What was the case about?
In HMRC v Hotel La Tour Ltd [2025] UKSC 46 ("Hotel La Tour") the Supreme Court rejected the taxpayer's attempt to reclaim VAT on professional fees (including legal and accountancy fees) incurred in respect of a share sale. In doing so, the Supreme Court tackled two related VAT issues which are important for many businesses.
First, it considered the circumstances in which share sales are VAT exempt or out of the scope of VAT, and the implications of this distinction.
Second, it reached a conclusion about the nature of VAT groups and the implications of VAT grouping for VAT deductibility.
What were the facts?
Hotel La Tour Limited ("HLT") provided management services for consideration to its subsidiary, Hotel La Tour Birmingham Ltd ("HLTB"), which let and operated a luxury hotel. HLT decided to sell HLTB to raise finance for its business activities, and in doing so incurred significant legal and accountancy fees. It reclaimed VAT on these professional fees, which HMRC denied, arguing that they were linked to a VAT exempt share sale and therefore not recoverable. HLT claimed the fees were incurred for the purpose of raising finance for its business activities and was therefore out of scope (and therefore potentially recoverable, due to HLT's other VATable supplies).
What was decided?
The Supreme Court dismissed the taxpayer's appeal, agreeing with the Court of Appeal (and disagreeing with the FTT and UT) that the VAT was not recoverable.
When are transactions connected to overall business activities?
HLT argued that since the purpose of the sale of HLTB was to raise finance for its business activities, the share sale should be connected with overall VATable business activities – and costs incurred in relation to it should be deductible.
The Supreme Court rejected this. It found that the overall "purpose" of the share sale could not override the normal VAT exempt treatment of share sales. The "direct and immediate link" to VATable supplies required for VAT deduction was not present.
In this circumstance, the professional fees were directly and immediately linked to the exempt share sale and therefore VAT was not deductible.
Could VAT groups come to the rescue?
HLT raised a further argument that transactions within VAT groups were ignored. This meant that its holding of shares in subsidiaries was not a business activity at all. HLT's sale of its subsidiary would then not be VAT exempt, but would instead be outside the scope of VAT altogether. This, in turn, would allow HLT to attribute related professional fees to its other VATable activities.
In response, the Supreme Court helpfully clarified VAT grouping (adopting an approach similar to that taken in lower courts in recent years). The Supreme Court explained that a VAT group simplifies and facilitates the collection of tax; it does not confer a relief or exemption on the constituent entities, or mean that the interaction between VAT group members can simply be ignored. Those entities continue to carry out economic activity between themselves, which can constitute business activities.
Despite the VAT group, HLT's holding of its subsidiaries was part of a business involving HLT providing management services for consideration to those subsidiaries.
