VAT recovery on the disposal of a subsidiary?

When a group disposes of a subsidiary it will usually incur significant deal costs in respect of which there is also significant VAT. It would be nice if this VAT could be recovered but unfortunately the traditional view is that because the sale of shares is exempt then it follows that the VAT is not recoverable. A recent case has however raised questions about this traditional approach.

The Hotel La Tour case

This involved a large hotel group whereby individual hotels were operated through separate subsidiary companies. In 2015 it decided to build a new hotel and planned to finance this by selling one of its underperforming ‘hotel subsidiaries’ (it wanted to build a new hotel in Milton Keynes for £30m and sell the company which operated a Birmingham hotel). The subsidiary was ultimately sold in 2017 and the company claimed input VAT of £76,000 in respect of marketing, legal, and tax advisory costs relating to the share disposal. Predictably (and based on the traditional view above) HMRC disallowed VAT recovery on the basis that the share disposal was an exempt supply.

The company appealed on the basis that the VAT was not paid in connection with an exempt supply but was rather a cost related to the raising of finance for a standard-rated venture (being the new hotel in Milton Keynes). Perhaps surprisingly the First Tier Tribunal found in favour of the tax-payer on the basis of a clear link between the costs and the standard rated business of building and operating the new hotel. Furthermore, (perhaps more surprisingly) the Upper Tribunal recently upheld that decision. This decision challenges HMRC’S traditional view of input tax, in that it must always be attributed to the first supply made in a chain. This case determined that the sale of shares could effectively be ‘looked through’ to the wider objective of securing finance for a business activity. One key finding was that the fees were a “cost component” of the VATable activities, rather than the VAT exempt sale of shares.

Forbes Dawson view

This is a very significant decision and could have wide-ranging implications, although HMRC may not let it lie and it could run and run. This case could be relevant in any case where a ‘VAT exempt asset’ is sold in order to raise funds for a non-exempt business. For example, this may be relevant if a company disposes of a rental property in order to provide financing for its trade. There are also many different scenarios where a trading subsidiary could have been sold to provide funding for the group. Where significant costs have been incurred in respect of the sale of a subsidiary or other exempt asset within the last four years then it may be worth submitting a protective claim on the back of this case.




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