UK Supreme Court confirms VAT recovery limits on share sale costs: Hotel La Tour appeal dismissed
On 17 December 2025, the UK Supreme Court handed down its long-awaited decision in Hotel La Tour Ltd v HMRC, bringing to a close more than four years of litigation closely watched by groups undertaking mergers, acquisitions and refinancing.
The Court ruled in favour of HMRC, denying VAT recovery on professional fees incurred in connection with a share sale, even where the sale proceeds were used to fund a taxable business activity.
As the parties were aligned that the sale of the subsidiary hotel shares constituted an exempt transaction for VAT purposes, the Court concluded that the related costs were incurred in direct connection with that exempt disposal. Those costs were not regarded as forming part of the overheads of the taxpayer’s general taxable activity. On that basis, the associated input VAT was treated as attributable to the exempt share sale and was therefore not deductible.
In reaching this conclusion, the Court also dismissed arguments founded on a broad reading of the CJEU’s decision in SKF. It expressly noted the lack of clarity in the relevant passages of that judgment and declined to accept that the principle of fiscal neutrality requires identical VAT recovery outcomes where a share disposal falls within the scope of VAT but is exempt, as compared with a disposal that is outside the scope of VAT and permits partial recovery by reference to the taxpayer’s overall economic activity.
Supreme Court: fund-raising purpose and VAT grouping rejected
1. No special VAT rule for fund-raising share sales
The Supreme Court confirmed that the direct and immediate link test applies without modification to share sales and other fund-raising transactions. The fact that a share sale is used to raise funds for a taxable business activity does not, by itself, allow input VAT recovery.
The Court rejected Hotel La Tour’s argument that VAT deductibility should turn on the objective purpose of the share sale (i.e. funding taxable hotel operations). References in CJEU case law to “purpose” or “exclusive reason” were held not to replace or soften the direct and immediate link test. Instead, they are simply another way of describing that same test.
The Court drew an important distinction:
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Purpose is relevant only where inputs are incurred before any taxable activity begins, to determine whether they are intended for future taxable supplies (e.g. start-up cases such as Gabalfrisa or Sveda).
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Where a business is already operating, the use of sale proceeds is irrelevant. What matters is which transaction consumed the inputs.
Accordingly, the professional fees incurred by Hotel La Tour were directly linked to the exempt share sale, not to the group’s wider taxable hotel business.
2. SKF and Frank Smart do not change the law
The Court confirmed that SKF did not overturn BLP and did not introduce a general rule that fund-raising costs automatically become general overheads where funds are used in taxable activities.
Similarly, Frank Smart was confined to its facts. It dealt with:
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Out-of-scope fund-raising, not exempt transactions; and
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A timing issue, where inputs were incurred before taxable activity commenced.
It does not support a broader principle that the aim of fund-raising determines VAT recovery where an exempt transaction already exists.
3. VAT grouping does not recharacterise the share sale
Hotel La Tour also argued that VAT grouping under section 43 VATA required management services between parent and subsidiary to be disregarded, meaning the share sale should be treated as out of scope, rather than exempt.
The Supreme Court rejected this entirely:
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VAT grouping is an administrative simplification, not a mechanism to create VAT relief or alter the character of transactions.
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Group members retain their legal identity, and courts may “look inside the VAT group” where necessary.
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Management of a subsidiary remains economic activity, even if intra-group supplies are disregarded for charging VAT.
Disregarding intra-group supplies does not mean those activities “evaporate” for the purpose of determining whether a share sale is an exempt economic activity.
4. Final conclusion
The Court upheld the Court of Appeal’s findings:
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There is no modification to the direct and immediate link test for share sales.
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The relevant link in this case was between the input costs and the exempt share sale, not the taxable hotel business.
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VAT grouping cannot be used to convert exempt share sale costs into deductible general overheads.
Four years of appeals
Hotel La Tour Ltd was part of a hotel group that decided to sell shares in a subsidiary. The sale was an exempt supply for VAT purposes. The proceeds from that share sale were then used to finance the construction of a new hotel, an activity that would generate taxable supplies once operational.
The company sought to recover VAT on advisers’ fees (legal, financial and corporate finance costs) incurred in connection with the share sale, arguing that those costs were a general overhead of the business and had a direct and immediate link to its downstream taxable activities.
Earlier decisions produced mixed outcomes:
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The First-tier Tribunal initially allowed the claim.
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The Upper Tribunal and Court of Appeal overturned that view, siding with HMRC.
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The appeal to the Supreme Court was therefore seen as the final opportunity to clarify the boundaries of VAT recovery in complex corporate transactions.
The Supreme Court’s decision
The Supreme Court confirmed that VAT recovery depends on the objective link between the costs incurred and the taxable or exempt outputs. In this case, it concluded that:
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The professional fees were directly and immediately linked to the exempt sale of shares.
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The subsequent use of the sale proceeds (to fund hotel construction) was not sufficient to recharacterise those costs as attributable to taxable supplies.
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The costs were not general overheads of the business, but instead formed part of the cost of carrying out an exempt transaction.
As a result, the VAT on those costs was irrecoverable.
Why this matters
This judgment reinforces a restrictive approach to VAT recovery on corporate transaction costs in the UK. It confirms that:
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Funding a taxable activity with the proceeds of an exempt transaction does not, by itself, create a right to VAT deduction.
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Courts will focus on the nature of the transaction giving rise to the costs, not the commercial rationale for incurring them.
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Share sales undertaken to raise capital remain high-risk from a VAT recovery perspective.
The Hotel La Tour decision brings clarity, but little comfort, to taxpayers. For UK businesses, it firmly closes the door on using downstream taxable investment as a basis for recovering VAT on exempt share sale costs.
