For ambitious businesses in the property and hospitality sectors, for the tax advisers they seek guidance from, and for HMRC officers, the Supreme Court (SC) judgement in Hotel La Tour Ltd [2025] UKSC 46 matters. A well-reasoned and sensible decision, it condensed complex VAT law and lengthy caselaw into a thoroughly understandable judgement which should raise understanding of a contested area of fundraising-related input VAT.
The issues
The case concerned a holding company (Hotel La Tour Ltd) selling its subsidiary – which operated a luxury hotel in Birmingham – to raise funds for constructing a new hotel. The holding company provided management services to the subsidiary, and both companies were in a VAT group.
The questions for the SC were:
• Was the input VAT on professional costs (A) irrecoverable as it related to the specific VAT exempt sale of shares, or (B) recoverable as it related to the general VATable business of running the hotel?
• Was this issue affected by the fact that the holding company and its subsidiary were in a VAT group?
The “purpose” of the fundraising: no need to consider this
The SC held that there was generally no need to look at the purpose of fundraising to determine the deductibility of VAT on professional costs.
A. If the fundraising activity was VAT exempt (e.g. a VAT exempt sale of shares), VAT on professional costs would:
• Be irrecoverable if those costs were directly and immediately linked to the VAT exempt sale of shares
• Depend on the overall activity (whether taxable or exempt) of the business if the costs were directly and immediately linked to the general business
B. If the fundraising activity was outside the scope (e.g. the sale of a tenanted building as a transfer of a going concern or TOGC), then the recoverability of VAT on professional costs relating to the TOGC would depend on the activities of the business as a whole.
There is only one situation where we look at the purpose of the taxpayer when determining deductibility of input VAT and that is when the taxpayer has not yet begun trading yet. In this case we allow input VAT deduction to the extent that it is attributable to intended taxable supplies. Otherwise, we look at the activity itself.
VAT grouping: not relevant to this issue
There was also a question of whether VAT grouping would affect this decision. This requires going into the weeds a touch.
A sale of shares is not necessarily VAT exempt. Just because a business sells shares (in a subsidiary, for example) doesn’t mean that business is in the business of selling shares. If a business generally sells hotel stays and sells (its shareholding of a) subsidiary to raise funds, that sale may be “incidental” to its hotel business. Merely sitting on a subsidiary is not an economic activity (for VAT purposes): it is totally passive. The sale of shares in such subsidiary should therefore be entirely outside the scope of VAT (not VAT exempt).
If the sale is entirely outside the scope of VAT, input VAT on professional costs is directly and immediately linked to the activities of the business as a whole. If those activities consist of selling hotel stays, then the business will be fully taxable. The fundraising costs should then be fully deductible.
Management services: not passive any more
Now, if a holding company supplies management services (or any services) to its subsidiary, these are prima facie VATable supplies. The holding company is no longer passively holding the subsidiary. So if the holding company sells shares in that subsidiary, it makes a VAT exempt sale of shares.
If management services are disregarded, is the holding passive again?
If the holding company is in a VAT group with that subsidiary, then the supplies of management services are disregarded for VAT purposes. Does that then mean that the sale of shares in the subsidiary is no longer VAT exempt, but outside the scope? If so, is the sale of shares now attributable to the hotel business (and deductible in full)?
The answer here is: no. The holding company is still performing an “economic activity” which renders the share sale VAT exempt. The point of a VAT group is to simplify tax collection and not to obtain a tax relief.
Conclusion
Overall, the SC has restored orthodoxy: VAT on costs directly linked to exempt share disposals are irrecoverable, regardless of fundraising purpose or VAT group status. This closes off arguments that had gained momentum in the lower tribunals and reinforces the importance of transaction structure in fundraising scenarios.
Would you like to know more?
For more information about UK VAT rules, and specialist guidance on the VAT implications of your activities and growth plans for your business, get in touch with Allon Greenstein or send us an enquiry.
