In a recent decision, the Supreme Court rejected an appeal by Hotel la Tour Ltd, which argued that it was entitled to reclaim input VAT on professional fees incurred during the sale of shares in the company that owned its luxury hotel in Birmingham.

HMRC maintained that the share disposal was a VAT-exempt transaction and that the legislation prevents the recovery of input tax where there is a direct and immediate link between the input costs (in this case, the professional fees) and an exempt supply.

Hotel la Tour Ltd (HTL) contended that no such direct and immediate link existed between the professional fees and the exempt share sale. Instead, it argued that the relevant link was between the fees and the wider taxable activities of the hotel group. This position was based on the fact that the Birmingham hotel was sold in order to raise funds to develop a new hotel in Milton Keynes.

Both the First-tier Tribunal and the Upper Tribunal had previously ruled in favour of HTL. However, the Court of Appeal concluded that the Tribunals had applied the incorrect test when determining whether a direct and immediate link was present. The Court of Appeal found that there was a direct and immediate link between the professional fees and the share sale, as the fees represented ‘cost components’ of the share sale, even though the level of fees did not affect the share price.

HTL subsequently appealed to the Supreme Court, which agreed with the Court of Appeal’s decision. The appeal was dismissed.