The holding company decided to set up another luxury hotel in Milton Keynes. To help pay for this it decided to sell its shares in the trading company. The holding company reclaimed the VAT incurred on the professional fees for the sale.

HMRC disallowed the VAT reclaim initially on the basis that the holding company was not making any economic supplies.

By the time the case reached Tribunal, HMRC had accepted that the holding company was undertaking taxable activities. HMRC’s reasoning re. the assessment was that the costs related to the exempt disposal of existing shares and as such were irrecoverable.

The taxpayer argued:

1. There was a direct link to the investment in the MK hotel and the future taxable supplies this would make;
2. As a VAT Group, the sale of the shares was outside the scope of VAT rather than exempt (this is based on a  previous case where an initial share offering was seen as outside the scope of VAT and as such the VAT incurred in making this supply was seen as an overhead of the business);
3. The sale of the shares should be treated as a Transfer of a Going Concern (TOGC).
   

Points 2 and 3 were dismissed by the Tribunal, however, the Tribunal took the view that the costs were directly linked to the “downstream” taxable supplies of the Milton Keynes hotel and this chain was not broken by the share sale. This view was upheld by the Upper Tier.

HMRC appealed this decision to the Court of Appeal. The Court has just released its ruling.

The Court of Appeal has agreed with HMRC that the costs related to the exempt share sale not the subsequent taxable supplies for the new hotel. This is in line with HMRC’s approach to VAT recovery. HMRC’s concerns regarding the Tribunal rulings was that there would be numerous cases were there was eventually a taxable supply and they would be inundated with claims.

That said, this may not be the end of the matter if the taxpayer appeals to the Supreme Court. If your business is in a similar situation to the taxpayer, a protective claim should be considered. Those that have made a claim based on the Tribunal rulings should also get professional advice as to the next steps.

If you have any questions regarding this or any other VAT issues, please contact our VAT Director, Ian Marrow .