Tax update: VAT recovery on exempt share sales

The recent judgement in the Hotel La Tour case has cast a spotlight on the potential for VAT recovery on costs relating to exempt share sales.

This case features Hotel La Tour Limited’s (HLT) attempt to recover VAT on costs incurred from selling shares in its subsidiary to fund future business expansion. The key issue was whether such a VAT recovery was possible, given HMRC’s initial stance that the sale of shares was an exempt supply, thus prohibiting VAT recovery on the associated costs.

Delving into the details, both the First-tier Tribunal (FTT) and the subsequent Upper Tribunal (UT) sided with HLT. They emphasised that the critical factor was the end-use of the proceeds from the share sale, not the exempt nature of the share sale itself. In HLT’s case, the proceeds were allocated towards taxable business activities, making the VAT on the costs recoverable. This judgement diverges from HMRC’s earlier position and introduces a nuanced perspective towards VAT recovery on exempt share sales.

Now, with a legally binding precedent set by the UT, an opportunity arises for businesses to file protective claims for input tax recovery on similar transactions. This is particularly relevant if the proceeds from such transactions were, or are intended for, taxable supplies and the costs are not embedded in the share price. This judgement encourages businesses to review past transactions, especially those within the last four years, to assess if they too have grounds for VAT recovery.

Although this judgement is subject to appeal by HMRC, it has momentarily provided a pathway for VAT recovery on exempt share sales. As the HMRC appeal unfolds, it would be prudent for businesses to consider filing protective claims, ensuring a favourable position should the appeal uphold the UT’s stance.

Furthermore, for a successful claim, several key elements need to be observed based on the HLT case:

  • Purpose of proceeds: the funds generated from the share sale should be earmarked for taxable activities.
  • Nature of costs: the costs related to the share sale should not be components of the share price but should be business overheads or other business-related costs.
  • Documentation: adequate documentary evidence supporting the use of proceeds towards taxable activities is crucial. This evidence could include financial statements, board meeting minutes, or other relevant documentation demonstrating the intended use of the funds.

The HLT case underscores the evolving landscape of VAT jurisprudence, emphasising the necessity for informed decision-making in this domain. Our specialist VAT team can help by providing the requisite guidance and support, ensuring that you are well-positioned in light of these developments.

If you would like further advice on this topic, please contact Bernardo Almeida on 01242 680000.

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