Revenue and Customs v Hotel La Tour Ltd: Input VAT on Exempt Fundraising Share Sales and the Limits of VAT Grouping

Revenue and Customs v Hotel La Tour Ltd: Input VAT on Exempt Fundraising Share Sales and the Limits of VAT Grouping

Case: Revenue and Customs v Hotel La Tour Ltd [2025] UKSC 46
Court: United Kingdom Supreme Court
Judge: Lady Rose (with whom Lord Briggs, Lord Hamblen, Lord Leggatt and Lord Richards agree)
Date: 17 December 2025

1. Introduction

This judgment is now the leading UK authority on when input VAT on professional fees incurred in connection with the sale of a subsidiary can be deducted, especially where:

  • the share sale is used to raise funds for a fully taxable business; and
  • the parent and subsidiary are members of a VAT group.

Hotel La Tour Ltd (“HLT”) was a holding company which:

  • owned all the shares in Hotel La Tour Birmingham Ltd (“HLTB”),
  • provided management services to HLTB for a fee, and
  • directly operated other taxable hotel activities.

To finance the construction of a new Milton Keynes hotel costing about £34.5m, HLT sold its shares in HLTB and used all net sale proceeds for the new project. HLT incurred professional fees (market research, shortlisting buyers, financial modelling, tax compliance etc.) of £382,900 plus £76,823 VAT.

The central question was whether that VAT was recoverable as input tax. HMRC said no: the professional services were directly and immediately linked to an exempt share sale. HLT argued that the link was with its general taxable hotel business and that the share sale was merely a fundraising step towards taxable activity.

The case thus required the Supreme Court to:

  • reconcile a complex body of CJEU case law on:
    • the “direct and immediate link” test,
    • exempt vs out-of-scope transactions,
    • share transactions by holding companies, and
    • fundraising transactions,
  • clarify the correct reading of SKF and its interaction with BLP, Abbey National, Kretztechnik and Frank Smart, and
  • determine whether VAT grouping under VATA 1994 s 43 can recharacterise the sale of a subsidiary so as to improve deductibility.

The Supreme Court dismissed HLT’s appeal and held that the VAT on the professional fees was not deductible.

2. Factual and Procedural Background

2.1 The commercial structure

  • HLT was a holding company.
  • HLTB was its wholly-owned subsidiary which operated a luxury hotel in Birmingham.
  • HLT provided management services to HLTB for remuneration (a taxable economic activity).
  • In mid‑2015, HLT decided to develop a new hotel in Milton Keynes, funded by:
    • sale of its shares in HLTB, plus
    • bank borrowing.

HLT engaged advisers to sell HLTB:

  • market research,
  • buyer shortlisting,
  • financial modelling,
  • tax compliance advice.

These professional services generated input VAT of £76,823.

HLT and HLTB were members of a VAT group under VATA 1994 s 43 at the time of the share sale.

2.2 HMRC’s position

HMRC accepted (after some initial dispute) that:

  • HLT’s management services to HLTB amounted to an economic activity, so that
  • the sale of HLTB shares fell within the scope of VAT (as a permanent and necessary extension of that activity, per Larentia + Minerva) but was exempt under art 135(1)(f) PVD and Item 6, Group 5, Sch 9 VATA.

On that footing, HMRC argued:

  • the professional services were “part of the process” of selling the shares,
  • there was a direct and immediate link between those inputs and the exempt share sale, and
  • input tax was not deductible.

2.3 First-tier Tribunal (FTT)

The FTT (Judge Richard Chapman QC and Ms Gill Hunter) decided for HLT ([2021] UKFTT 451 (TC)):

  1. “Fundraising modification” of the test
    The FTT held that in “fundraising cases” (including share disposals to raise capital), the usual “direct and immediate link” test is “modified” so that:
    • the initial share transaction is “to be disregarded”, and
    • if objectively the purpose of the share sale is to fund the taxable economic activity of the business, input VAT on costs for the share sale is treated as linked to the general taxable business, not to the share sale itself.
    They relied on a line of cases culminating in SKF and the Supreme Court decision in Frank A Smart.
  2. “Cost components” and pricing
    The FTT also held the costs were not “incorporated into” the price of the HLTB shares because the shares were sold for the best market price; the sale price had not been marked up to cover professional fees. This supported (in their view) that inputs were cost components of the general hotel business, not of the share sale.
  3. VAT grouping argument
    HLT raised late an argument that VAT grouping meant HLT’s management services to HLTB should be ignored, so the share sale was out of scope (like a pure holding company). The FTT refused to entertain the new point and said they would in any event have rejected it.

2.4 Upper Tribunal (UT)

The UT (Zacaroli J and Judge Brannan) dismissed HMRC’s appeal ([2023] UKUT 178 (TCC)):

  • They endorsed the FTT’s view that there is a special fundraising rule: where a share sale (even if exempt or out of scope) is objectively for raising funds for taxable activities, the share sale is effectively disregarded and inputs are treated as linked to the general economic activity.
  • They agreed that the inputs were “cost components” of the general hotel business rather than of the share sale.
  • They did not address VAT grouping.

2.5 Court of Appeal

The Court of Appeal (Whipple LJ, with Nugee and Elisabeth Laing LJJ) allowed HMRC’s appeal ([2024] EWCA Civ 564):

  • The CJEU case law did not establish:
    • a rule that inputs for exempt share sales can never be attributed to the general business; nor
    • a rule that fund‑raising share sales are always to be disregarded, with inputs automatically attributed to the general business.
  • Rather, in line with SKF, it is for the national court to decide, on the facts, whether inputs are directly and immediately linked to:
    • the exempt share sale, or
    • the overall economic activity.
  • The FTT/UT misapplied the “cost component” concept by focusing on pricing methodology; the test does not depend on a cost‑plus price formulation.
  • On the facts, the inputs (marketing, legal and accounting fees) were “part of the process of selling the shares” and were “used” in that fundraising transaction: they were directly and immediately linked to the exempt share sale. Input tax was therefore irrecoverable.

The Court of Appeal’s approach to VAT grouping was later upheld by the Supreme Court, though that court addressed the grouping point expressly.

2.6 The Supreme Court

The Supreme Court dismissed HLT’s further appeal. It held, in essence, that:

  • the FTT and UT misapplied the “cost component” concept,
  • there is no special modified rule for “fundraising” share disposals: the same direct and immediate link test applies,
  • SKF does not abolish the distinction between exempt and out‑of‑scope transactions, nor does it create an automatic attribution of share sale costs to general business simply because the proceeds are used for taxable activities, and
  • VAT grouping does not reclassify the sale of HLTB’s shares from exempt economic activity into an out-of‑scope transaction.

3. Summary of the Supreme Court’s Decision

The key holdings can be summarised as follows:

  1. Cost components: pricing is not decisive
    The notion that inputs must be “components of the price” (art 1(2) PVD) does not require:
    • a cost‑plus pricing structure, or
    • proof that the specific costs were added into the sale price.
    The FTT and UT erred by relying on the mechanics of price formation in the share sale to decide attribution.
  2. Exempt vs out-of-scope transactions: SKF did not erase the distinction
    The court confirmed:
    • Exempt supplies (like many share disposals) “break the VAT chain”: inputs directly and immediately linked to them are not deductible.
    • Out‑of‑scope transactions, by contrast, may allow attribution of inputs to the trader’s general economic activity (as in Abbey National and Kretztechnik).
    • SKF did not create a universal rule that exempt share disposals must be treated like out‑of‑scope transactions for input tax purposes.
  3. No “fundraising exception” to the direct and immediate link test
    There is no special rule that fundraising transactions (including share disposals) are to be “disregarded” and their input costs automatically attributed to the general business merely because:
    • the objective or subjective purpose is to raise funds for taxable activities, or
    • the proceeds are actually used in taxable activities.
    The test remains: to what transaction(s) are the inputs directly and immediately linked?
  4. Purpose of the share sale is generally irrelevant
    Outside the specific context of pre‑trading expenditure (or timing issues considered in cases like Sveda and Frank Smart), the purpose of raising funds does not alter the attribution of input tax. The Supreme Court rejected any general “follow the money” rule.
  5. Application to HLT’s facts
    On the findings of the FTT itself, the:
    • marketing,
    • legal, and
    • accountancy
    costs were “part of the process” of selling the HLTB shares and “used in the fundraising transaction”. That means that:
    • the inputs had a direct and immediate link with the exempt share sale, and
    • no right to deduct arises.
  6. VAT grouping does not convert exempt activity into out-of-scope
    VAT grouping under VATA s 43:
    • is a simplification measure for administration and anti‑avoidance;
    • causes intra‑group supplies to be disregarded for accounting purposes;
    • does not retrospectively negate the fact that:
      • HLT provided taxable management services to HLTB; and
      • the sale of HLTB’s shares is a permanent and necessary extension of that economic activity and thus an exempt economic activity.
    HLT could not use VAT grouping as a device to characterise the share sale as out of scope and thereby secure deductibility.

Accordingly, the Supreme Court upheld the Court of Appeal and confirmed that HLT’s input VAT of £76,823 on the professional fees is irrecoverable.

4. Legal Framework

4.1 Deduction of input VAT: PVD and VATA 1994

Article 168 of the Principal VAT Directive (“PVD”, Directive 2006/112/EC) provides that, in so far as goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person is entitled to deduct VAT charged on those inputs.

This is implemented in the UK by VATA 1994 s 24, which defines “input tax” as VAT on supplies to a taxable person of goods or services “used or to be used for the purpose of any business carried on or to be carried on by him”.

From this, CJEU case law developed the familiar “direct and immediate link” test:

  • Input VAT is deductible where there is a direct and immediate link between the input and:
    • a particular taxable output transaction; or
    • failing that, the taxable person’s overall economic activity.
  • If the direct and immediate link is with:
    • an exempt transaction, or
    • a transaction outside the scope of VAT,
    input VAT is generally not deductible.

4.2 Inputs as “cost components”

Article 1(2) PVD refers to deduction of “VAT borne directly by the various cost components” of the price of goods/services. The “cost components” or “components of the price” language is frequently repeated by the CJEU (e.g. Investrand).

Crucially, however, as the Supreme Court stresses (following Volkswagen Financial Services and AG Kokott in C&D Foods):

  • “Cost component” is an economic, not a mathematical, concept.
  • There is no requirement to show that:
    • the business used a “cost‑plus” method; or
    • the costs in question were itemised in a pricing model.
  • An input is a cost component whenever it is economically and objectively linked to the activity such that the profitability of the activity depends on it.

4.3 Share transactions and economic activity

As a general rule (e.g. Harnas & Helm):

  • mere acquisition, holding and sale of shares is not economic activity;
  • it is therefore outside the scope of VAT.

However, where a holding company:

  • is directly or indirectly involved in managing its subsidiaries, and
  • that involvement entails the provision of services for consideration (administrative, financial, commercial, technical etc.),

the holding company has an economic activity. This is the Cibo/Floridienne/Larentia + Minerva line of authority.

In those circumstances:

  • expenditure on acquiring shareholdings in subsidiaries is a general cost of the economic activity (and thus generally deductible, subject to any exempt outputs);
  • transactions in the shares themselves (including disposals) can be a permanent and necessary extension of that taxable management activity (Larentia + Minerva, Sonaecom, SKF).

4.4 Exempt share sales

Article 135(1)(f) PVD requires Member States to exempt from VAT:

“transactions, including negotiation but not management or safekeeping, in shares, interests in companies or associations, debentures and other securities…”

In the UK this is implemented in Group 5, Schedule 9 VATA. Thus:

  • if a share sale is an economic activity, it is within the scope of VAT but exempt;
  • input tax costs directly and immediately linked to that share sale are therefore non‑deductible (subject to partial exemption rules where appropriate).

4.5 VAT grouping (art 11 PVD, VATA s 43)

Article 11 PVD allows a Member State to regard as a single taxable person “any persons [within its territory] who, while legally independent, are closely bound to one another by financial, economic and organisational links.”

In the UK, VATA s 43 provides that:

  • VAT group members are treated as a single taxable person;
  • supplies between group members are disregarded “for the purposes of this Act”.

The CJEU has stressed that grouping:

  • is a mechanism to simplify administration and combat abuse (Norddeutsche Gesellschaft),
  • does not itself alter the substantive conditions for being a taxable person (Polysar), and
  • means intra‑group transactions are not recognised for VAT accounting purposes, but that does not obliterate the underlying economic reality (Finanzamt T v S).

5. Precedents and Case Law in Detail

5.1 The direct and immediate link & general costs

  • Investrand
    Confirmed that:
    • inputs can be deductible even without a direct link to a specific taxable output, if they form part of the taxable person’s general costs, and
    • as such, they are components of the price of all supplies and have a direct and immediate link with the economic activity as a whole.
  • Midland Bank
    Recognised the “direct and immediate link” test and stressed:
    • it is not possible to formulate rigid rules for every commercial configuration;
    • national courts must apply the test on the facts, considering all circumstances (para 25).

5.2 Inputs appearing to be “consumed” by non‑taxable transactions: Sveda & Iberdrola

  • Sveda
    The taxpayer built a free‑to‑use mythology path, funded 90% by the Ministry of Agriculture, intending to sell taxable refreshments and souvenirs to visitors.
    • The path itself was provided free (out of scope), yet the CJEU held that the input costs had a direct and immediate link with the planned taxable activities as a whole.
    • The immediate “use” of capital goods free of charge did not break the direct and immediate link with the economic activity (para 34).
  • Iberdrola
    Iberdrola rebuilt a waste‑water pump owned by a municipality free of charge, so that it could connect a holiday apartment complex (its future taxable activity).
    • The pump reconstruction (a free supply to the municipality) was out of scope.
    • Nonetheless, the costs had a direct and immediate link with Iberdrola’s overall economic activity (future letting of apartments), so input VAT was deductible.

These cases show that even where inputs are “consumed” in free or out‑of‑scope activities, the direct and immediate link can be with the taxable business as a whole. That concept was pivotal to the arguments made by HLT but, as the Supreme Court explains, cannot simply be transplanted into cases involving exempt share sales without careful attention to the broader case law.

5.3 Holding companies, share transactions and economic activity

  • Harnas & Helm
    Confirmed that passive holding of shares (no management involvement, no services) is not economic activity.
  • Floridienne & Cibo
    Established that:
    • a pure holding company is not a taxable person;
    • however, if it takes direct or indirect involvement in managing subsidiaries and provides taxable services for remuneration, it becomes a taxable person; and
    • expenditure connected with acquiring such shareholdings is attributable to the economic activity (general costs).
  • Larentia + Minerva
    Confirmed that expenditure on acquiring holdings in subsidiaries, where the parent is involved in management through taxable services, is attributable to the parent’s economic activity as a whole and that input VAT is, in principle, fully deductible (subject to exemptions).
  • Sonaecom
    Reaffirmed that acquisition‑related costs can be general costs and that deduction may be partial where the group’s economic activity involves exempt outputs.
  • C&D Foods
    Concerned a proposed share disposal by a parent which provided management services to its subsidiary:
    • the CJEU held that the proposed share sale did not amount to economic activity (was out of scope) because it was not a permanent and necessary extension of the parent’s economic activity; and
    • input VAT on legal fees incurred in preparing the sale (which did not in fact occur) was not deductible.

These cases form the doctrinal backdrop for treating the HLT share sale as an economic activity and therefore exempt under art 135(1)(f).

5.4 Exempt vs out-of-scope & fundraising: BLP, Abbey National, Kretztechnik

  • BLP Group
    • BLP sold shares in a German company (an exempt share sale) to pay off bank debts associated with its taxable business.
    • It claimed deduction of VAT on professional fees, arguing the wider purpose was to support its taxable activities.
    • CJEU rejected this: input tax on services “used for an exempt transaction” is not deductible even if the ultimate purpose is to finance taxable activity.
    • The CJEU ruled that focusing on the purpose of raising funds would undermine legal certainty and violate the objective nature of the VAT system (para 24).
  • Abbey National
    • Involved a transfer of a business as a going concern (“TOGC”), which the UK treated as a “non‑supply” (out of scope).
    • Input VAT on services incurred in effecting the transfer was deductible because:
      • the TOGC was not an exempt supply breaking the VAT chain;
      • the input costs formed part of the overheads of the transferor’s economic activity as a whole (para 35–36).
  • Kretztechnik
    • Concerned a company issuing new shares (an out‑of‑scope transaction) to raise capital for its fully taxable business.
    • The CJEU held that the issue of new shares was not a supply to shareholders, so it was out of scope.
    • Costs of listing and issuance formed part of overheads and had a direct and immediate link with the whole economic activity; input VAT was fully deductible (para 36–37).

Taken together, these cases establish a crucial distinction:

  • where the specific transaction is exempt (BLP), inputs directly linked to it are non‑deductible, even if the wider financing purpose is to support taxable activities;
  • where the specific transaction is out of scope (Abbey National, Kretztechnik), its existence does not break the VAT chain, and the inputs may be treated as overheads of the taxable economic activity.

5.5 SKF, fiscal neutrality and Frank Smart

(a) SKF

SKF was especially important in this appeal. SKF, a parent company actively managing subsidiaries, proposed to dispose of two shareholdings to fund other activities in its group.

The key elements:

  • Like here, the share disposals were:
    • part of a restructuring,
    • designed to raise funds for wider group activities.
  • The CJEU held:
    • that such disposals were economic activity where the parent provided taxable services to the subsidiaries (paras 33–36), and
    • that, depending on Member State implementation of the TOGC rules, a disposal could be either:
      • out of scope, if equivalent to a transfer of a totality of assets under art 5(8); or
      • an exempt share transaction under art 135(1)(f).

The controversial feature of SKF was the CJEU’s discussion of fiscal neutrality:

  • Earlier case law allowed deduction of consultancy fees related to share disposals that were out of scope (e.g. Abbey National, Kretztechnik).
  • In SKF, the CJEU suggested that if, in out‑of‑scope cases, consultancy costs are treated as general costs, then “the same tax treatment must be allowed” where the share disposal is exempt, otherwise fiscal neutrality would be infringed (para 66–71).
  • But crucially, this conclusion is conditional: it only applies if, on the facts, the costs are not directly and immediately linked to the exempt disposal itself and are instead cost components of the taxable person’s general economic activity.

The Supreme Court therefore interprets SKF as:

  • rejecting any automatic rule that exempt disposals necessarily preclude attribution of input costs to the general activity; but
  • preserving the framework that:
    • if inputs are directly and immediately linked to a specific exempt share disposal, they are non‑deductible (BLP still good law);
    • only where there is no such link can one treat them as overheads of general taxable activity.

(b) Frank Smart

Frank A Smart & Son Ltd v HMRC involved purchase of entitlement units to receive agricultural subsidy payments (the subsidies themselves being out of scope). The Supreme Court there held:

  • input VAT on the purchase of the units was deductible, because the expenditure was incurred as part of a funding exercise to develop FASL’s taxable business (future capital expenditure on farming assets),
  • the timing point was crucial: the question was whether the units were acquired to finance future taxable activity.

In the present case, HLT relied on passages in Frank Smart where Lord Hodge:

  • spoke of the purpose of fundraising as a question of fact, and
  • appeared to endorse that expenditure incurred “with a view to” future taxable economic activity may be deductible.

Lady Rose carefully analysed these references and concluded that:

  • Frank Smart is about pre‑trading / future use of inputs and does not establish a general “purpose‑based” rule for share disposals;
  • Lord Hodge’s comments on purpose must be read in that timing context and in light of CJEU case law like Sveda and Gabalfrisa.

(c) Cambridge and Deutsche Bank: limits of fiscal neutrality

The Supreme Court also highlights later CJEU authority which confirms that fiscal neutrality is a principle of interpretation only:

  • Deutsche Bank – held that fiscal neutrality cannot expand the scope of an exemption beyond its wording (para 45). It is not a rule of primary law overriding legislative choices between taxable and exempt transactions.
  • Cambridge – University fees charged by a fund manager on an endowment/donations fund were non‑deductible because:
    • raising and managing donations was non‑economic (out of scope);
    • that remained so “regardless of the reason why those donations… were received” (para 29);
    • the funds merely subsidised the University’s activities, they were not cost components of taxable outputs.

These cases support the Supreme Court’s rejection of a broad “follow the money” or purpose‑based modification of the direct and immediate link test.

5.6 VAT grouping: Norddeutsche, Polysar, Thorn, Northumbria

  • Norddeutsche Gesellschaft
    Confirmed that the purpose of VAT grouping is simplification and anti‑abuse, and emphasised that what matters for taxable person status is whether an entity carries on independent economic activity in its own name and at its own risk (para 78).
  • Polysar
    AG van Gerven stressed that art 4(4) of the Sixth Directive (now art 11 PVD) is not aimed at altering the underlying conditions for liability to tax. Grouping is an administrative device; it does not turn a non‑economic entity into a taxable person simply because it belongs to a group.
  • Thorn Materials Supply
    Concerned time of supply where part of the purchase price was paid while seller and buyer were in the same VAT group. The House of Lords relied on the disregard provision to treat intra‑group supplies as not giving rise to VAT until after the seller left the group. But the total consideration, including sums paid whilst intra‑group, still formed the measure of VAT. Lady Rose uses this to show that “disregard” is not absolute: courts may look into the “black box” of the VAT group when necessary.
  • Northumbria NHS Foundation Trust
    Concerned different “de‑supply” provisions in secondary legislation governing cars provided to employees. The Supreme Court distinguishes it here; its specific statutory wording is inapplicable to VAT grouping.

These authorities underpin the Supreme Court’s conclusion that VAT grouping:

  • does not erase the economic reality of management services between HLT and HLTB for purposes of art 135(1)(f);
  • does not change the classification of the share sale from exempt economic activity to out‑of‑scope non‑activity.

6. The Supreme Court’s Legal Reasoning

6.1 Rejection of the “cost components / pricing” approach

Lady Rose firmly rejected the idea that input tax attribution turns on whether the input costs were factored into the price of the share sale.

Relying on Volkswagen Financial Services and AG Kokott in C&D Foods, the Court held:

  • an input can be a “component of the price” even if:
    • the business’s pricing ignores that cost for commercial reasons, or
    • market pricing (e.g. a listed share price) bears no obvious relation to underlying transaction costs;
  • examining whether the price of the share sale was “loaded” with the costs is therefore a misapplication of the case law.

This error infected both FTT and UT reasoning. The Supreme Court confirms that:

  • the economic function of the input, not the accounting formula for the output price, is what matters.

6.2 Exempt vs out-of-scope after SKF: what changed and what did not

The Court accepts that before SKF, the case law showed a clear distinction:

  • BLP: exempt share sale breaks the chain; inputs linked to it are not deductible even if the purpose is to raise funds for taxable activity.
  • Abbey National, Kretztechnik: out‑of‑scope transfers/share issues do not break the chain; costs can be overheads of the taxable activity.

HLT’s central argument was that SKF effectively “equalised” exempt and out‑of‑scope share disposals for input tax purposes, compelling courts to treat professional fees on share disposals as overheads of the general activity whenever the proceeds fund taxable supplies.

The Supreme Court rejects this reading:

  • SKF does not hold that exempt share disposals must always enjoy the same deductibility treatment as out‑of‑scope share disposals.
  • Rather, it holds that:
    • fiscal neutrality forbids basing deductibility solely on whether a share disposal is exempt or out-of-scope where the difference rests only on whether the parent is involved in management; but
    • the usual “direct and immediate link” test must still be applied.
  • If, on the facts, consultancy costs are not directly and immediately linked to the share sale itself, they may be general costs (even if the share sale is exempt); but if they are so linked, BLP still excludes deduction.

Thus, SKF modifies the reasoning, not the result, of BLP:

  • courts must not assume that because a share disposal is exempt, any related input is automatically non-deductible;
  • but once a direct and immediate link with the exempt share disposal is found, the BLP outcome follows.

6.3 No “fundraising exception”: purpose is generally irrelevant

HLT and the FTT/UT treated cases like SKF and Frank Smart as establishing a “fundraising principle”:

  • where a transaction is a means to an end (raising funds),
  • inputs are attributed to that end (the taxable general business), not to the fundraising transaction itself.

The Supreme Court rejects this for three reasons:

  1. CJEU’s repeated insistence on objectivity
    Cases from BLP onwards stress that:
    • VAT deduction rules are based on the objective character of transactions, not on the taxpayer’s intent or purpose (except in pre‑trading scenarios).
    • Focusing on purpose would require tax authorities to conduct intrusive enquiries into intentions, contrary to legal certainty.
  2. Cambridge’s explicit rejection of purpose‑based reasoning
    In Cambridge, the CJEU held that input tax on managing donation and endowment funds was non‑deductible “regardless of the reason why those donations and endowments were received”, emphatically denying that the use of funds in economic activity alters attribution.
  3. Pre-trading and timing cases are distinct
    The line of cases allowing input deduction based on intention (e.g. Sveda, Gabalfrisa, and Frank Smart) concerns:
    • inputs incurred before taxable activity has begun; and
    • the taxpayer’s objective plan to use those inputs in future taxable transactions.
    Outside that context, general reliance on “purpose” (such as “raising funds for our business”) is not a valid basis for re‑attributing input VAT.

The Court warns that any broad “follow the money” rule would:

  • create severe uncertainty as to which receipts financed which particular project where the taxpayer has a pooled cash position; and
  • incentivise taxpayers to restructure documentation or accounting artificially to secure favourable VAT outcomes.

6.4 Applying the test to HLT: where does the direct link lie?

Once stripped of the erroneous “fundraising modification” and pricing focus, the factual findings of the FTT effectively dictated the outcome.

The FTT had found that:

  • the professional services (market research, shortlisting buyers, financial modelling, legal and tax advice) were:
    • “part of the process of selling the shares”; and
    • “used in the fundraising transaction”.

Lady Rose agrees with the Court of Appeal that:

  • those findings establish that the inputs were directly and immediately linked with the exempt share sale – that is their objective economic function;
  • the fact that the proceeds of the sale were later deployed in HLT’s taxable hotel business does not change the attribution.

There was therefore no need to remit to the FTT: properly applying the law to the existing findings, the only conclusion was that the disputed input VAT was non‑deductible.

6.5 VAT grouping: why it does not help HLT

HLT’s final argument was that VAT grouping under s 43 VATA meant:

  • the management services from HLT to HLTB (otherwise taxable economic activity) had to be “disregarded” for VAT purposes; and therefore
  • the share sale should be treated as simply a parent selling shares in a company in which it had no economic activity – thus an out‑of‑scope share sale (Harnas & Helm style),
  • which would in turn enable the Abbey National/Kretztechnik line to apply, making the professional fees general overheads of HLT’s taxable hotel business.

The Supreme Court rejects this argument decisively:

  • The eligibility criteria for VAT grouping (close financial, economic and organisational links) is conceptually distinct from:
    • whether a holding company is involved in the management of its subsidiaries for consideration (the Cibo criterion), and
    • whether share disposals are a permanent and necessary extension of that activity (Larentia + Minerva).
  • Section 43’s disregard of intra‑group supplies is designed to simplify VAT accounting and to combat avoidance; it does not retrospectively deny the reality that:
    • HLT was in fact providing management services for remuneration to HLTB; and
    • that economic activity is what brings the share sale within the scope of VAT in the first place.
  • To accept HLT’s position would:
    • undermine the coherent application of the Cibo/Larentia principles,
    • make the VAT treatment of share disposals turn arbitrarily on whether a Member State had adopted VAT grouping and how its domestic rules were framed, and
    • risk serious distortions of fiscal neutrality.

The Court draws support from:

  • Polysar – art 11 does not change who is a taxable person; it merely allows multiple taxable persons to be treated administratively as one.
  • Thorn – even where intra‑group supplies are “disregarded”, courts can “look inside the black box” of the VAT group to identify the true measure of consideration and the underlying transactions.

Accordingly, VAT grouping cannot be used to reclassify the sale of HLTB as an out‑of‑scope transaction to boost deductibility.

7. Impact and Significance

7.1 For corporate groups and holding companies

The decision will be of major importance to groups that:

  • conduct taxable activities through subsidiaries, and
  • undertake share disposals as part of restructuring or financing taxable operations.

The Supreme Court’s message is plain:

  • Professional fees (investment bankers, lawyers, accountants, corporate finance advisers) incurred in effecting a share disposal will normally be directly and immediately linked with that disposal.
  • If the disposal is an exempt transaction (which it will be if the parent is involved in management and the disposal is within scope), the default position is that input VAT is non‑deductible.
  • It is only where, on the facts, those costs are not directly and immediately linked to the share sale – for example, potentially in cases more akin to Abbey National or Kretztechnik where the specific transaction is out of scope – that they may be treated as general overheads.

7.2 For structuring fundraising: share sales vs loans vs share issues

The case reinforces the old lesson of BLP:

  • the VAT consequences of different financing routes (loan finance, share issue, sale of shares or assets) may be materially different; and
  • the principle of fiscal neutrality does not require all economically similar funding choices to be treated the same for VAT.

Practically:

  • Loan finance – professional services associated with obtaining loans are often treated as general overheads of the taxable activity; subject to partial exemption, input VAT may be recoverable.
  • Issue of new shares – following Kretztechnik, costs of share issues are generally deductible where the proceeds are used for taxable activities.
  • Disposal of existing shares – where the parent is involved in management and supplies taxable services, the disposal is likely to be an exempt economic activity, and the professional fees in disposing of the shares will typically be non‑deductible.

This decision therefore has direct implications for how corporate groups structure future capital raising and restructuring exercises.

7.3 For VAT grouping strategy

Groups can no longer plausibly argue that:

  • membership of a VAT group converts a managed subsidiary into a purely held investment for share disposal purposes; or
  • the disregard of intra‑group supplies under s 43 VATA can re‑characterise a share disposal as out of scope.

VAT grouping remains a powerful tool for cash‑flow and compliance simplification, and to neutralise irrecoverable VAT on intra‑group recharges in certain configurations. But the Supreme Court has made clear that:

  • it cannot be used to sidestep the CJEU’s jurisprudence on:
    • when share transactions are economic activity, and
    • when those economic activities are exempt under art 135.

7.4 For application of “direct and immediate link” post‑SKF

The judgment provides much‑needed clarification of how UK courts should navigate the sometimes opaque CJEU case law:

  • SKF is not a charter for treating all share disposal costs as overheads; it simply prevents courts from assuming non‑deductibility purely because a disposal is exempt.
  • Courts must:
    • first ask: is there a direct and immediate link between the input and the share disposal?
    • if yes, and the disposal is exempt, input VAT is non‑deductible (BLP remains authoritative);
    • if no, they may look to whether the inputs are overheads of the general economic activity, irrespective of whether the disposal is exempt or out of scope.

This structured approach will influence how tribunals and courts analyse complex mixed‑use inputs in the future.

7.5 For the role of CJEU case law in UK VAT

Although Brexit is not addressed in the judgment, its method is instructive:

  • The Supreme Court undertakes a detailed, careful exegesis of CJEU authority.
  • It resists literalist readings of particular phrases (e.g. “cost components”, “purpose”) in isolation.
  • It situates each case in its factual and doctrinal context, refusing to treat isolated dicta as establishing sweeping rules.

This judgment will likely be cited as a model of how UK courts continue to interpret retained EU VAT law and the CJEU jurisprudence that underpins it.

8. Complex Concepts Explained

8.1 Exempt vs out-of-scope transactions

  • Exempt:
    • The transaction is within the scope of VAT (i.e. it is an economic activity, a supply of goods or services for consideration by a taxable person).
    • But the law says that no VAT is charged on that supply (e.g. certain financial services, insurance, medical services, share transactions).
    • Inputs directly and immediately linked to the exempt supply are non‑deductible (subject to partial exemption if the business also makes taxable supplies).
  • Out of scope:
    • The transaction is not a supply of goods or services for consideration, or otherwise not an “economic activity”.
    • VAT law simply does not apply to it.
    • Because it is not part of the VAT chain, an out‑of‑scope transaction does not in itself make input tax non‑deductible; instead, one looks to how the related inputs are used in the taxable economic activity as a whole.

8.2 “Direct and immediate link”

This is the core test for deductibility:

  • Ask first: To what output transaction(s) is this input directly and immediately linked?
    • If to a specific taxable supply, input VAT is generally deductible in full.
    • If to a specific exempt supply, input VAT is generally not deductible.
    • If no such specific link exists, but the cost is part of the general overheads of the economic activity, input VAT is deductible proportionately to the mix of taxable and exempt outputs.

For HLT, the Court held the direct and immediate link was with the exempt disposal of HLTB shares, not with HLT’s general hotel business.

8.3 Economic activity

“Economic activity” is defined broadly in VAT law as:

  • any activity of producers, traders and persons supplying services, including mining or farming and the activities of the professions, where it is conducted on a continuing basis for remuneration.

In the context of share transactions:

  • mere acquisition and holding of shares, receiving dividends, or selling shares in isolation is not economic activity;
  • but if a holding company provides management services to subsidiaries for remuneration, it is carrying on an economic activity; the share transactions can then be treated as a permanent and necessary extension of that activity.

8.4 Fiscal neutrality

Fiscal neutrality has two aspects:

  • Economic neutrality: VAT should not distort competition between businesses engaging in the same economic activities.
  • Systemic neutrality: within a business, VAT should not be a cost burden on inputs used for taxable outputs.

However, as Deutsche Bank and the present Supreme Court decision emphasise:

  • Fiscal neutrality is a principle of interpretation, not an absolute overriding rule.
  • It cannot expand the scope of exemptions or create new rights to deduct without clear legislative wording.

8.5 VAT grouping

VAT grouping allows companies which are closely linked to be treated as a single taxable person:

  • they file a single VAT return;
  • supplies between group members are ignored for VAT accounting purposes; and
  • only supplies between the group (as a whole) and third parties are accounted for.

But grouping does not:

  • change the economic substance of what the entities actually do;
  • turn a non‑taxable person into a taxable person;
  • convert an exempt supply into an out‑of‑scope transaction.

9. Conclusion

Revenue and Customs v Hotel La Tour Ltd is a major clarification of UK VAT law on the deductibility of input VAT associated with share disposals, particularly in fundraising contexts and within VAT groups. Its main contributions are:

  • It confirms that there is no special “fundraising” modification to the “direct and immediate link” test. Professional fees incurred to sell a subsidiary are, on typical facts, directly and immediately linked to that share sale, not to the business funded by its proceeds.
  • It clarifies the correct reading of SKF:
    • SKF does not abolish the difference between exempt and out‑of‑scope transactions; and
    • BLP remains the leading authority where inputs are directly linked to exempt share disposals.
  • It corrects the misuse of the “cost components” terminology, emphasising that what matters is the economic function of the input, not the mechanics of pricing or cost‑plus calculations.
  • It delineates clearly the limited role of purpose and intention in VAT deduction:
    • purpose is relevant in pre‑trading and timing cases (e.g. Sveda, Frank Smart);
    • but in cases like HLT, where the economic activity is ongoing and the transaction in question is a specific share disposal, purpose does not override the objective direct and immediate link.
  • It concludes that VAT grouping under s 43 VATA:
    • cannot be used to recharacterise an exempt share sale as out of scope; and
    • does not erase the underlying management services that justify treating the share disposal as an exempt economic activity.

The practical consequence for HLT is an irrecoverable input tax cost. More broadly, the judgment sends a clear signal: corporate groups cannot rely on fundraising motives, subsequent use of proceeds, or VAT grouping to transform the VAT result of exempt share disposals. The central question remains, as it has always been under EU VAT law: to what, in truth, are the inputs directly and immediately linked?

Note: This commentary is intended as an academic and professional analysis of the judgment, not as legal advice on any individual situation.

Case Details

Year: 2025
Court: United Kingdom Supreme Court

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