Supreme Court denies VAT recovery on costs relating to sale of a subsidiary company

Overview

In a significant decision for corporate groups undergoing restructuring, the Supreme Court has confirmed that VAT on professional costs incurred in connection with a VAT-exempt share disposal is not recoverable, even where the purpose of the disposal is to raise funds to support a fully taxable business.

The judgment overturns earlier tribunal decisions and brings clarity to an area that has caused long-running uncertainty: whether transaction costs incurred in relation to a share sale can be treated as general overheads of a taxable business rather than being wholly attributed to the share sale itself.

The answer, following HMRC v Hotel La Tour Ltd [2025] UKSC 46, is clear: there is no general “fundraising exception” allowing the taxpayer to look past the share sale and to base VAT recovery on the use of funds generated by the share sale.

Background and the VAT issue

Hotel La Tour Ltd (HLT) owned a hotel-operating subsidiary to which it provided management services in return for payment. HLT sold the subsidiary’s shares to fund the development of a new hotel and incurred significant professional VAT-bearing fees in relation to the sale. The question was whether the VAT on the fees was recoverable as an overhead of HLT’s fully taxable hotel operations, or irrecoverable on the basis the costs were attributable to the VAT-exempt share sale. The answer depended on whether the professional fees bore a “direct and immediate link” to the share sale or to HLT’s taxable hotel business.

The Supreme Court’s decision

The Supreme Court considered leading authorities including BLP, Midland Bank, Abbey National, Kretztechnik, SKF, Sveda, Securenta and Frank Smart, finding in favour of HMRC. The professional fees were directly and immediately linked to the share sale and not to HLT’s hotel business.

The Supreme Court focused on the objective use of the services on which input VAT was incurred, being the sale of shares. The services were used to effect the sale of the shares and were therefore directly and immediately linked to that sale. Their link to HLT’s hotel business was indirect – the services themselves were not used for the purpose of the business even if the funds raised from the share sale were so used. 

In reaching its conclusion the court examined the way in which CJEU case law had developed over the years and the apparent difference between the treatment of costs relating to activities not giving rise to any supplies, and those giving rise to VAT-exempt supplies (neither of which give entitlement to input VAT recovery). 

The Supreme Court found that in both cases it was necessary to consider whether the costs in question had a direct and immediate link to taxable supplies made by the business. While the test was the same, one might expect costs relating to non-supplies to more often qualify as having a direct and immediate link to the business as a whole, particularly where the reason why the activity did not give rise to any supplies was that no consideration was received in respect of it. Where a business putatively incurs costs in relation to an activity for which it receives no form of payment or other consideration, the costs in question are more likely to in fact directly and immediately be linked to that person’s business as a whole. 

The Supreme Court noted that the Principal VAT Directive and decisions of the CJEU also provide for VAT recovery to the extent to which the costs in question are “cost components” of taxable supplies. However, the Court made clear that any form of cost component analysis did not require, or permit, VAT recovery to be determined by reference to any form of calculation showing that the cost of inputs was included in the calculation of the price of outputs. To the extent to which the First Tier Tribunal and Upper Tribunal had based their decisions on such an analysis, they had therefore erred in law. 

VAT grouping of HLT and its subsidiary

The sale of shares in its subsidiary was only a supply within the scope of VAT because HLT had previously provided management services to the subsidiary and the share sale was an extension of that business activity. 

HLT was in a VAT group with its subsidiary at the time of sale and argued that the sale should not therefore have been seen as being in the course of a business activity, because its management services to its subsidiary were disregarded for VAT purposes. 

However, the Supreme Court found that the purpose of VAT grouping was to facilitate the administration and collection of tax and did not mean that the business activities of its members were extinguished. HLT was therefore undertaking a business activity (albeit within a VAT group) and the share sale was an extension of that business. 

Practical implications

For corporate groups contemplating disposals where the parent provides taxable management services to the subsidiary, the sale will generally be within the scope of VAT but VAT-exempt, and so VAT on transaction-specific advisory and deal execution costs will typically not be recoverable. A “fundraising” narrative will not change the outcome and so careful planning and budgeting for deal costs remains critical where VAT incurred on fees could be material.

Interestingly, the Court left open the possibility that VAT incurred in relation to share disposals might be recoverable as an overhead cost of the business. The Court did not give any indication as to the circumstances in which treating VAT incurred on disposal costs as a business overhead might be permissible, but emphasised that determining the extent of VAT recovery depends on an inquiry taking account of all relevant facts. VAT recovery is not driven by labelling a transaction as VAT-exempt or outside of scope alone, nor by the intended use of proceeds. Retaining robust contemporaneous evidence of how inputs are used is therefore important, as it may determine the outcome in marginal cases. 

The Supreme Court’s decision may be helpful for taxpayers in certain limited circumstances, specifically where the business is only entitled to partial recovery of VAT on its overhead costs, provides management services to its subsidiary and is selling the subsidiary to a non-UK buyer (as a supply of share to a non-UK buyer gives entitlement to input VAT recovery). In such circumstances VAT incurred on transaction costs should be recoverable in full on the basis that it is wholly attributable to a sale of shares to a non-UK buyer.

Finally, a question remains as to whether recovery of VAT on the disposal of a subsidiary might be more readily justifiable where the person disposing of the shares has not provided any form of services to the subsidiary, so the sale falls outside the scope of VAT (rather than being VAT-exempt).