Supreme Court Ruling on Input VAT Recovery: Hotel La Tour Decision and Its Impact on Share Sales

The UK Supreme Court has brought finality to a long‑running dispute about whether companies can reclaim VAT on professional fees associated with selling shares in a subsidiary. In HMRC v Hotel La Tour Ltd [2025] UKSC 46, the court held that the input VAT incurred on adviser fees for an exempt share sale is not deductible, even where the purpose of the sale is to fund future taxable activities. This landmark ruling clarifies the direct and immediate link test for input VAT recovery and underscores the importance of transaction structuring for businesses.

Background to the Hotel La Tour dispute

• Hotel La Tour Ltd (HLT) acted as a holding company and owned all the shares in Hotel La Tour Birmingham Ltd (HLTB). HLT provided management services to HLTB, and together they formed a VAT group.
  
• In 2015 HLT decided to build a new hotel in Milton Keynes. To finance the project it sold its shares in HLTB to a third party. The sale proceeds, minus professional fees of about £382,900 plus VAT of £76,823, were used to fund the Milton Keynes development.
  
• HLT reclaimed the input VAT on those fees, arguing that the services were linked to its general hotel business and not the share sale. HMRC denied the claim on the basis that the share sale was a VAT‑exempt transaction.
  

Hotel La Tour Decisions of the tribunals

• First‑tier Tribunal (FTT): The FTT accepted HLT’s argument. It found that the professional services were not cost components of the share sale and that the sale’s purpose—to finance the Milton Keynes hotel—meant the fees were linked to taxable downstream activities.
  
• Upper Tribunal (UT): HMRC appealed, but the UT agreed with the FTT. It held that the share sale did not break the link to the taxable hotel activities; since the proceeds funded the new hotel, the fees were indirectly linked to taxable supplies.

Court of Appeal Outcome

HMRC appealed again. The Court of Appeal overturned the tribunals’ decisions, finding that the professional services were directly and immediately linked to the exempt share sale and therefore the VAT was irrecoverable. The Court of Appeal emphasised the BLP Group plc v Customs and Excise Comrs (CJEU) precedent, which states that where costs relate to an exempt transaction, input VAT cannot be deducted.

HLT then appealed to the Supreme Court.

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Supreme Court Ruling on VAT Recovery on Share Sale

On 17 December 2025 the Supreme Court unanimously dismissed HLT’s appeal. Lady Rose, delivering the judgement, confirmed key points:

• Direct and immediate link test: 

The court reaffirmed that to recover input VAT there must be a direct and immediate link between the services received and a taxable output. Where a service is a cost component of an exempt transaction—here, the share sale—VAT cannot be recovered. The court rejected the FTT and UT’s use of a ‘cost component’ analysis focused on whether the fees were built into the share price.

• Purpose of fundraising is irrelevant: 

HLT argued that because the purpose of the sale was to fund the taxable hotel business, the fees should be linked to that business. The Supreme Court disagreed. It held that the purpose for which funds are raised does not override the statutory treatment of a share sale as an exempt supply.

• Distinguishing exempt and out‑of‑scope transactions: 

The court drew a clear distinction between transactions within scope but exempt and those out of scope of VAT. If a transaction is out of scope (e.g., issuing new shares or obtaining a loan), costs may be linked to the general business, and VAT recovery may be allowed; but where the transaction is an exempt share sale, no deduction is possible.

• VAT grouping: 

HLT argued that because it and HLTB formed a VAT group, the share sale should be treated as out of scope and the fees attributable to the overall business. The Supreme Court rejected this, explaining that VAT grouping simplifies tax administration but does not change the nature of supplies; members continue to carry on economic activities between themselves.

The court therefore concluded that the professional fees were directly linked to the share sale and not to HLT’s general business; the input VAT was irrecoverable.

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Key principles on input VAT recovery

The decision clarifies several principles for businesses considering share sales:

• Exempt share sales block recovery

When a company sells shares in a subsidiary, the transaction is exempt from VAT under the financial services exemption. Input VAT on adviser fees incurred for that sale is not deductible.

• Out‑of‑scope transactions may allow recovery

If a transaction is outside the scope of VAT—such as issuing new shares or obtaining a loan—the related costs can be attributed to the overall business and input VAT can be recovered to the extent the business makes taxable supplies.

• Partial exemption for holding companies

Holding companies providing management services can sometimes recover VAT on professional costs if they can demonstrate that the costs relate to their economic activity and not solely to exempt transactions. However, the Supreme Court indicated such cases are fact‑specific and require evidence that services are linked to the general business.

• VAT grouping does not create a ‘fundraising exception’

Being in a VAT group does not convert an exempt share sale into an out‑of‑scope transaction. VAT grouping is a mechanism for simplifying administration and does not create new reliefs.

Why purpose doesn’t trump exemption

Some commentators hoped that the Supreme Court might recognise a “fundraising exception” for share sales used to raise capital for taxable activities. The court firmly rejected this approach. It said allowing the underlying purpose to determine VAT recovery would create uncertainty and encourage companies to manipulate records to suit tax goals. The decision restores legal certainty: if costs are directly linked to an exempt transaction, the intended use of the proceeds is irrelevant.

Implications of input VAT recovery case for businesses

Plan the transaction structure

The ruling makes clear that the method used to raise funds determines VAT recoverability. Companies that sell shares to fund projects cannot recover VAT on adviser fees because the share sale is exempt. In contrast, selling the business assets as a transfer of a going concern (TOGC) is outside the scope of VAT. In such cases, provided the buyer continues the same business and meets other conditions, VAT is not charged, and the seller may recover VAT on related costs.

Consider alternative fundraising options

• Loan financing or share issues: Raising finance via loans or issuing new shares may be outside the scope of VAT, meaning adviser fees could be attributable to the general business and input VAT recoverable.
• Selling assets instead of shares: If HLT had sold the hotel as a going concern rather than the shares in HLTB, the sale might have been outside the scope of VAT and VAT recovery on fees could have been possible.
• Partial exemption: Businesses with both taxable and exempt activities should regularly review their partial exemption method to maximise recovery of overhead VAT and ensure compliance.

Importance of expert advice

The Hotel La Tour case illustrates how easily VAT recovery can be misunderstood. Advisory fees for major transactions can be substantial, and getting the VAT analysis wrong may materially affect deal economics. Professional advisers can help businesses assess whether costs are linked to exempt or out‑of‑scope transactions and plan accordingly.

How We Help Businesses

At Apex Accountants, we specialise in helping businesses navigate the complexities of VAT on corporate transactions:

• Transaction planning and structuring: We analyse whether a proposed sale or acquisition should be structured as a share sale, asset sale or other finance arrangement to optimise VAT recovery.
  
• VAT and partial exemption reviews: Our team reviews your business’s VAT position, ensuring that partial exemption methods are appropriate and that input VAT on overheads is maximised within the law.
  
• Deal execution support: We work alongside legal advisers during due diligence to identify VAT risks, manage adviser fees and ensure compliance with HMRC requirements.
  
• Representation and dispute resolution: If HMRC queries your VAT treatment, we provide robust defence and negotiate with HMRC on your behalf.
  

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Conclusion

The Supreme Court’s decision in HMRC v Hotel La Tour confirms that adviser fees connected to exempt share sales are not recoverable. It emphasises that the method of fundraising matters more than its purpose: selling shares is an exempt supply, whereas issuing shares, taking loans, or selling assets as a going concern may be out of scope and allow VAT recovery. 

Businesses planning transactions should carefully examine the VAT implications and seek professional advice to avoid costly surprises. By structuring transactions appropriately and understanding the direct and immediate link test, businesses can maximise VAT recovery while remaining compliant with UK law.

If you are planning a share sale, restructuring, or fundraising transaction, it is important to review the VAT position early. Apex Accountants provide practical VAT advice tailored to your business activities. You can contact us to discuss your situation and understand the best approach before taking any steps.