Commissioners for HM Revenue and Customs v Hotel La Tour Ltd

Hearing dates: 10 and 11 April 2024

Approved Judgment

This judgment was handed down remotely at 10.30am on 21 May 2024 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

Introduction

This is HMRC's appeal against the decision of the Upper Tribunal (Zacaroli J and Judge Guy Brennan) [2023] UKUT 00178 (TCC), which dismissed HMRC's appeal against the decision of the First-tier Tribunal (Judge Richard Chapman KC and Ms Gill Hunter) [2021] UKFTT 0451 (TC).

The issue is whether Hotel La Tour Ltd (“HLT”), the representative company of the Hotel La Tour Group which carries on the taxable business of providing hotel accommodation, can deduct input tax incurred in connection with a sale of shares in its managed subsidiary Hotel La Tour Birmingham Ltd (“HLTB”).

The FtT and UT held that HLT could deduct the input tax. Their conclusions rested significantly on the judgment of the Court of Justice of the European Union in Case C-29/08 Skatteverket v AB SKF [2010] STC 419 (“ SKF”) as they understood SKF to have been interpreted by the Supreme Court in Frank A Smart & Son Ltd v Revenue and Customs Commissioners [2019] UKSC 39, [2019] 1 WLR 4849 (“ Frank Smart”). For the reasons which follow, I disagree with the FtT and UT and conclude that HLT is prevented, by operation of the ordinary rules of VAT which are long-settled and not displaced by these or any other authorities, from recovering input tax which had a direct and immediate link with HLT's exempt supply of shares in HLTB. I am not persuaded that the existence of a VAT group between HLT and HLTB at the time of the share sale alters that conclusion.

Background

The facts are not controversial and can be shortly stated, drawing on the FtT's judgment at [2]–[13]. HLT is a holding company which owned the share capital of HLTB. HLT and HLTB formed a VAT group with HLT as the representative member. HLTB owned and operated a luxury hotel in Birmingham. HLT provided HLTB with management services including the provision of key personnel for the hotel business.

In 2015, HLT decided to develop a new hotel in Milton Keynes (the “Milton Keynes Development”). HLT decided to sell HLTB's business, which was mature, and use the proceeds of sale to part-fund the Milton Keynes Development. In July 2017, HLT sold the shares in HLTB to Dalata UK Ltd (“Dalata”) for £4,812,231.24, together with an undertaking from Dalata to put HLTB in funds to repay its borrowings from HLT in the amount of £12,179,678.66 and to repay its bank borrowings in the amount of £13,496,714. The net amount received by HLT as a result of the share sale was £16,000,000 comprising consideration for the shares and repayment of HLT's loan to HLTB, less the costs of sale including the fees for professional services (the “Net Proceeds”).

HLT engaged various third parties to provide professional services to assist with the sale including market research, buyer shortlisting, financial modelling and tax compliance (the “Services”). This was with a view to obtaining the highest price available for the shares, and thereby maximise the funds available for the Milton Keynes Development. The Services cost HLT £382,899.51 plus VAT of £76,822.95. The third parties providing the Services were:

i) Marketing agents (Jones Lang La Salle Ltd), who charged £255,000 plus VAT of £51,267.19;

ii) Solicitors (Shoesmiths), who charged £115,399.51 plus VAT of £23,055.76 for strategic advice and conveyancing costs; and

iii) Chartered Accountants (Grant Thornton), who charged £12,500 plus VAT of £2,500 for tax support in respect of the share sale.

HLT commenced the Milton Keynes Development using the Net Proceeds to fund it.

HLT filed its 09/17 VAT Return seeking repayment of the input tax incurred on the Services. HMRC commenced enquiries and concluded that HLT was not entitled to repayment of that input tax, upholding that conclusion on internal review.

The Tribunal Decisions

First-tier Tribunal

HLT appealed to the FtT on 2 November 2018. The matter came before the FtT for hearing on 2 and 3 June 2021. The FtT allowed HLT's appeal. At paragraph [35] it found that:

“… there is a direct and immediate link between the Services and HLT's downstream taxable general economic activities and … the chain is not broken by the share sale.”

At [36] the FtT said:

“We accept that the first stage of the analysis is to be modified in fundraising cases in the sense that (with one rider) the initial share transaction is to be disregarded.”

The rider was that:

“the chain will be broken where the cost of the inputs was a cost component of the price of the shares in the initial transaction” (see paragraph [36]).

At [41] the FtT said:

“We do not accept that the use of the Services for the fundraising transaction prevents deduction” (emphasis in original).

The FtT held that, objectively ascertained, the purpose of the share sale was to fund HLT's taxable general activities, namely the Milton Keynes Development (see paragraph [43]). It held that “… the Services were all part of the process of selling the Shares” but that “goes to the question of whether or not the Services were used in the fundraising transaction” and that while the FtT agreed that they were so used “this does not prevent deduction” (see paragraph [44]).

The FtT concluded as follows:

“46. We find that the cost of the Services was not incorporated in the price of the shares sold in (and were not cost components of the price of the shares in) the initial transaction. The agreed evidence is that the Shares were sold for the best price achievable in the market. The price was not increased in order to provide for the costs of the Services and there was no allocation for such costs within the sale price. We note in this regard that although there is no requirement for such increased price or allocation in order for the costs to be components of the price of the Shares, the presence of such increase or allocation would support the cost of the Services being cost components of the initial transaction. Instead, the Services were paid for out of the proceeds of sale, thus reducing the amount available for the taxable transactions and so being a cost of those taxable transactions. Further, for the reasons set out above, the objective purpose of incurring the costs of the Services was in order to raise the funds to pay for the downstream transactions.”

The FtT refused to allow HLT to rely on a late argument that HLT and HLTB were in the same VAT Group, but held that the argument would not in any event have succeeded (see paragraphs [50] and [53]). The FtT dismissed HLT's alternative argument, which was not renewed on cross appeal to the UT or to this Court, that the share sale should be treated as a transfer of a going concern (“TOGC”) for VAT purposes (see paragraph [62]). The appeal was allowed (see paragraphs [47] and [67]).

Upper Tribunal

HMRC appealed. The matter came before the UT on 13 June 2023. The UT rejected HMRC's submissions (see paragraph [59]) concluding that the reasoning and jurisprudence of the CJEU had evolved considerably since BLP (a reference to Case C-4/94, BLP Group PLC v Customs and Excise Commissioners [1996] 1 WLR 174, considered below) (paragraph [60] of the UT) and that the CJEU had applied the principle of fiscal neutrality to extend the Kretztechnik treatment (a reference to Case C-465/03 Kretztechnik AG v Finanzamt Linz [2005] 1 WLR 3755, also considered below) to what would “otherwise be an exempt transaction” by taking account of the ultimate purpose of the transaction (paragraph [61] of the UT). The UT held that Frank Smart had confirmed that approach and that “the BLP decision can no longer be regarded as representing a complete statement of the CJEU's jurisprudence in this area” (paragraph [62] of the UT). SKF had rejected the “chain-breaking” effect of an exempt transaction in the context of that transaction being a “fund-raising” transaction (paragraph [64] of the UT). It considered whether the costs were reflected in the price of the shares, interpreting SKF as requiring such an inquiry (see paragraph [66]).

The UT held that the FtT had correctly stated the law and was not in error in its application of the legal test to the facts, according to the “modified approach” signalled in SKF and Frank Smart (paragraph [67] of the UT). In those circumstances it was not necessary to address Mr Firth's alternative argument on VAT grouping (see paragraphs [68] and [70] of the UT). It dismissed HMRC's appeal (paragraph [71]).

Grounds of Appeal and Respondent's Notice

By her grounds of appeal, Ms McArdle, who has represented HMRC throughout, advances two grounds of appeal, which substantially overlap and which I shall consider under the heading the “ Deduction Issue”:

i) That the UT (and, inferentially, the FtT before it) fell into error in failing to apply the two-stage test of asking, first, whether the Services have a direct and immediate link to a specific supply for consideration constituting an economic activity (here, the exempt sale of shares in HLTB); and secondly, if (and only if) the answer to the first stage is that there is no such direct and immediate link, whether there is a direct and immediate link between the...