Hotel La Tour Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 03 December 2021 |
| Neutral Citation | [2021] UKFTT 451 (TC) |
| Court | First-tier Tribunal (Tax Chamber) |
[2021] UKFTT 451 (TC)
Richard Chapman QC
Mr Michael Firth, counsel, appeared for the appellant.
Miss Isabel McArdle, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents.
Value added tax – Fundraising transactions – Whether or not there was a direct and immediate link to downstream taxable activities – Yes – Whether or not VAT grouping means that there was no economic activity for the purposes of the initial transaction – No – Whether or not the share purchase agreement was the equivalent of a transfer of a going concern – No – Appeal allowed upon the basis of the direct and immediate link to downstream taxable activities.
The FTT permitted recovery of input tax incurred in relation to a share transaction on the grounds that the shares had been sold to raise funds and there was a direct and immediate link between the professional fees and downstream taxable activities.
The appellant, “HLT”, owns 100% of the share capital in its subsidiary Hotel la Tour Birmingham Ltd (“HLTB”). HLTB operated a hotel in Birmingham and received various services from HLT including key personnel and the right to use the Hotel la Tour brand name. HLT and HLTB were registered for VAT as a VAT group.
HLT decided to build a new hotel in Milton Keynes and that this development would be partially financed through the sale of HLTB. A buyer was found and, under the agreement for the sale of the shares, HLT would continue to provide services to HLTB in order that it could continue to operate the hotel.
The FTT was provided with evidence that the shares in HLTB were sold in order to finance the Milton Keynes development, including board meeting minutes and the loan agreement with the bank providing the additional finance required. The loan agreement stated that funds could not be drawn down until the net proceeds from the share sale had been used (para. 11).
HLT recovered VAT incurred on professional fees associated with the sale of HLTB shares on the grounds that, because the shares were sold to finance the construction of a new hotel, there was a direct and immediate link to future taxable supplies.
The FTT reviewed case law concerning attribution of input tax. It in particular it quoted extensively from the Court of Session decision in Frank A Smart & Sons Ltd (Scotland) [2019] BVC 37 in which a farmer was entitled to recover input tax incurred applying for subsidies used to support his farming activities (subsidies being a non-business income stream).
The FTT also referred to the ECJ decision in AB SKF (Case C-29/08) [2011] BVC 359 in which the ECJ stated “There is a right to deduct input value added tax … if there is a direct and immediate link between the costs associated with the input services and the overall economic activities of the taxable person. It is for the referring court to take account of all the circumstances surrounding the transactions at issue in the main proceedings and to determine whether the costs incurred are likely to be incorporated in the price of the shares sold or whether they are among only the cost components of transactions within the scope of the taxable person's economic activities” (para. 80 of the AB SKF decision).
The FTT concluded that the cost of the professional fees incurred by HLT had not been incorporated into the price of the shares, it was therefore not a cost component of the shares; and the objective purpose of obtaining the professional fees was to raise funds for the downstream activities, which were taxable (para. 46). For this reason the appeal was allowed (para. 47).
The FTT went on to consider HLT's other arguments, which were that either the sale of the shares was outside the scope of VAT (because HLT and HLTB were in a VAT group) or the sale of the shares was part of a transfer of a going concern (because HLT provided services to HLTB and would continue to do so). The FTT dismissed both of these grounds of appeal.
There have been a number of cases in which the question of when it is possible, in the context of input tax recovery, to consider the wider business purpose of an expense when attempting to establish the supplies with which it has a direct and immediate link.
Most recently the Court of Appeal refused to allow the Royal Opera House [2021] BVC 12 to draw a link between its catering supplies and the costs of its productions (the tickets to which are exempt).
In the context of professional fees incurred in connection with share transactions, the HLT case is interesting because it represents the clearest indication yet that jurisprudence has evolved in the 16 years since BLP Group plc (Case C-4/94) [1995] BVC 159 in which the ECJ stated “except in the cases expressly provided for by [the VAT directives], where a taxable person supplies services to another taxable person who uses them for an exempt transaction, the latter person is not entitled to deduct the input VAT paid, even if the ultimate purpose of the transaction is the carrying out of a taxable transaction” (para. 28).
Given the complexities of the issues involved an appeal by HMRC to the UT is probably likely.
[1] This appeal relates to the recoverability of input tax arising from fees for professional services incurred in respect of the sale of shares by Hotel La Tour Ltd (“HLT”) in HLT's subsidiary, Hotel La Tour Birmingham Ltd (“HLTB”). By a decision dated 26 June 2018, HMRC disallowed HLT's input tax claim for the period 09/17 and issued a corresponding assessment on the basis that the sale of shares was an exempt supply. HLT appeals upon the basis that the relevant services were directly and immediately linked to HLT's downstream taxable activities, that the effect of HLT and HLTB being in a VAT group is that the supply of the HLTB shares is to be treated as outside the scope of VAT, and, in the alternative, that the sale of the shares in HLTB is to be treated as a sale of a going concern. The amount in issue is £76,822.
[2] It is convenient to begin with our findings of fact as there was no dispute between the parties as to the factual circumstances of the appeal. We have been provided with a bundle of documents and witness statements from Mr Mark Stuart (HLT's current Managing Director and, at the relevant times, HLT's Finance Director) on behalf of HLT and from Mr Martyn Ransom (HMRC's decision-making officer) on behalf of HMRC. Although HMRC stated that they put HLT to strict proof as to its factual case, no competing set of facts were provided in answer to HLT's evidence. Further, neither counsel cross-examined the other party's witness. There is, of course, dispute between the parties as to the consequences of these factual circumstances.
[3] At the material time, HLT was a holding company and owned the whole of 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 under the name “Hotel La Tour”. HLT provided HLTB with management services. These management services included the provision of key personnel such as the general manager of the hotel.
[4] HLT also owned the right to the name “Hotel La Tour” together with other intellectual property and other rights, including the domain name for the Hotel La Tour website, the Hotel La Tour logo, and agreements between HLT and two online booking agencies. HLT permitted HLTB to use this intellectual property and rights although there was no evidence as to the terms or scope of such permission. HLTB was the leaseholder of the property comprising the hotel and its landlord was an unconnected third party. HLT had no interest of its own in the property.
[5] In about mid-2015, HLT decided to construct and develop a new hotel in Milton Keynes (“the Milton Keynes Development”). It was anticipated that this would cost approximately £34,500,000. Various finance options were considered. Ultimately, the preferred option was to sell HLTB and to borrow the shortfall from a bank. This choice was reinforced by the fact that the decision to build in Milton Keynes coincided with HLT concluding that HLTB's business had reached the stage where it could not grow any further.
[6] HLT sought to obtain the highest price possible for the shares, subject to offers being serious and viable. It is clear from board meeting minutes that from the outset the proceeds of sale of HLTB were to be used to fund the Milton Keynes Development.
[7] On 17 May 2017, HLT agreed heads of terms with Dalata UK Ltd (“Dalata”) for the purchase of the shares. The sale was completed by a share purchase agreement dated 21 July 2017 (“the Share Purchase Agreement”). The Share Purchase Agreement included (in summary) the following terms:
- HLT agreed to transfer the whole of its shares in HLTB to Dalata (the Shares).
- The Share Purchase Agreement defined the consideration for the purchase of the shares as being the sum of £4,812,231.24 subject to any adjustments for completion accounts.
- Dalata also undertook to put HLTB in funds to discharge its loan to HLT (being the outstanding sum of £12,179,678.66) and to discharge the sum owing to Coutts Bank (being the outstanding sum of £13,496,714) immediately after completion.
- HLT granted Dalata a licence for three months following completion to use the name Hotel La Tour and HLT's intellectual property and a licence for twelve months following completion to use the term previously known as Hotel La Tour on its website and other literature.
- HLT agreed to various restrictive covenants including not to operate or be interested in a competing hotel, restaurant or conference centre within 40 miles of the centre of Birmingham for three years.
- Paragraph 10.2 of Schedule 2 to the Share Purchase Agreement provides the following warranty (the Target being HLTB):10.2. Assets sufficient for the businessThe...
To continue reading
Request your trial