In a recent Upper Tier Tribunal decision, the tax tribunal has held in favour of the taxpayer confirming that VAT incurred on professional fees relating to a share sale was directly and immediately linked to the economic activity of providing taxable supplies and therefore the VAT was correctly recoverable. The issue of VAT recovery on deal fees has been through the courts at national and European level for almost thirty years and what was a fairly solid position has shifted somewhat over time.
We asked our VAT expert, Kelly Eland, to tell us more about the history of the case and look into the VAT recovery decision in greater detail.
VAT recovery, then
In 1995, the CJEU heard the case of BLP (referred by the UK tax authorities). In this case, the taxpayer had sold shares in a company to raise funds for the purpose of paying off debts incurred while making taxable transactions.
The taxpayer then sought to recover the input tax associated with the sale of shares (charged by its bankers, solicitors and accountants) on the grounds that the VAT was linked to its taxable transactions (the taxpayer was carrying on an economic activity of supply management services to its subsidiaries).
The CJEU held that where a taxable person supplied services to another taxable person who used them for an exempt transaction, the latter person was not entitled to deduct the input VAT paid, even if the ultimate purpose of the transaction was the carrying out of a taxable transaction.
In terms of VAT recovery, what did this really mean?
Breaking this down, input VAT (VAT incurred on costs) is recoverable to the extent that it relates to onward taxable supplies. So if a business incurs VAT on legal fees in relation to its taxable business of acquiring a plot of land in order to develop a hotel with a view to selling hotel accommodation, a VAT recovery can be made.
Conversely, if a business incurs VAT on legal fees in relation to its exempt activity of providing insurance, that VAT is not recoverable. These two scenarios are straightforward as there is what the courts would call a ‘direct and immediate link’ between the cost incurred and the onward taxable or exempt transaction.
The difficulty arises where there is potentially a ‘chain-breaking’ transaction between incurring VAT on costs and carrying out either a taxable or exempt business. That is what happened in the case of BLP and also what happened in Hotel La Tour.
In BLP (back in the mid 90s) the CJEU were firmly of the view that because VAT had been incurred on costs relating to the sale of shares (sale of shares being an exempt supply for VAT purposes), it did not matter that the objective purpose in selling the shares was to fund the taxable activities of the business. They held that the VAT had been incurred in relation to an exempt sale of shares and therefore there was a direct and immediate link between the VAT bearing costs and the subsequent exempt supply.
In reality, this is a restrictive view generating irrecoverable VAT costs in the hands of a business that would otherwise be fully taxable (i.e. the VAT recovery would be possible).
VAT recovery, where are we now?
In the intervening years, there have been many cases looking at various different shades of this issue and over time, the position has shifted to take a more purposive approach. In the most recent case, Hotel La Tour (‘HLT’) decided to sell one of the hotels in its group, Hotel La Tour Birmingham (HLTB’) that was not performing as desired. The intention was to sell HLTB and to use the proceeds of the sale to build a new hotel in Milton Keynes.
Significant professional fees were incurred and HLT sought to reclaim the VAT. HMRC rejected the claim on the basis that the costs were incurred in relation to an onward exempt supply, being the sale of shares in HLTB. HLT argued that from an objective point of view, the fees were incurred in order to raise capital to develop a new hotel that would generate taxable supplies. They argued that the sale of shares in HLTB did not prevent its VAT recovery because its purpose in selling the shares was to develop its business of generating taxable supplies. Both First Tier and Upper Tier Tribunal agreed with the taxpayer.
What does this mean for businesses wishing to make a VAT recovery?
The decision provides opportunities for businesses to recover VAT that historically may have been considered as relating to exempt supplies. So whether your business has sold shares to raise capital in the last four years or is intending to do so in the future, speak to us to get the advice needed to maximise your VAT recovery. It is possible that HMRC will appeal (the VAT at stake here for the treasury is likely to be significant) but any appeal is unlikely to succeed given the direction of decisions at Supreme Court and CJEU level.
If you have any questions about VAT recovery, or indeed anything mentioned in this post, Kelly and our VAT team are only a call or click away. You can contact us or telephone us on 020 3697 7147, or you can visit our web chat in the bottom right corner which is manned during office ours and you can leave a message out of hours.