Commissioners for His Majesty's Revenue and Customs v Hotel La Tour Ltd

This Supreme Court decision is about a common business problem: can you recover VAT on adviser fees when you sell shares in a subsidiary to raise money for growth?

Hotel La Tour said yes. It argued that the sale was a funding step for its wider taxable hotel business, because the money raised was used for a new hotel development.

HMRC said no. It argued that the fees were incurred to make the share sale happen, and that share sale was an exempt transaction for VAT purposes.

The Supreme Court agreed with HMRC. It held that the disputed fees were directly and immediately linked to the exempt share sale itself, not to the wider taxable trading activity. That meant the input VAT was not deductible.

For business owners, the practical point is simple. A commercial growth purpose does not automatically make VAT on deal costs recoverable. The court will look at what the services were objectively used for.

HLT was a holding company in a hotel group. It owned HLTB, which operated a luxury hotel in Birmingham. HLT also supplied management services to HLTB for payment.

In about mid-2015, HLT decided to develop a new hotel in Milton Keynes. The project was expected to cost about £34.5 million. To help fund it, HLT chose to sell the shares in HLTB and borrow the remaining shortfall from a bank.

HLT then instructed professional advisers to assist with the sale. The judgment identifies work including market research, shortlisting prospective buyers, financial modelling and tax compliance advice. Those services cost £382,900 plus VAT of £76,823.

The shares were sold in July 2017. The judgment says the whole of the net sale proceeds was in fact used to fund the Milton Keynes project.

HMRC disallowed HLT’s claim to deduct the VAT on those adviser fees. HMRC’s view was that the fees were linked to the share sale, and the share sale was an exempt supply. HLT argued that this was too narrow because the sale was undertaken to raise funds for its wider taxable hotel business.

That set up the central dispute. Were these costs part of making an exempt share sale, or were they part of the general costs of running and expanding a taxable business?

The legal issue was not whether HLT had a sensible commercial reason for the sale. It plainly did. The issue was how to attribute the adviser costs for VAT purposes.

The judgment explains that input VAT is generally deductible where goods or services are used for the purposes of taxed transactions. Case law often asks whether there is a direct and immediate link between the input cost and a particular output transaction. If there is no such specific link, the cost may instead be treated as part of the business’s general overheads and linked to its economic activity as a whole.

That distinction mattered here. If the adviser fees were directly and immediately linked to the share sale, and the share sale was exempt, the VAT would not be deductible. If the fees were instead linked to HLT’s wider taxable hotel business, the VAT might be recoverable.

The court also had to deal with two extra complications discussed in the judgment:

• share sales can sometimes be treated differently in VAT analysis depending on the surrounding activity; and
• HLT and HLTB were in a VAT group at the time of the sale.

So the real question was not just what the money was for in a broad commercial sense. It was what the disputed services were objectively used to do.

The Supreme Court dismissed HLT’s appeal. It agreed with the Court of Appeal that the disputed fees were directly and immediately linked to the share sale and not to HLT’s wider hotel business.

The court placed weight on the factual findings that the inputs were part of the process of selling the shares and were used in that fund-raising transaction. In other words, these were not ordinary running costs of the hotel business. They were services obtained to make the disposal happen.

The court also rejected the idea that the answer turned on whether the adviser costs were built into the share price in a cost-plus sense. The judgment explains that the language sometimes used in VAT cases about costs being components of price should not be treated as requiring a pricing exercise of that kind.

Just as importantly, the court rejected HLT’s argument that there is a special rule for fund-raising transactions. The fact that the sale was intended to raise money for taxable business activity did not automatically move the costs away from the share sale and into the business’s general taxable overheads.

Finally, the court rejected the VAT grouping argument. Although supplies between group members are disregarded for certain VAT purposes, that did not mean the underlying management activity between HLT and HLTB disappeared for the purpose of analysing the share sale and the related input costs.

The result was that the VAT on the professional fees was not deductible.

This case matters because many SMEs and growing groups treat transaction costs as a side issue until late in the deal. The judgment shows that this can be expensive.

If your business sells shares in a subsidiary, spins out a division, reorganises a group or raises funds through a disposal, adviser fees can be substantial. Legal, tax, accounting, modelling and corporate finance work often carries significant VAT. If that VAT cannot be recovered, it becomes a real deal cost rather than a timing item.

The key lesson is to separate two different questions:

• Why is the business doing the transaction commercially?
• What were the advisers objectively engaged to do?

In Hotel La Tour, the commercial answer was growth. The sale funded a new hotel project. But the legal answer on the facts was that the advisers were engaged to help sell shares. That objective link drove the VAT result.

So a business owner should not rely only on a broad narrative such as expansion, refinancing, debt reduction or strategic simplification. Those reasons may explain the transaction, but they do not necessarily determine VAT recovery on the related costs.

The case is especially relevant for groups where the parent charges services to subsidiaries and where a VAT group is in place. The existence of a VAT group did not rescue the claim here.

A useful way to apply this decision is to think in workstreams rather than in broad deal labels.

For example, if advisers are retained to identify buyers, prepare sale materials, model disposal outcomes, support negotiations or deal with tax compliance for a share sale, those services may be seen as used to make that sale happen. On the facts of this case, that kind of connection was enough to attach the costs to the exempt share sale.

By contrast, business owners should be careful not to assume that every cost incurred around a wider growth plan has the same VAT treatment. A project may involve several strands at once: a disposal, new borrowing, operational expansion and ordinary trading activity. The court’s approach means you need to ask what each service was actually for.

This is why engagement letters, scopes of work, invoices and internal approvals matter. They help show the objective content of the transaction and the role of each adviser. If the paperwork shows that a service was obtained to execute a share sale, it may be difficult later to argue that the cost really belonged to the business’s general taxable overheads.

For SMEs, the practical message is to model the possibility of sticking VAT early, while the transaction is still being designed.

If your business is considering a disposal or internal reorganisation, treat VAT on transaction costs as a live workstream, not an afterthought.

Start by mapping the proposed steps. Is the business selling shares, selling assets, borrowing, or doing a combination of these? The answer matters because the VAT treatment of costs can depend heavily on what the advisers are engaged to support.

Next, review the business’s own VAT profile. A fully taxable trader may still suffer irrecoverable VAT on costs linked to an exempt transaction. If the business already makes a mix of taxable and exempt supplies, the position may be even more sensitive.

Then look closely at the adviser documents. Engagement letters and invoices should clearly describe each workstream. Board papers and internal approvals should also reflect the actual transaction steps. These records may become important evidence of what the services were objectively used for.

Finally, build the VAT cost into the deal model. If the fees are material, an irrecoverable VAT outcome can affect pricing, funding assumptions and net proceeds.