In HMRC v Hotel La Tour Ltd [2025] UKSC 46 (“Hotel La Tour Ltd”), the UK Supreme Court considered whether a holding company was entitled to recover input Value Added Tax (“VAT”) on professional fees incurred in connection with the sale of its shares in a subsidiary. The Supreme Court held the professional fees were directly and immediately linked to an exempt supply (the share sale), and not a taxable business. On this basis, the input VAT on those professional fees was irrecoverable.

Background

Hotel La Tour Ltd (“HLT”) was the UK holding company of Hotel La Tour Birmingham Ltd (“HLTB”), a UK subsidiary. HLT supplied taxable management services to HLTB and the companies formed a VAT group. In 2017, HLT sold all the shares in HLTB in order to raise funds for the development of a new hotel in the UK. HLT incurred professional fees for advisory, financial and legal services, on which VAT was charged. HLT claimed recovery of that VAT as input tax on the basis that the disposal of the shares in HLTB was part of its wider taxable business activities. His Majesty Revenue and Customs Authority (“HMRC”) denied the claim and held that input VAT was irrecoverable as the professional fees were directly and immediately linked to an exempt transaction, namely the VAT exempt share sale.

The First-tier Tribunal (“FTT”) and Upper Tribunal (“UT”) agreed with the submissions of HLT and accepted that the expenditure on the professional fees formed part of HLT’s general business costs, and input VAT was recoverable. The Court of Appeal reversed the decision of the UT. The decision of the Court of Appeal went to the Supreme Court where it was concluded that there was a direct and immediate link between the cost of the professional fees and the sale of the shares in HLTB. The share sale was VAT exempt, and, accordingly, the Supreme Court decided input VAT paid on the professional fees was irrecoverable.

There were two central questions to be considered by the Supreme Court. First, whether the share sale was an economically exempt activity for VAT purposes, or whether the share sale was out of scope for VAT purposes. Second, whether the inputs incurred by HLT were directly and immediately linked to the share sale and hence not deductible.  

Exempt and Out-of-Scope Output Transactions

The way transactions are classified as exempt or out-of-scope can determine whether input VAT may be recovered. The Supreme Court noted that before the case of Skatteverket v AB SKF (Case C-29/08) [2010] STC 419, the distinction between exempt and out-of-scope transactions was clear.

If the output transaction is outside-the-scope of VAT, the costs incurred in relation to that transaction may still be treated as part of the taxable person’s general overheads and attributed to the overall taxable business. Therefore, VAT may be recoverable.

By contrast, where an output transaction is exempt, the input VAT directly attributable to exempt supplies is irrecoverable.

HLT argued that recent case law [1] suggests that exempt transfers must be treated in the same way as out-of-scope transfers in order to comply with the principle of ‘fiscal neutrality’. The Supreme Court rejected this approach and stated that the principle of ‘fiscal neutrality’ is a principle of interpretation and not of substantive law. The Supreme Court considered that the case authorities from the Court of Justice of the European Union (“CJEU”) regarding ‘fiscal neutrality’ did not establish a principle which ignores the way in which the legislature treats transactions as being VAT exempt or not (paragraph 88 of the Supreme Court’s judgment). The legal distinction between exempt and out-of-scope transactions could not, therefore, be overridden on the basis of fiscal neutrality.

The Direct and Immediate Link Test

The other stage of the test deciding VAT recovery was how the test for the ‘direct and immediate link’ with a specific transaction constituting an economic activity should be applied. The FTT and UT agreed with HLT’s submission that the direct and immediate link test had been modified when that test is to be applied to share sales, or other financial transactions, to focus on the commercial purpose of the transaction for which the disposal proceeds were to be used. In this case, the purpose of the transaction, according to HLT’s appeal, was the hotel business as opposed to the share sale. The Supreme Court rejected this approach.

According to the Supreme Court, the direct and immediate link was between the professional fees and the exempt sale of the shares in HLTB as opposed to the overall hotel business of HLT. The Supreme Court found that any rule or modification of the ‘direct and immediate link test’ for share sales would be a ‘recipe for confusion’ and an invitation for companies to manipulate their accounts or their correspondence in an attempt to make it appear that a share sale was or was not linked to a particular activity to suit their tax situation better (paragraph 99 of the Supreme Court’s judgment).

Costs Allocation and VAT Grouping

The Supreme Court confirmed there is no reason why one should examine whether professional fees were included in the calculation of the price charged for the shares. Furthermore, the Supreme Court found that simply being part of a VAT group does not allow professional fees incurred for an exempt transaction to be treated as recoverable VAT.

Implications

The Supreme Court’s decision in Hotel La Tour Ltd confirms the application of the direct and immediate link test in determining input VAT recovery. It highlights the importance of distinguishing between exempt and out-of-scope transactions. The decision by the Supreme Court weaves together both CJEU and UK case authorities, but also runs contrary to some of the CJEU decisions (as is permitted under the EU Retained Law Act 2023 and following the UK’s departure from the European Union). For advisers, the judgment serves as a reminder that commercial purpose alone is not sufficient by itself to secure input VAT recovery where costs are directly attributable to exempt supplies. Careful documentation will be important to ensure that costs attributable to exempt supplies are treated as such, and that genuine overheads are not incorrectly attributed to an exempt share sale.

[1] BLP Group plc v Customs and Excise Commissioners (Case C‑4/94), Frank A Smart & Son Ltd v Revenue and Customs Commissioners [2019] 1 WLR 4849.