’s taxable activities if they were ‘cost components’ of the company’s outputs, and that they were ‘used for the purposes of transactions’.
The UT rejected HMRC’s submissions on the basis that the ‘direct and immediate link’ requirements set out in early VAT caselaw has evolved and that an objective approach is now more appropriate. Also, the fact that other litigation (‘Kretztechnik’) has found that VAT on costs relating to share issues (which are ‘outside the scope’ of VAT) can be viewed as business overheads and potentially VAT deductible, would mean that denying the same treatment for costs relating to exempt share sales would jeopardise the fiscal neutrality requirement of the VAT regime, given that they are essentially the same kind of transaction.
Care should be taken as it is not yet known if HMRC will appeal this decision further. However, it would be prudent to revisit the circumstances around previous share sales and consider if this binding UT decision offers scope to reclaim elements of VAT that have previously been restricted.
If costs were incurred some time ago (but within the 4 year cap for retrospective VAT adjustments) and if, after reviewing the details, your circumstances broadly reflect the critical points of this case, thought should be given to collating and submitting a protective claim.
Also, any plans for restructuring or for any future share sales should be reviewed with this case in mind, to see what positive impact it might have.
For immediate assistance to assess the potential opportunity arising from this significant case please contact Mike Trotman in our specialist VAT team on firstname.lastname@example.org - call 0330 124 7740 or use IndirectTax@Xeinadin.com
This article is for general information only and specific advice should be sought as required.