The Upper Tribunal upheld the decision of the First Tier Tribunal (FTT) that the appellant, Hotel La Tour was correct in treating the sale of its shares as being outside the scope of VAT rather than an exempt supply.

In 2015, Hotel La Tour raised funds to invest in a new hotel in Milton Keynes and decided to finance the project by selling its existing hotel in Birmingham. The development was expected to cost £34.5m and the shares in the subsidiary that owned the hotel were eventually sold to an unrelated buyer in 2017.

The consideration for the purchase of shares was £4,812,231.24, subject to adjustments in completion accounts. Upon the sale, the Birmingham subsidiary was removed from the hotel’s VAT group.

The company then filed its 09/17 VAT return on 2 November 2017 seeking repayment of £68,883. On 23 November 2017, HMRC commenced enquiries in respect of the 09/17 VAT return.

HMRC rejected the claim and issued a VAT assessment of £76,000 on the basis that the professional services were used to make a supply of shares, to which VAT was not deductible because it was a VAT-exempt supply. This dispute proceeded to the FTT.

The professional fees were for accountants, solicitors and marketing agents.

During its appeal, HLT argued that the relevant services were ‘directly and immediately’ linked to the taxable supplies because the shares in its subsidiary, Hotel La Tour Birmingham Limited (HLTB) were sold to raise funds for the new hotel.

It also argued that because the Milton Keynes hotel and Birmingham hotel were in the same VAT group, the sale of the shares was to be treated as outside the scope of VAT rather than as an exempt supply.

The FTT agreed that the VAT had been incurred for the downstream taxable activities of running the new hotel in Milton Keynes.

In the Upper Tribunal, HMRC argued that the FTT had applied the wrong test for determining whether there was a direct and immediate link between the services and the sale of the shares.

HMRC relied upon the Court of Justice of the EU’s decision in BLP [1995], which ruled that where a taxable person supplied services to another taxable person who used them for an exempt transaction, the latter person was not entitled to deduct the input of VAT paid, even if the ultimate purpose was to carry out a taxable transaction.

In BLP, the taxpayer had sold shares in a company to raise funds to pay off debts incurred while making taxable transactions. They were carrying on an economic activity of supplying management services to its subsidiaries.

In their defence, Hotel la Tour relied on the case of SKF, which intended to dispose of two companies, to which it had provided services subject to VAT.

The proceeds of the sale were used to finance other activities of the group. The CJEU concluded that the principle of ‘fiscal neutrality’ required that SKF had the right to deduct input tax incurred during exempt sales of shares.

Judge Guy Brannan said: ‘It seems clear to us that the reason and jurisprudence of the CJEU has evolved considerably since BLP.

‘In SKF, the CJEU grappled with the issue of fiscal neutrality in circumstances where essentially the same transactions could either be outside the scope of VAT or exempt from VAT. We accept the submission made by Hotel La Tour that the CJEU in SKF was addressing the distinction between a transaction which is exempt and one which is outside the scope of VAT.