The UK Court of Appeal’s decision in Hotel La Tour has dashed taxpayers’ hopes of being more readily able to recover VAT paid on deal fees in respect of share sales. It is possible that the taxpayer may seek to appeal to the Supreme Court (after all, the taxpayer won before the First-tier and Upper Tribunals), but I wouldn’t necessarily bet on the Supreme Court reversing the Court of Appeal’s decision. 

Hotel La Tour (HLT) provided management services to a wholly-owned subsidiary, Hotel La Tour Birmingham (HLTB), which ran a hotel. HLT decided to develop a new hotel in a different location and, to raise funds for this development, it sold HLTB. This share sale was exempt from VAT and, in connection with it, HLT incurred marketing, legal and accountancy fees. HLT sought to recover the VAT on those fees because the share sale’s purpose was to raise funds for HLT’s wider business which included the making of taxable supplies.  

The First-tier and Upper Tribunals had effectively accepted this argument – raising taxpayers’ and advisers’ hopes that input tax on deal fees should be recoverable where the share sale was for the purpose of funding taxable activity – but the Court of Appeal did not recognise such a rule. 

The Court of Appeal decided that, for the VAT to be recoverable, there must be a direct and immediate link between the input transaction (i.e. the marketing and advice here) and either one or more particular (taxable) output transactions or the taxable person’s economic activity as a whole. If the input transaction has a direct and immediate link with an exempt transaction (as the marketing and advice with the share sale here), VAT cannot be recovered. 

The test is of an alternative “either/or” nature; it cannot be both. If a direct and immediate link to a particular (taxable or exempt) transaction has been established, there cannot also be such a link to the overall activity. The Court of Appeal indicated that this did not imply an order of priority which, I suppose, may imply that the tribunal’s task will be to look at the evidence in the round to determine in which direction there is the stronger link – to the exempt share sale or the overall taxable activity. 

In most cases, this should be obvious: VAT on fees for advice on the negotiation and documentation would almost certainly be irrecoverable. But the Court of Appeal acknowledges that there is a more than “merely fanciful” possibility that VAT on (some) deal fees could be recoverable. So, around the edges, the decision may generate further litigation to determine exactly how fanciful (or not) the possibility is.  

It is also possible that it could mark the start of a rift between UK and EU case law on VAT. The interpretation of the CJEU’s decision in SKF (and the extent to which is represented a departure from the CJEU’s earlier decision in BLP) is central to the decision. According to the Court of Appeal, SKF did not do all that much. It merely confirmed that, as a matter of principle, it is possible that VAT on deal fees could be recoverable, if there is a direct and immediate link to the seller’s overall taxable activity, and not to the exempt share sale. So, if it changes BLP it all, it only serves to clarify that BLP should not be taken to imply that all deal fees must necessarily be taken to have a direct and immediate link to the exempt share sale (so that associated VAT is irrecoverable). Would the CJEU agree that that is what it decided in SKF? At least the taxpayer here seemed to take a different view.