VAT Recovery on Fundraising Share Sales
The VAT treatment of legal fees and other professional fees is a thorny issue that has caused much debate over the years for company groups considering the sale of shares from within their companies. This is because although the business might solely generate VATable income (which would ordinarily allow for full VAT recovery on costs), the sale of shares itself is exempt from VAT (therefore restricting input VAT recovery).
The latest in a long line of disputes between HMRC and taxpayers relating to this issue is a VAT appeal involving Hotel le Tour (“HLT”). HLT sold shares in a subsidiary company on a VAT-exempt basis. However, it did so in order to part-fund the development of a new hotel that would increase the VATable activity of the group.
Both the First Tier and Upper Tier Tribunals agreed with the taxpayer that the costs could be attributed to the wider taxable activity of the group, with the result that the VAT on professional fees linked to the share sale was recoverable. However, these earlier decisions were overturned earlier this year by the Court of Appeal (CoA”). The CoA ruled that the costs were directly attributable to the sale of the shares, and this analysis was unaffected by the fact that the funds generated from the sale were intended to support the VATable activity of the group. As a result, the CoA ruled that the VAT on relevant costs was not recoverable.
However, the above is not necessarily the end of this saga, as it has been announced that the Supreme Court has granted HLT permission to appeal the decision of the CoA. As a result, there is still hope for HLT and other taxpayers in a similar position!
The principles surrounding the recovery of VAT on deal fees are complex, and taxpayers considering entering a transaction involving the purchase or sale of shares are advised to seek specialist advice.
Along with the issue of VAT recovery, there are also often steps that can be taken to remove the VAT on certain costs linked to a share sale or purchase. Therefore, affected businesses are urged to contact VAT People Limited who are experts in this field. You can reach Rob McCann on 0161 477 6600 or rob.mccann@thevatpeople.co.uk.
Case study – asset management
A client approached us having provided services to the overseas owner of a portfolio of UK property.
We reviewed the position in detail and identified that the services supplied by the client were not “related to land”. This ensured that the client did not need to charge VAT to its overseas customers and didn’t need to pay a six-figure VAT bill.