Breaking the Chains: Landmark Tribunal Ruling Expands VAT Recovery Opportunities for Taxpayers

In a highly significant decision, the Upper Tribunal has dismissed HMRC’s appeal against the taxpayer’s First-tier Tribunal success in the case of HMRC v Hotel La Tour Limited [2023] UKUT 178.

The Facts of the Case

Hotel La Tour Ltd (“HLT”) incurred fees for professional services in respect of a sale of shares in its subsidiary Hotel La Tour Birmingham Ltd “HLTB”). HMRC disallowed HLT’s input tax claim on the basis that the sale of shares in HLTB was an exempt supply and the VAT on the professional services was directly and immediately linked therefore to the exempt sale of shares. HLT’s successful argument was that the relevant services were directly and immediately linked to HLT’s downstream taxable activities.

In 2015, HLT decided to construct and develop a new hotel in Milton Keynes, costing approximately £34.5 million. That construction was partly financed by the sale of HLTB - the proceeds of the sale were to be used to fund the Milton Keynes development. HLT engaged various companies to provide professional services, with a view to obtaining the highest sale price available, which would provide for the largest sum possible to pay towards the Milton Keynes development.

The Decision

The judgment challenges HMRC’s traditional view of input tax, which is that it must always be attributed to the first output in a chain and that, if the first output is VAT exempt, then the input tax is non-recoverable. That view has leant heavily on a very old judgment of the European Court of Justice in the case of BLP Group plc v Customs and Excise Commissioners - [1995]. HMRC still refer to that case in their guidance manuals for officers stating that “it confirmed that, as VAT is a transaction-based tax, the ultimate purpose of a business is irrelevant so it is only the immediate supply to which any input is a cost component that matters.”

That guidance is proven to be incorrect by the judgment of the Upper Tribunal in Hotel La Tour, which specifically stated that:

“….subsequent decisions of the CJEU had called the BLP decision into question in the light of its developing jurisprudence attributing input expenditure on the raising of capital to the general overheads of an undertaking. Although not formally overruled, the BLP decision can no longer be regarded as representing a complete statement of the CJEU’s jurisprudence in this area”.

Opportunities for Taxpayers

Whilst the decision might be appealed by HMRC, other taxpayers should take immediate action to consider whether they might benefit from this decision as potential claims are restricted to four years. The opportunity may be wider than cases on all fours with HLT and may expand to create VAT recovery whenever fund raising supports downstream taxable activities. This could have a positive impact, for example, on the charity sector, who have traditionally not been entitled to any VAT recovery on the costs of fund-raising events.

To discuss the issue further, please contact Glyn Edwards.