TLLC Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 03 September 2013 |
| Neutral Citation | [2013] UKFTT 467 (TC) |
| Date | 03 September 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 467 (TC)
Judge Edward Sadler, Michael Sharp.
Kevin Prosser QC, instructed by Deloitte LLP, appeared for the Appellant
Kieron Beal QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Value added tax - input tax - recovery of VAT on professional fees relating to the sale of shares in subsidiary companies - whether sale of shares constituted an economic activity - if so, whether an exempt supply - if an exempt supply, whether input tax deductible - whether sale of shares a transfer of a going concern - if so, whether input tax deductible - whether discharge of indebtedness by subsidiary companies on completion of sale comprised part of consideration for the supply of the shares - appeal dismissed.
The First-tier Tribunal dismissed the taxpayer company's appeal against HMRC's decision that it was unable to claim input tax credit on supplies received from its professional advisers in relation to the sale of shares in subsidiary companies. The sale was exempt from VAT and the costs incurred were directly and immediately linked to the exempt supply so that the company was not entitled to recover attributable input tax.
The taxpayer was the representative member of a VAT group carrying on a taxable business of providing hotel accommodation under the name "Travelodge". Under the terms of a sale and leaseback agreement, the group sold 16 hotel properties directly and sold the shares in 18 subsidiary companies which between them held 119 hotel properties. The Travelodge group incurred substantial professional fees in relation to the sales of the subsidiary companies and maintained that it was entitled to credit for the VAT charged on the fees. HMRC denied the claim, in the sum of £723,627, primarily on the ground that the supplies in question were directly linked to the exempt supply of shares in the subsidiaries.
The Tribunal was asked to consider six questions: whether the sale of shares constituted an economic activity for VAT purposes; if not, whether the appellant was entitled to recover the VAT paid on the professional fees; if the sale of the shares was an economic activity, whether it was, nevertheless, outside the scope of VAT as the transfer of a going concern; if the sale of the subsidiary companies was the transfer of a going concern, whether the taxpayer was entitled to recover the VAT paid on the professional fees; if the sale of the subsidiary companies was an economic activity which was an exempt supply, whether the taxpayer was, nevertheless, entitled to recover the VAT paid on the fees; and, finally, the value of the consideration for the sale of shares, should it be necessary to calculate deductible input tax in the event of an apportionment being required between exempt and other supplies.
The first question had to be answered in order for the Tribunal to address the main issues. It was the taxpayer's view that if the sale was not an economic activity and was, therefore, outside the scope of VAT, the VAT incurred in relation to the sale should be deductible as being directly and immediately linked to its taxable business activities, in the nature of overhead costs. However, the Tribunal found that the sale of the shares was an economic activity for the purposes of EC Directive 2006/112 (the 2006 VAT Directive) and was exempt from VAT. In view of this finding, it was not necessary to address the second question. In answer to the third question, the Tribunal held that the sale of shares in the subsidiaries did not amount to the transfer of a business as a going concern and this rendered the fourth question otiose.
Having concluded that the sale of the subsidiary companies was an economic activity and an exempt supply, the Tribunal next considered whether the taxpayer was entitled to recover the VAT paid on the professional fees. The company's submission, based on principles established inSkatteverket v AB SKFECAS (Case C-29/08) [2011] BVC 359, was that the costs were not costs which were incorporated in the price of the shares, and therefore were not directly linked to the exempt transaction comprised by the sale of the shares. Consequently, the expenditure was incurred in making taxable supplies and the input tax was deductible. The Tribunal dismissed the taxpayer's argument, holding that, on any sensible basis, the costs must be regarded as incorporated in the price of the shares and must, therefore, be directly and immediately linked to the sale of the shares. Having sided with the taxpayer on the final question regarding the method of establishing the value of the consideration of the share sales, the Tribunal dismissed the appeal. The taxpayer was not entitled to recover the input tax paid on the supplies of professional services in relation to the sale of the subsidiaries.
This long-running appeal commenced in 2007, but was delayed to await delivery of the judgment of the Court of Justice of the European Union in the case ofSkatteverket v AB SKF. The hearing was further delayed awaiting the judgment of the same court in Staatssecretaris van Financiën v X BV (Case C-651/11) [2013]. The latter decision was ample authority for the proposition that where there is a transfer of shares alone, even the entire shareholding, that cannot be treated as the transfer of a business as a going concern.
For commentary on the VAT implications of selling the shares of a company see theCCH VAT Reporter at 54-150. For the deduction of VAT upon the disposal by holding companies of subsidiaries see 19-105.
[1]This is an appeal by the company TLLC Limited ("the Appellant") against an assessment to VAT made by The Commissioners for Her Majesty's Revenue and Customs ("the Commissioners") and dated 5 July 2007. That assessment was made to recover certain input tax which the Appellant had claimed as a credit against its output tax for its VAT quarterly accounting periods 12/04 and 03/05. The amount of VAT so assessed is £723,627.21.
[2]The Appellant delivered its notice of appeal on 31 October 2007. By agreement of the parties the appeal was stood over for a number of years awaiting the delivery of the judgment of the Court of Justice of the European Union ("the CJEU") inSkatteverket v AB SKFECAS (Case C-29/08) [2011] BVC 359 ("the AB SKF case"). Following that judgment the Appellant delivered a revised notice of appeal, specifying further grounds of appeal, on 10 August 2011.
[3]At the hearing of the appeal the parties were aware that a further case was before the CJEU, the decision in which could be relevant to certain of the submissions made at the hearing. A decision in that case was released on 30 May 2013, and following its release the parties made further written submissions to the tribunal with reference to that decision (Staatssecretaris van Financiën v X BVECAS (Case C-651/11) [2013] ECR I-0000 ("the X BV case")).
[4]The Appellant is the representative member of a VAT group carrying on a business of providing hotel accommodation under the Travelodge trade name. The supplies made in the course of that business are taxable supplies for VAT purposes. In late 2004 and early 2005 members of the Travelodge group of companies entered into a complex sale and leaseback transaction with an unrelated third party in relation to certain of the group's hotel properties. In the course of that transaction the group sold 16 hotel properties directly, and sold the shares in 18 subsidiary companies which between them held 119 hotel properties. The subsidiary companies in question were substantially indebted to other (retained) Travelodge group companies, and on completion of the sale of the subsidiary companies the purchaser procured each subsidiary company to discharge its indebtedness to the Travelodge group.
[5]The Travelodge group incurred substantial fees from its professional advisers in relation to the sale of the subsidiary companies (and also in relation to the sale of the 16 hotel properties sold directly, but that is not a concern of this appeal). Those advisers charged VAT on the supply of the services they had made (which, by virtue of the VAT group registration were all treated as made to the Appellant). The Appellant claims, on a number of alternative grounds, that it is entitled to a credit for such VAT charged to it as input tax. The Commissioners deny that claim, principally on the ground that the supplies in question are directly linked to an exempt transaction entered into by the Appellant (that is, the sale of the shares in the subsidiary companies).
[6]Simply stated, therefore, the issue for determination is whether the Appellant is entitled to recover (by way of credit) the input tax it has paid on the supplies made to it by its professional advisers in relation to the sale of the subsidiary companies.
[7]As matters were refined by the parties during the preliminary stages of the appeal proceedings, and in particular as the parties developed their respective arguments in the light of the judgment in theAB SKF case, they together posed six questions for our decision:
(2) Question 1: Did the sale of the shares in the subsidiary companies constitute "an economic activity" for VAT purposes? The Appellant argues that it did not (it therefore being a transaction outside the scope of VAT); the Commissioners argue that it did.
(3) Question 2: If the sale of the subsidiary companies is not an economic activity, is the Appellant entitled to recover the input tax paid on the professional fees? The Appellant argues that in such a case the costs of its input supplies are overhead costs of its taxable business and the VAT is therefore recoverable; the Commissioners argue that the professional fees are directly and immediately linked with the sale of the subsidiary companies, and not with the group's hotel...
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