Revenue and Customs v Hotel La Tour Ltd

Factual and Procedural Background

Company A was a holding company which owned all the share capital of Company B. Company B leased and operated a luxury hotel in one city, and Company A supplied management services to Company B for remuneration.

In about mid‑2015, Company A decided to construct and develop a new hotel in another city at a projected cost of about £34.5 million. It planned to fund this project by selling its shares in Company B and borrowing the shortfall from a bank. To facilitate the share sale of Company B, Company A engaged professional advisers (including market researchers, corporate finance and tax advisers) and incurred professional fees totalling £382,900 plus £76,823 VAT.

The shares in Company B were sold in July 2017. In the event, the entirety of the net sale proceeds was used to fund the new hotel project. Company A, whose hotel‑operation activities were fully taxable for VAT purposes, sought to deduct the £76,823 of VAT on the professional fees as input tax in its VAT returns to the Tax Authority.

The Tax Authority disallowed the deduction. It contended that the professional services were directly and immediately linked to an exempt supply, namely the sale of the shares in Company B, and that input tax attributable to an exempt supply is not deductible. Company A maintained that the relevant link was not with the individual exempt share sale but with its general taxable hotel business, so that the VAT should be deductible (in full) as part of the general overheads of its taxable economic activity.

At the relevant time, Company A and Company B were members of a VAT group under section 43 of the Value Added Tax Act 1994 (“VATA”). Company A later argued that, because intra‑group supplies are disregarded for VAT purposes, the management services it supplied to Company B should be ignored when characterising the share sale, with the consequence (it said) that the sale should be treated as outside the scope of VAT rather than exempt.

The First‑tier Tribunal (Tax Chamber) held in favour of Company A, finding that the professional services were directly and immediately linked to Company A’s general economic activity (its taxable hotel business), not to the share sale, and that the VAT was deductible. The Tribunal considered the share sale to be a fund‑raising transaction whose purpose was to finance the taxable business and applied what it regarded as a modified form of the “direct and immediate link” test in such circumstances. It also rejected, as raised too late and substantively unfounded, the VAT grouping argument.

The Upper Tribunal (Tax and Chancery Chamber) dismissed the Tax Authority’s appeal, broadly endorsing the First‑tier Tribunal’s “fund‑raising” analysis and its conclusion that the costs were “cost components” of the taxable general business rather than of the share sale.

The Court of Appeal allowed the Tax Authority’s appeal. It held that the lower tribunals had misapplied the “direct and immediate link” test, had wrongly treated the share sale as if it could be ignored because it was a fund‑raising transaction, and had placed improper weight on whether the costs were “incorporated” into the share price. On the facts as found by the First‑tier Tribunal, the Court of Appeal concluded that the professional services were used in, and directly and immediately linked with, the exempt share sale, so the related input tax was not deductible. It declined to remit the case.

The present judgment is the final appellate decision. The court agrees with the Court of Appeal’s outcome, dismisses Company A’s appeal, and holds that the disputed input VAT is not deductible.

Legal Issues Presented

1. Whether the VAT incurred on professional services used to sell the shares in Company B is directly and immediately linked to:
   1. the specific exempt share sale transaction; or
   2. Company A’s general taxable hotel business,
   and hence whether the related input VAT is deductible.
2. Whether the fact that the share price was set without taking account of the professional fees (i.e. the costs were not “priced in” on a cost‑plus basis) means that those costs cannot be directly and immediately linked to the share sale and must instead be treated as general overheads of the taxable business.
3. Whether, in light of CJEU case law (particularly Skatteverket v AB SKF) and the domestic decision in Frank A Smart & Son Ltd v Revenue and Customs Comrs, transactions which raise funds for a taxable business (such as share disposals) are subject to a modified “fund‑raising” version of the direct and immediate link test that focuses on the objective purpose of the transaction.
4. Whether CJEU authority has effectively removed the distinction, for purposes of input tax deduction, between share disposals that are exempt supplies and those that are outside the scope of VAT.
5. Whether, given that Company A and Company B were in a VAT group, the management services supplied by Company A to Company B must be disregarded under VATA section 43, with the consequence that the share disposal should be treated as outside the scope of VAT (rather than as an exempt economic activity), thereby altering the attribution of input tax.

Arguments of the Parties

Company A's Arguments

• The professional services (marketing, legal and accountancy fees) were acquired and used to raise funds to finance Company A’s hotel business as a whole; objectively, their purpose and economic function was to support the taxable hotel operations, not to realise a stand‑alone exempt financial transaction.
• Consistently with CJEU decisions such as Abbey National and Kretztechnik, costs associated with out‑of‑scope or fund‑raising transactions can be treated as general overheads where the proceeds are applied to taxable economic activity; this principle, Company A argued, has been extended by SKF (and recognised domestically in Frank Smart) to exempt share disposals made for the purpose of funding taxable business.
• On a proper reading of SKF, fiscal neutrality requires that share disposals which are exempt be treated, for input‑tax attribution purposes, in the same way as share disposals which are outside the scope of VAT. Accordingly, VAT on services used to effect such disposals should be deductible where the proceeds are used in taxable activities.
• The lower tribunals correctly treated the share sale as a fund‑raising transaction and focused on its “objective purpose”. Where a transaction is merely a means to an end (raising capital) and not an aim in itself, its VAT consequences should follow those of the principal taxable activity it finances.
• The First‑tier Tribunal rightly held that the professional costs were not “cost components” of the share sale: the shares were sold for the best market price without any element to recover those fees. Therefore, the costs could not be directly and immediately linked to the share sale and must instead form part of the overheads of the taxable hotel business.
• Because Company A and Company B were members of the same VAT group, section 43 VATA required intra‑group supplies, including Company A’s management services to Company B, to be “disregarded” for VAT purposes. Without those (disregarded) services, Company A’s shareholding in Company B is simply an investment, and the sale of the shares is an out‑of‑scope transaction. On that footing, the Kretztechnik/Abbey National line requires the input VAT on the share‑sale services to be attributed to the general taxable business, rendering it deductible.

Tax Authority's Arguments

• Once it was accepted that Company A supplied sufficient management services to Company B for consideration, Company A was actively involved in the management of its subsidiary and thereby carried on an economic activity in the sense recognised in cases such as Cibo and Larentia + Minerva.
• On that basis, the sale of Company A’s shares in Company B constituted a direct, permanent and necessary extension of Company A’s economic activity and fell within the scope of VAT. By virtue of article 135 of the Principal VAT Directive and its domestic implementation, such a share disposal is an exempt transaction.
• The professional services were acquired and used specifically for the process of selling the shares (including valuation, marketing, negotiation and legal work). They were, as the First‑tier Tribunal itself found, “part of the process” of the sale and were “used” in that transaction. Accordingly, the required direct and immediate link is between those services and the exempt share disposal, not the general hotel business.
• Under settled case law such as BLP Group, where inputs are directly and immediately linked to a specific exempt output transaction, input VAT is not deductible, and the taxpayer’s ultimate motive (e.g. to repay loans or to fund taxable activities) is irrelevant.
• SKF did not overrule BLP Group or abolish the distinction between exempt and out‑of‑scope transactions. It merely recognised that, in some cases, even where there is a share disposal, the direct and immediate link may be with the taxable person’s general economic activity rather than with the specific transaction. It did not introduce a general “fund‑raising” exception based on purpose.
• The “cost components” language does not impose a requirement that the taxpayer’s pricing be calculated on a cost‑plus basis. The absence of a separately identifiable mark‑up in the share price to recoup the professional fees does not preclude a direct and immediate link with the share sale.
• VAT grouping is an administrative and anti‑avoidance device that treats the group as a single taxable person for specified purposes and disregards intra‑group supplies to simplify accounting. It does not extinguish the underlying economic reality that Company A supplied taxable management services to Company B or alter the application of the Larentia + Minerva principles to the classification of Company A’s dealings in Company B’s shares. Nor does it convert an otherwise exempt economic activity into an out‑of‑scope transaction for deduction purposes.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Investrand BV v Staatssecretaris van Financiën (Case C‑435/05) [2008] STC 518	VAT deduction rules are intended to relieve the trader entirely of the burden of VAT incurred in the course of all economic activities; inputs forming part of general costs can be directly and immediately linked with the taxable person’s economic activity as a whole.	Used to explain the basic purpose of the deduction system and to illustrate that some inputs, though not tied to a specific output, are deductible as part of general overheads of the taxable business.
Midland Bank plc v Customs and Excise Comrs (Case C‑98/98) [2000] 1 WLR 2080	Formulation and explanation of the “direct and immediate link” test and confirmation that national courts must apply that test to the facts, taking all surrounding circumstances into account.	Relied on as the foundational articulation of the direct and immediate link test and as authority that there can be no rigid formula beyond case‑by‑case evaluation.
'Sveda' UAB v Valstybinė mokesčių inspekcija (Case C‑126/14) [2016] STC 447	Even where capital goods are used immediately in an out‑of‑scope free‑of‑charge activity, input VAT can be deductible if there is a direct and immediate link with the taxable person’s planned economic activity as a whole.	Used to show that inputs apparently consumed by a non‑taxable transaction (a free path for visitors) may nonetheless be directly linked to the taxable business (e.g. sales of refreshments to visitors), supporting the idea of “looking through” a non‑remunerated activity.
Direktor na Direktsia 'Obzhalvane i danachno‑osiguritelna praktika' – Sofia v 'Iberdrola Inmobiliaria Real Estate Investments' EOOD (Case C‑132/16)	Inputs used to provide something free of charge (reconstruction of a wastewater pump for a municipality) can still be deductible where they are objectively linked to the taxable person’s future taxable activities.	Cited to reinforce that actual use of inputs in an out‑of‑scope, free‑of‑charge supply does not necessarily dictate the attribution of those inputs; the overall economic context may justify linking them to the general taxable business.
Harnas & Helm CV v Staatssecretaris van Financiën (Case C‑80/95) [1997] STC 364	Generally, issuing, buying and holding shares is not an economic activity for VAT purposes and is outside the scope of VAT (unless there is a commercial share‑dealing business).	Invoked to state the default position that share transactions are normally non‑economic (out of scope), providing a contrast with situations where management services convert holdings into an economic activity.
Floridienne SA v Belgium (Case C‑142/99) [2000] STC 1044	A parent company’s involvement in the management of subsidiaries constitutes economic activity where services are supplied for consideration; dividends are not consideration for such services.	Used to underpin the principle that management services supplied by a parent to subsidiaries for remuneration are taxable supplies and form part of the parent’s economic activity.
Cibo Participations SA v Directeur régional des impôts du Nord‑Pas‑de‑Calais (Case C‑16/00) [2002] STC 460	A pure holding company (mere acquisition and holding of shares) is not a taxable person; however, where the parent is directly or indirectly involved in managing subsidiaries and supplies services for remuneration, it carries out taxable economic activity.	Relied on to confirm that Company A, by supplying management services to Company B for consideration, was engaged in economic activity.
MVM Magyar Villamos Művek Zrt v Nemzeti Adó‑ és Vámhivatal Fellebbviteli Igazgatóság (Case C‑28/16) [2017] STC 452	Where a holding company provides services to its subsidiaries free of charge, those services are out of scope and do not constitute economic activity.	Cited to distinguish between remunerated and unremunerated intra‑group services for the purpose of determining whether a holding company is carrying on taxable economic activity.
Sonaecom SGPS SA v Autoridade Tributária e Aduaneira (Case C‑42/19)	A holding company that provides taxable services only to some subsidiaries is a taxable person but may deduct input tax only pro rata, in line with the composition of its activities.	Used to illustrate that a holding company’s right to deduct is proportionate to the extent its activities consist of taxable supplies.
Beteiligungsgesellschaft Larentia + Minerva mbH & Co KG v Finanzamt Nordenham (Joined Cases C‑108/14 and C‑109/14) [2015] STC 2101	Expenditure connected with acquisition of shareholdings by a holding company that manages its subsidiaries is attributed to that company’s economic activity as a whole, giving rise to a right to deduct (subject to any exempt outputs).	Relied on for the principle that dealings in shares (at least on acquisition) can be a “permanent and necessary extension” of the parent’s management activity and that such acquisition‑related costs can belong to general overheads.
Sonaecom SGPS SA v Autoridade Tributária e Aduaneira (Case C‑42/19) – reference to Larentia + Minerva	Clarifies that expenditure on acquiring shareholdings by an actively managing holding company may form part of general costs; input VAT is deductible in full unless there are exempt outputs, in which case apportionment applies.	Cited to emphasise that in Larentia + Minerva the inputs were treated as general overheads rather than linked to a specific share‑dealing transaction.
Wellcome Trust Ltd v Customs and Excise Comrs (Case C‑155/94) [1996] STC 945	Sale of shares is generally not an economic activity unless it forms part of a business such as commercial share dealing or is carried out to secure involvement in management.	Used in summarising the principle that share sales are typically outside the scope of VAT unless connected to a broader economic activity.
C&D Foods Acquisition ApS v Skatteministeriet (Case C‑502/17) [2019] STC 593	For a share disposal to be an economic activity, its direct and exclusive reason must be the taxable economic activity of the parent, or it must constitute a direct, permanent and necessary extension of that activity; otherwise it remains out of scope and inputs are not deductible.	Relied on to illustrate the “direct and exclusive reason” test for share disposals and to show that not every disposal by an active holding company is within the scope of VAT.
BLP Group plc v Customs and Excise Comrs (Case C‑4/94) [1996] 1 WLR 174	Where services are used for an exempt transaction (e.g. sale of shares), input VAT on those services is not deductible even if the purpose of the exempt transaction is to fund taxable activities; the taxpayer’s ultimate intention is irrelevant.	Applied as the leading authority that a direct and immediate link between inputs and an exempt transaction precludes deduction and that fund‑raising purpose does not alter this.
Abbey National plc v Customs and Excise Comrs (Case C‑408/98) [2001] 1 WLR 769	On a transfer of a going concern treated as a “non‑supply” (out of scope), services used to effect the transfer can be treated as overheads of the business as a whole; the distinction between exempt supplies (which break the VAT chain) and out‑of‑scope “non‑supplies”.	Used to show that where the putative specific output is out of scope as a non‑supply, inputs can be attributed to general activities, contrasting with the treatment of exempt supplies.
Kretztechnik AG v Finanzamt Linz (Case C‑465/03) [2005] 1 WLR 3755	The issue of new shares to raise capital is outside the scope of VAT; costs of such an issue can be general overheads directly and immediately linked with the whole economic activity, giving rise to deduction where downstream activities are taxable.	Cited to support the proposition that where the “closest” transaction is out of scope (share issue), attribution may shift to the general business, and to contrast with cases involving exempt outputs.
Volkswagen Financial Services (UK) Ltd v Revenue and Customs Comrs (Case C‑153/17) [2018] STC 2217; [2019] 4 WLR 32	Clarifies that “cost component” status does not depend on how prices are actually calculated or whether costs are expressly loaded into particular prices; economic linkage, not cost‑plus pricing, is decisive.	Relied on to reject the First‑tier and Upper Tribunals’ focus on whether professional fees were “incorporated” into the share price, and to explain that the “cost components” formulation is not a pricing‑mechanics test.
'Skatteverket v AB SKF' (Case C‑29/08) [2010] STC 419	Disposal of shares by a parent involved in management is an economic activity within scope and, where it falls within article 135(1)(f), an exempt transaction; however, consultancy costs for such disposals may, in some cases, be linked to the taxable person’s general economic activity rather than to the exempt disposal, to avoid unjustified differences between exempt and out‑of‑scope share disposals.	Analysed in depth to determine whether it equalises treatment of exempt and out‑of‑scope share disposals. The court concludes that SKF does not abolish the distinction but allows that, even where a share sale is exempt, inputs may in some circumstances be linked to general activities. On the facts here, that possibility did not assist Company A.
Gabalfrisa SL v Agencia Estatal de Administración Tributaria (Joined Cases C‑110/98 to C‑147/98) [2002] STC 535	Initial investment expenditure incurred with a view to commencing a taxable business constitutes economic activity, and input VAT on such pre‑commencement costs is deductible if there is a genuine intention to use them in taxable activities.	Used to explain that purpose/intention matters primarily in “timing” cases where inputs precede commencement of economic activity, not as a general override of the direct and immediate link test.
Chancellor, Masters and Scholars of the University of Cambridge v Revenue and Customs Comrs (Case C‑316/18) [2019] 4 WLR 126	Raising and managing donations/endowments is not carried out as a taxable person; inputs related to such fund‑raising do not give rise to deduction, regardless of the use of the funds; donations used to subsidise prices are not cost components of taxable outputs.	Relied on to show that the purpose of fund‑raising (supporting economic activities) does not itself create a right to deduct, and that inputs linked to out‑of‑scope activities of a non‑taxable person are not deductible.
Finanzamt Frankfurt am Main V‑Höchst v Deutsche Bank AG (Case C‑44/11) [2012] STC 1951	The principle of fiscal neutrality is a principle of interpretation, not a rule of primary law; it cannot be used to extend the scope of VAT exemptions in the absence of clear wording.	Cited to rebut the notion that fiscal neutrality could justify treating exempt and out‑of‑scope transactions identically or expanding exemptions beyond their legislative terms.
Frank A Smart & Son Ltd v Revenue and Customs Comrs [2019] 1 WLR 4849	Input tax on acquiring assets (entitlements to subsidy) can be deductible where the acquisition is part of a funding exercise for future taxable activities; SKF did not extend BLP to out‑of‑scope fund‑raising but extended the more favourable out‑of‑scope share‑disposal reasoning to exempt disposals by allowing examination of cost attribution.	Used to clarify the effect of SKF and to support the view that it permits, but does not compel, attribution of share‑sale costs to general business, and that purpose is relevant mainly in pre‑activity timing cases.
Finanzamt T v S (Case C‑184/23) [2024] STC 1391	Creation of a VAT group under article 11 PVD means group members are treated as a single taxable person; intra‑group transactions are disregarded for VAT purposes and only the group files VAT returns.	Invoked to describe the legal effect of VAT grouping and to frame the analysis of whether that effect alters the characterisation of Company A’s management services and share disposal.
Finanzamt Kiel v Norddeutsche Gesellschaft für Diakonie mbH (Case C‑141/20)	Purpose of the VAT group option is administrative simplification and anti‑avoidance; whether an entity in a group carries on independent economic activity is assessed by whether it acts in its own name, on its own behalf and under its own responsibility and bears the economic risk.	Used to show that the criteria for VAT grouping differ from those for determining whether a holding company is engaged in taxable management activity for share‑disposal purposes.
Polysar Investments Netherlands BV v Inspecteur der Invoerrechten en Accijnzen, Arnhem (Case C‑60/90) [1993] STC 222	Liability to VAT depends on the activities of each legal person, not the group as a whole; the VAT‑grouping provision is an administrative simplification and does not alter the fundamental conditions of taxability.	Cited via the Advocate General’s analysis to support the view that grouping does not change whether particular activities amount to economic activity or not.
Customs and Excise Comrs v Thorn Materials Supply Ltd [1998] STC 725	Considered the effect of the statutory “disregard” for intra‑group supplies on determining the time of supply; the disregard provision simplifies collection but does not necessarily remove all legal relevance of intra‑group transactions.	Discussed because Company A relied on it by analogy. The court distinguished it and emphasised that the disregard provision is not designed to confer exemption or change the underlying nature of activities.
R (Northumbria Healthcare NHS Foundation Trust) v Revenue and Customs Comrs [2020] EWCA Civ 874; [2020] STC 1720	Interprets a separate “de‑supply” provision concerning the tax treatment of cars to employees, whose wording differs materially from VATA section 43.	Cited to show that decisions on other statutory “de‑supply” provisions cannot be transposed to the VAT‑grouping context relied on by Company A.

Court's Reasoning and Analysis

1. General VAT Framework and the “Direct and Immediate Link” Test

The court begins by outlining the VAT system: VAT is intended to be borne by the final consumer; taxable persons charge VAT on outputs and may deduct VAT on inputs used for their economic activities. The right to deduct is governed at EU level by article 168 of the Principal VAT Directive and domestically by section 24 VATA.

From CJEU case law, input VAT is deductible where there is a “direct and immediate link” between the input transaction and taxable output transactions. Where no such link with specific outputs exists, inputs may still be deductible if they form part of the taxable person’s general costs and, as such, are components of the price of its taxed supplies. The decisive questions are:

• Which output transactions are the goods or services “used for the purposes of”?
• Are those outputs taxable, exempt, or outside the scope of VAT?

The court emphasises that the CJEU has deliberately refrained from rigidly defining “direct and immediate link”; national courts must apply it case by case, assessing all circumstances.

2. Misuse of the “Cost Components” Concept

The lower tribunals had reasoned that because the professional fees were not factored into the price of the shares (which were sold for the best achievable market price), they could not be “cost components” of the share sale and so must relate to the general business. The court rejects this.

Drawing on Volkswagen Financial Services and the Advocate General’s analysis in C&D Foods, the court holds that:

• “Cost components” is an economic‑link concept, not a mechanical pricing test; inputs need not be separately priced into the output.
• This is particularly true for share sales, where prices are rarely set on a cost‑plus basis.

Accordingly, whether Company A’s professional fees were part of the price‑setting calculus for the shares is not determinative of the existence or location of a direct and immediate link. The First‑tier and Upper Tribunals erred in using incorporation into price as a decisive criterion.

3. Exempt vs Out‑of‑Scope Transactions

The judgment then addresses the distinction between exempt and out‑of‑scope transactions, especially in share‑related contexts:

• Generally, acquisition, holding and sale of shares are not economic activities and are out of scope (e.g. Harnas & Helm), unless part of a commercial dealing business or a means of participating in management.
• Where a parent supplies taxable management services to a subsidiary, dealings in the subsidiary’s shares can be a direct, permanent and necessary extension of its management activity and thus form part of its economic activity (Cibo, Larentia + Minerva).
• Share disposals that are within the scope of VAT are exempt under article 135(1)(f) PVD and its UK implementation.
• By contrast, certain transfers (e.g. transfers of a business as a going concern or issues of new shares) are treated as out of scope “non‑supplies” (Abbey National, Kretztechnik), in which case the associated costs may be allocated to general taxable activities.

From earlier case law, the court distils (among other points) that:

• If inputs are directly and immediately linked with a specific exempt or out‑of‑scope transaction, they are not deductible.
• If inputs are linked instead with the taxable person’s overall economic activity, they are deductible in full or in part depending on the mix of taxable and exempt/out‑of‑scope outputs.

4. Interpretation of SKF and its Relationship with BLP, Abbey National and Kretztechnik

The crucial debate concerned how SKF fits into the earlier case law and whether it changed the treatment of exempt share disposals.

The court notes that in BLP Group, inputs directly linked to an exempt share sale were held non‑deductible, and the taxpayer’s fund‑raising purpose (to pay bank debts) was rejected as irrelevant. Later cases (Abbey National, Kretztechnik) allowed inputs related to out‑of‑scope “non‑supplies” (transfer of a going concern, share issues) to be treated as general overheads.

In SKF, the CJEU held that where a parent actively manages subsidiaries, a share disposal is an economic activity and (unless treated as a going‑concern transfer) an exempt transaction. It then went on to say that consultancy costs relating to share disposals could sometimes be treated as general costs even if the disposal is exempt, to avoid unjustified differences in treatment between exempt and out‑of‑scope disposals.

The court interprets SKF as follows:

• SKF did not extend the strict BLP approach to out‑of‑scope transactions; rather, as explained in Frank Smart, it extended the more favourable “general‑costs” reasoning from out‑of‑scope cases to certain exempt disposals where appropriate.
• It does not eliminate the distinction between exempt and out‑of‑scope transactions, nor does it compel a conclusion that inputs used for exempt share disposals are always linked to general business activities.
• Instead, it recognises that even if the share disposal is exempt, there is room in some cases for the direct and immediate link to be with the taxable business as a whole, depending on objective circumstances.

Thus, the court rejects the Tax Authority’s more rigid submission that exempt status automatically fixes the link to the share sale, but equally rejects Company A’s reading that SKF requires exempt share‑sale costs to be treated as overheads whenever the proceeds finance taxable activities.

5. Rejection of a General “Fund‑raising Purpose” Test

Company A argued that where a transaction is a means of fund‑raising for a taxable business, the direct and immediate link test is “modified” so that the link is with the taxable business rather than the fund‑raising transaction. The court rejects this.

It distinguishes between:

• Cases where inputs precede the start of economic activity and intention is relevant to establish that the taxpayer is acting as a taxable person (e.g. Gabalfrisa, Sveda), and
• Cases like the present, where the taxpayer is already trading.

In the former, purpose/intention may be crucial to determining whether initial investment expenditure is directed towards future taxable activity. In the latter, settled CJEU authority, including BLP Group and Cambridge, makes clear that the purpose of raising funds (e.g. to support or expand taxable activities) does not recharacterise the transaction for input‑tax attribution.

The court therefore concludes that there is no special “fund‑raising” variant of the direct and immediate link test for share disposals or financial transactions. References in case law to the “purpose” or “exclusive reason” of a disposal are part of assessing whether the disposal itself is an economic activity (as in C&D Foods), not a licence to bypass the basic linkage rules once that classification is made.

The domestic decision in Frank Smart is read consistently with this: it concerned out‑of‑scope receipts used to fund future taxable investments, where timing and intention were critical. It is not authority for a general rule that any fund‑raising expenditure is automatically overhead of the taxable business.

6. Application of the Direct and Immediate Link Test to Company A

Applying the clarified principles, the court agrees with the Court of Appeal that:

• Company A’s supply of management services to Company B for remuneration meant that it was involved in the management of its subsidiary and thereby engaged in economic activity.
• On that footing, the sale of the shares in Company B was a permanent and necessary extension of Company A’s economic activity, brought within the scope of VAT and classified as an exempt transaction.
• The professional services at issue (marketing, legal and accountancy services) were, on the First‑tier Tribunal’s own findings, “part of the process” of selling the shares and were “used” in making that sale.
• Objectively, the inputs are therefore directly and immediately linked with the exempt share sale. Though that sale formed part of a wider strategy to finance Company A’s hotel business, that broader purpose does not change the immediate economic link between the services and the exempt output.

In light of that conclusion, and given that the share sale is an exempt transaction, the resulting input VAT is not deductible. The possibility recognised in SKF that share‑sale costs may sometimes be overheads linked to general activities does not alter the result on these particular facts.

7. VAT Grouping Argument

Finally, the court addresses Company A’s argument that VAT grouping changes the analysis by requiring intra‑group services to be disregarded. The reasoning is:

• Article 11 PVD and VATA section 43 allow certain entities with close links to be treated as a single taxable person and provide that intra‑group supplies are “disregarded” for VAT accounting.
• However, case law such as Cibo, Norddeutsche Gesellschaft and Polysar indicates that VAT‑grouping is an administrative simplification and anti‑avoidance tool; it does not alter the substantive conditions for being a taxable person or change the character of underlying economic activities.
• The fact that Company A and Company B were grouped does not retroactively negate the economic reality that Company A was providing management services to Company B of a type treated in Larentia + Minerva and related cases as taxable management activity.
• The House of Lords’ decision in Thorn is distinguished: while it applied the disregard provision to the timing of supply, it did not hold that underlying supplies cease to exist for all legal purposes. It confirms that section 43 is not intended to confer substantive exemptions.
• The separate “de‑supply” regime considered in Northumbria Healthcare is based on materially different statutory wording and offers no support for extending the VAT‑grouping disregard in the manner Company A suggests.

The court therefore holds that VAT grouping does not convert what would otherwise be an exempt share disposal within the scope of VAT into an out‑of‑scope transaction. The Larentia + Minerva principles continue to apply, and the share sale retains its character as an exempt economic activity for the purposes of input‑tax attribution.

Holding and Implications

Holding: The court dismisses the appeal. The professional services acquired by Company A to facilitate the sale of its shares in Company B are directly and immediately linked to that exempt share disposal. Because the share sale is an exempt economic activity, the related input VAT of £76,823 is not deductible.

Implications: The direct consequence is that Company A must bear the “sticking” input tax on its share‑sale costs, and the Tax Authority’s assessment disallowing the deduction stands. The decision confirms that:

• There is no special “fund‑raising” modification of the direct and immediate link test for share disposals or other financial transactions.
• Exempt share disposals remain distinct from out‑of‑scope transactions, though in some cases (consistent with SKF) input costs may be attributable to general business if the facts justify it.
• The “cost components” language does not require a cost‑plus pricing analysis.
• VAT grouping does not alter whether a parent’s dealings in its subsidiary’s shares are economic activity or change the basic input‑tax attribution rules.

The judgment applies established principles to a common transactional pattern and clarifies their interaction rather than creating a new legal rule.