A taxpayer, a company in the hotel industry, has won its case at the Upper Tribunal (UT) having previously won it at the First-tier Tribunal (FTT).  The company owned a subsidiary that held and operated a luxury hotel in Birmingham.  The taxpayer wished to open a new hotel in Milton Keynes but to obtain the funds necessary to begin this venture it decided to sell the company that held the hotel in Birmingham.  The parent and subsidiary companies had formed a VAT group.  In selling the subsidiary company’s shares, the taxpayer incurred VAT on professional services (accountants, lawyers and brokers) used when making the sale.

The taxpayer then used the funds from the disposal of the hotel owning subsidiary to embark on establishing a new luxury hotel in Milton Keyens and also reclaimed the VAT on the professional services amounting to some £77k.  HMRC disagreed with the reclaim holding that the disposal was an exempt disposal of financial instruments and therefore the VAT incurred was attributable to this exempt transaction.  The taxpayer held that while the disposal of the subsidiary shares was indeed an exempt transaction the funds were used in the furtherance of the companies taxable activies and were therefore reclaimable.

The FTT had previously found for the taxpaying company holding that underlying EU law and a fairly recent Supreme Court (SC) case meant the taxpayer was entitled to reclaim the VAT on the exempt transaction costs as the funds were indeed used in the furtherance of the company’s taxable activities.  Please find analysis of the relevant SC case here.  The answer would have been different if the taxpaying company had undertaken exempt supplies, such as banking, education or insurance.  The UT found that the FTT had understood the law correctly and that its ‘application of these principles to the facts of the present appeal to be unimpeachable’.

The UT dismissed HMRC’s appeal.

The decision can be found at: THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS v HOTEL LA TOUR LTD [2023] UKUT 00178 (TCC) – GOV.UK (www.gov.uk)

This is a helpful decision from the UT showing that VAT incurred on both exempt and outside of the scope transactions can be reclaimed where the funds received are used in the furtherance of the taxpayers taxable activities..

Please contact if you have any questions on VAT and VAT groups.  The above case highlights that considering VAT early on when planning transactions can lead to substantial savings.