VAT recovery on the disposal of shares

Some commentators are estimating that as many as 40% of business owners are planning to sell their companies in the next year or so, with the fear of increased taxes being touted as a key factor in these decisions. One area that may not be on the radar of these businesses is the potential to reclaim VAT on costs associated with such disposals.

The focus on VAT recovery on deal fees is often on the buy-side, with the acquiring vehicle not always able to reclaim VAT on significant professional and legal fees incurred in making the purchase. However, VAT recovery on sale-side costs is an important issue. The recent case of Hotel La Tour [2023] UKUT 178(TCC) is fact specific, but the dismissal of HM Revenue & Customs’ (HMRC’s) appeal by the Upper Tribunal (UT), highlights circumstances where VAT incurred on the disposal of shares would be recoverable.

In Hotel La Tour, a holding company (HLT) and a wholly owned subsidiary (which owned and operated a hotel), were members of the same VAT group, with HLT supplying management services to the subsidiary. In order to raise funds to develop a new hotel, HLT sold all of its shareholding in the subsidiary. HLT sought to reclaim VAT incurred on professional services incurred with respect to the disposal of the shares. The share sale itself is an exempt supply, and under basic VAT principles, the VAT on costs which are attributable to exempt supplies, are not recoverable. HMRC disallowed HLT’s claim to VAT, which was then appealed, and the First Tier Tribunal (FTT) agreed with HLT that the VAT was indeed recoverable. The UT has now dismissed HMRC’s appeal of the FTT decision.

At the heart of this case is the argument whether the exempt disposal of shares ‘breaks the chain’, preventing VAT recovery even if the motivation behind the disposal was to raise funds which would be used to develop a new fully taxable business operation. Applying previous case law in Frank A Smart [UKSC39 (2019)] and SKF (C-29/08) [2010] STC 419, the UT in Hotel La Tour concluded it is correct that the use of services for a fundraising transaction which was either outside the scope of VAT or exempt (as in the case of Hotel La Tour), did not prevent VAT deduction if the purpose of the fundraising was to fund future taxable economic activities, and the cost of those services are cost components of those ‘downstream’ taxable activities, and not incorporated into the price of the shares.

Holding companies which are disposing of shareholdings in subsidiaries should review their entitlement to VAT recovery on costs associated with the sale in advance, so any irrecoverable VAT is budgeted for, but also to maximise the VAT recovery opportunity where one exists.

If you have any queries on VAT recovery in regards to the disposal of shares, please speak to Nick Hart.