In the latest VAT case to reach a conclusion Hotel La Tour has today lost its appeal at the Supreme Court.
This is a VAT case that has been followed with interest over the last couple of years since a taxpayer win could have had a potentially significant impact on VAT recovery in many business situations.
Recovering professional fees
In brief, Hotel La Tour had sought VAT recovery on professional fees incurred in connection with the sale of shares in a subsidiary company. This appeared to undermine a fundamental principle of VAT recovery – which is that VAT on costs associated with making an exempt supply is exempt input tax and in principle is not recoverable.
However, Hotel La Tour was initially successful at the First Tier Tribunal and then at the Upper Tribunal, by arguing it was entitled to VAT recovery since the purpose of the exempt share sale was to raise funds, which would be invested in another business activity which itself would generate taxable rather than exempt income.
Look through
The Court of Appeal reversed this last year, finding that the company’s ‘look through’ argument to link the costs incurred with future, downstream supplies was flawed. The starting point should be to establish whether there is a direct and immediate link to a supply. In this instance the Court of Appeal found there was, and the supply in question was the exempt sale of shares. Once that link between cost and supply had been established there was no need to look any further at the wider business objective of the transaction.
Hotel La Tour then took their appeal to the Supreme Court, which essentially has today endorsed the Court of Appeal’s findings in a unanimous decision, albeit with some additional reasoning of its own.
Reflect on the detail
As with all such Court judgments there is a need to spend time reflecting on the detail. However, an initial reading is that the Supreme Court has held the linking of costs to downstream taxable supplies based on an intended use of the monies raised from the exempt share sale is a step too far.
Indeed, the Court suggests that such an approach would be ‘a recipe for confusion’ where businesses might be tempted to manipulate their accounts and correspondence to make it appear a share sale was linked (or not linked) to a particular project depending on which suited its tax position better.
Curious reading
There are parts of the judgment that I find a little curious on first reading – such as the suggestion that transactions within the scope of VAT (such as a sale of existing shares) are generally where costs have a direct and immediate link. Whereas outside the scope transactions (such as an issue of new shares) are where the costs have less of a direct link and will be a general overhead of the business. However, the overall thrust of the Supreme Court judgment is clear enough.
Final arbiter
The Supreme Court is the final arbiter in VAT matters for the UK and hence this litigation is now concluded. No doubt some will find this outcome disappointing, however I feel the judgment does restore a degree of certainty whilst providing further clarity in a fundamental area of VAT, by reinforcing some well-established principles around VAT recovery and the attribution of costs to the making of supplies.