The Supreme Court has handed down its decision in Commissioners for HM Revenue and Customs v Hotel La Tour Ltd [2025] UKSC 46. Isabel McArdle and Gareth Rhys appeared for the successful Commissioners.
The Appellant holding company incurred input VAT on supplies of professional services acquired in preparing for and selling its subsidiary by way of a sale of shares. The sale of shares was within the scope of VAT but an exempt supply. The proceeds of sale were used to finance the Appellant’s fully taxable downstream business. The Court summarised the issues in the appeal at para 45:
- Whether the fact that the price of shares was set without taking into account the costs of the inputs meant that the direct and immediate link was with the general business and not the share sale;
- Whether the fact the share sale was exempt rather than out of scope meant the direct and immediate link must be with the share sale and not the general taxable business; and
- Whether the purpose of fundraising for the overall business meant that the direct and immediate link was with overall business and not the share sale.
Key points to note from the judgment:
- The “cost components” test does not require an examination of the pricing of outputs to ascertain whether costs were included in the calculation of price. The phraseology is unhelpful, not applied literally, and particularly inapt for sales of shares, which are rarely priced on a costs plus basis (paras 47, 49-50).
- The CJEU in SKF (C-29/08) departed from its previous case law only insofar as it accepted the possibility that inputs used for a sale of shares might have a direct and immediate link with taxable overall business rather than with the share sale, even where the share sale is exempt rather than out of scope. It is necessary to analyse the connection between the inputs and the exempt share sale to ascertain where the direct and immediate link lies. However, an input is more likely to be directly and immediately linked to the general business rather than a specific supply if the latter is provided for no consideration, such as in Sveda (C-126/14) and Iberdrola (C-132/16) (paras 90-92).
- The direct and immediate link test has not been modified to take account of the objective purpose for a transaction, such as fundraising, when applied to share sales or other financial transactions. Purpose, i.e., the taxable person’s intention in entering into a transaction, is only relevant to the direct and immediate link test in the context of repayment of input VAT on future taxable activity (paras 95-96, 106-108, 110).
- The effect of VAT grouping does not change the analysis of whether the sale of shares is economic activity, and therefore within the scope of VAT but exempt, or outside the scope. The “disregard” in s43 of the Value Added Tax Act 1994 is a simplifying statutory fiction and does not cause the intra-group supplies to evaporate. The Appellant and its subsidiary retained their individual identities and economic activity took place between them (paras 121, 124).
The press summary and full judgment can be found here.
