In a recent ruling, the Supreme Court dismissed Hotel la Tour Ltd’s appeal in which they argued that they were allowed to reclaim input VAT incurred on the professional fees that they incurred during the sale of shares in the company that owned their luxury hotel in Birmingham.

HMRC’s position was that the sale of shares was a VAT-exempt transaction and the legislation disallows input tax reclaim when there is a direct and immediate link between the input (in this case, the professional fees), and an exempt supply.

Hotel la Tour (HTL) argued that there was no direct and immediate link between the professional fees and the exempt share sale. Instead, the link existed between the fees and the overall taxable activities of the hotel group. Their reasoning for this was that the Birmingham hotel was sold in order to raise funds to build a new hotel in Milton Keynes.

The First Tier and Upper Tribunals had previously found in favour of HTL, although the Court of Appeal found that the Tribunals had incorrectly determined the correct test to establish the presence of a direct and immediate link. The Court of Appeal found that there was a direct and immediate link between the professional fees and the share sale because the fees were ‘cost components’ of the share sale, even though the amount of fees did not influence the share price.

HLT appealed to the Supreme Court which agreed with the Court of Appeal’s ruling. The appeal was dismissed.