Isabel McArdle recently appeared for the successful Appellants in HMRC v Hotel La Tour Ltd [2024] EWCA Civ 564, an appeal concerning whether use of services such as market research, buyer shortlisting, financial modelling and tax compliance in an exempt sale of shares prevented recovery of input tax arising, or whether such input tax was recoverable as attributable to the downstream taxable business of the Respondent, because the ultimate aim of the share sale was to raise funds for the taxable downstream activity.

The Court of Appeal allowed the appeal, finding that the use in the exempt share sale prevented recovery of input tax. It rejected the argument of the Respondent that the CJEU decision, C-29/08 Skatterverket v AB SKF [2010] STC 419, had the effect of causing input tax incurred on costs of the nature in question to be treated as directly and immediately linked to downstream taxable activity, where the objective purpose of a sale of shares was to fund such activity, thus allowing recovery of the input tax. The Court of Appeal found: “84… SKF preserved the existing rules … whilst adding a rider to the first proposition to the effect that input tax connected with a share sale may have a direct and immediate link either with the share sale or with the taxpayer’s business as a whole, that being a matter for the domestic court to determine.”

The Court of Appeal also rejected a second argument of the Respondent that the effect of the Respondent and its subsidiary being in a VAT group meant that management services from the former to the latter were to be treated as not being supplied, and thus the shareholding of the former in the latter was to be treated as non- economic activity. The Court found that the services continued to be treated as being supplied, and thus the sale of the shares was to be treated as within the scope of economic activity. Even if that was wrong, “120… the disposal of the shares would not be part of a merely passive holding activity which is non-economic in character; rather, the disposal would be seen as closely linked to [the Respondent]’s active management of and engagement in the hotel business itself”.