The Supreme Court judgment in the Hotel La Tour saga confirms long-standing principles of VAT recovery on share sales, explains Ed Saltmarsh.
For the past five years, the litigation surrounding Hotel La Tour Ltd (HLT) has captivated the VAT community. It offered a tantalising prospect that the rigid restrictions on recovering VAT incurred during share sales – established over 30 years ago in the landmark European Court of Justice (ECJ) case BLP Group plc v Commissioners of Customs & Excise (Case C4/94) (BLP) – might finally be overturned.
Following victories for HLT at both the First-tier Tribunal (FTT) and the Upper Tribunal (UT), some advisers began to believe that the judicial wind had shifted. The arguments focused on the "ultimate purpose" of a transaction, suggesting that if a share sale was conducted to fund a taxable expansion, the associated VAT should be recoverable. It was a line of reasoning that tried to align the UK's VAT regime more closely with commercial reality.
However, that optimism has now been extinguished. Following a successful appeal by HMRC to the Court of Appeal in 2024, the case proceeded to the UK’s highest court. In a judgment handed down on 17 December 2025 (HMRC v Hotel La Tour Ltd [2025] UKSC 46), the Supreme Court unanimously dismissed HLT's appeal.
The decision not only reaffirms the principles of BLP but also clarifies the limits of the judgment of the Supreme Court in HMRC v Frank A Smart & Son Ltd [2019] UKSC 39, (Frank A Smart) effectively closing the door on the "fundraising" argument for exempt share disposals.
Where we started
HLT, a holding company, owned the entire share capital of Hotel La Tour Birmingham Ltd. In 2017, HLT decided to sell this subsidiary. The purpose of the sale was not to exit the market or distribute profits to shareholders. Instead, the proceeds were entirely earmarked to finance the development of a new luxury hotel in Milton Keynes. HLT engaged various professionals, including lawyers, accountants and marketing agents, to facilitate the share sale, incurring substantial VAT on their fees.
HLT sought to recover this VAT. They argued that because the funds were used exclusively to support the taxable activity of the new Milton Keynes hotel, the costs were general overheads of the business. HMRC rejected this, citing the decision in BLP. HMRC's view was simple: the costs had a "direct and immediate link" to the exempt sale of shares by HLT, and the chain of attribution stopped there.
The lower tribunals
The FTT and later the UT found in favour of HLT. Their reasoning relied heavily on the evolution of case law since BLP was decided in 1995.
Specifically, the lower tribunals looked to the ECJ decision in Skatteverket v AB SKF (Case C-29/08) (SKF) and the UK Supreme Court's decision in Frank A Smart. They interpreted SKF as suggesting that where costs are incurred for the purpose of raising capital, and those costs are not incorporated into the price of the specific transaction (the sale of the shares), they might be treated as general overheads.
The UT concluded that because the share sale was a fundraising exercise for a taxable business (the development of the Milton Keynes hotel), and the professional fees did not directly increase the share price (which was based on market value), the "direct and immediate link" was to the downstream taxable activity. The Supreme Court has now clarified that the decision in SKF was misunderstood by the lower courts.
The Supreme Court's analysis
In a comprehensive judgment, the Supreme Court dismantled the reasoning of the lower tribunals and restored the more orthodox interpretation of input VAT attribution. The court's analysis rested on three pillars:
- the nature of the link;
- the definition of a cost component; and
- the distinction between exempt and outside the scope supplies.
1. Reaffirming the 'direct and immediate link'
The Supreme Court held that the "direct and immediate link" test is the primary method for determining VAT deductibility. The court emphasised that this link is objective, not subjective.
While HLT's subjective intention was to fund a new hotel, the objective reality was that the professional services were consumed to effect the sale of the shares. Without those services, the sale could not have proceeded as it did. Therefore, there was a direct and immediate link between the input services and the exempt sale of the shares.
The court effectively stated that BLP remains good law. The ultimate economic purpose of a transaction (ie, what you do with the money) is irrelevant if there is a direct and immediate link to an exempt supply. The chain of attribution is broken the moment the costs are used for an exempt transaction.
2. The cost component confusion
A significant portion of the judgment was dedicated to correcting a misunderstanding regarding "cost components".
HLT had argued – and the UT had accepted – that the professional fees were not a cost component of the share price. Their reasoning was economic: because the shares were sold at a market value determined by the subsidiary’s assets and goodwill, rather than on a “cost-plus” basis, HLT argued the fees had not been incorporated into the share price and must therefore be treated as general overheads.
The Supreme Court confirmed that the Court of Appeal was correct to reject this pricing theory as conceptually flawed. The Supreme Court clarified that in VAT law, the term "cost component" does not require a complex economic analysis of how a price was calculated. Instead, it is simply a label for the value of inputs consumed in making a supply.
The test remains objective and functional: were the costs incurred to bring about the share sale? If yes, they are objectively a cost component of that transaction. The fact that the share price was determined by market forces rather than a specific mark-up on costs is irrelevant. To rule otherwise would suggest that VAT attribution depends on pricing structures rather than the use of the services.
3. The case of Frank A Smart
Finally, the court made a critical technical distinction between HLT and the 2019 case of Frank A Smart. In that case, the taxpayer recovered VAT on costs incurred to acquire farming entitlements (a form of subsidy). The Supreme Court upheld that recovery because the receipt of the subsidy was outside the scope of VAT. Because the transaction itself was not a supply for VAT purposes, the recovery of the VAT on the costs could ‘look through’ to the general business activities (farming).
In HLT, the transaction was a sale of shares. A sale of shares is not outside the scope; it is an exempt supply. The Supreme Court ruled that this distinction is crucial. An exempt supply acts as a blocker. You cannot look through an exempt supply to the ultimate taxable purpose in the same way you can look through an outside the scope activity.
The court also dismissed HLT's alternative argument regarding VAT grouping. HLT had suggested that being in a VAT group with the subsidiary meant the share sale should be treated as an outside the scope event. The court clarified that VAT grouping is a tool for administrative simplification, not a mechanism to change the fundamental VAT nature of a transaction or to grant relief that would not otherwise exist.
The end of the fundraising argument
This judgment effectively ends the argument, for now, that selling shares to raise cash for the business converts VAT on deal fees into recoverable VAT on overheads.
The court acknowledged the taxpayer's argument regarding fiscal neutrality – the principle that VAT should not burden a fully taxable business. However, they noted that fiscal neutrality is not an overarching rule that allows courts to ignore the legislative treatment of exemptions. The exemption for share sales is a specific feature of the VAT regime and the “sticking” (ie, irrecoverable) VAT on deal fees is a known consequence of that exemption.
The Supreme Court’s judgment firmly restores the BLP orthodoxy. The grey area created by the FTT and UT has been removed, and businesses face a settled, if restrictive, landscape for VAT recovery on share sale costs.
Protective claims
Following the UT decision in 2023, many businesses submitted protective claims for VAT incurred on similar share sale fees, pending the Supreme Court outcome. In light of this ruling, it is likely that most of those claims will not succeed and advisers may wish to discuss withdrawing outstanding claims with their clients. While penalties should not apply, interest may be due if any amounts were prematurely repaid by HMRC.
Active holding companies
The decision does not alter the established rules allowing active holding companies to recover VAT on general operating costs or on costs associated with acquiring subsidiaries. The judgment focuses specifically on the VAT treatment of the costs incurred in relation to share disposals, not on holding company recovery more broadly.
It is now more important than ever to ensure strict attribution of costs. Where invoices include both general advisory work (potentially recoverable) and share sale-specific work (irrecoverable), itemisation is essential.
What this means going forward
The Supreme Court's ruling confirms that the "direct and immediate link" test remains the cornerstone of VAT attribution. On the facts of Hotel La Tour, that link pointed squarely to the exempt share sale, not the wider taxable hotel business.
The BLP barrier remains as high as ever. However commercially necessary a share sale may be, the purpose behind the sale cannot override the exempt nature of the transaction. For most businesses, this means that VAT incurred on fees for disposing of subsidiaries will remain an absolute cost.
Businesses planning to raise capital must therefore recognise that using share disposals as a funding mechanism will typically produce irrecoverable VAT on deal fees. Careful structuring and early VAT advice are essential before assuming any recovery position.
Ed Saltmarsh, Technical Manager, VAT and Customs Duties
