Can Mining and Energy companies recover VAT on costs of past share disposals?

Recent developments in case law mean that there may be opportunities for businesses in the energy sector to reclaim VAT on professional costs in relation to the disposal of shares in companies, both prospectively but also in respect of prior transactions.

Historically, HMRC’s policy was to deny the recovery of VAT incurred on costs relating to a share sale to a UK purchaser. This was on the basis that the sale of shares was a VAT exempt supply and there is no entitlement to recover VAT incurred which is directly attributable to such supplies.

The decision by the Upper Tier Tribunal (UTT) in the Hotel La Tour (UT/2022/000031) case casts doubt over whether this is the correct approach. Where the purpose of selling shares is to fund activities which generate taxable supplies of the vendor or members of its VAT group it can be argued that there is no direct and immediate link between the costs of such a transaction and the exempt supply of the shares. As such businesses should assess whether there are opportunities to revisit the treatment they have adopted. It is possible that HMRC could further appeal as this is likely to be a matter of VAT policy for them and so by making claims which are in time now there is an opportunity to protect the right to recover VAT if the decision of the UT is upheld.

Background

Hotel La Tour (HTL) was a holding company and owned the entire share capital of Hotel La Tour Birmingham Ltd (HLTB). HLTB and HLT were members of a VAT group of which HLT was the representative member. HLTB owned and operated a hotel.

In 2015, HLT decided to construct a new hotel in Milton Keynes from which it would generate taxable revenues. To assist with financing the development, HLT decided to sell HLTB.

HLT filed its September 2017 VAT return seeking repayment of £68,883 which included VAT incurred on professional services used to assist in the sale of the shares in HLTB. HMRC denied the recovery on the basis that the costs were attributable to the exempt supply of the shares. HLT appealed to the VAT tribunal.

First Tier Tribunal (FTT)

According to the FTT, various legal precedent, such as the Supreme Court's Frank A. Smart decision, indicated that a more objective assessment of the intended use of the funds should be taken, and that the method by which the funds are obtained - whether through loans or share sales - should not necessarily deny VAT recovery.

The FTT concluded that the purpose of the share sale was to fund HLT’s taxable general activities. HLT’s financial position was that it could not afford to develop the Milton Keynes hotel without entering into the sale of shares in HLBT. The FTT noted that there was no suggestion that the proceeds were to be used for any purpose other than the development of the Milton Keynes hotel.

Therefore HTL won its appeal at the FTT.

Upper Tribunal (UT)

HMRC appealed the FTT decision on two grounds:

• “The FTT erred in law and applied the wrong test for determining whether there was a direct and immediate link between the Services and the sale of the Shares.”
• “The Decision was contrary to binding authority.”

The UT rejected HMRC’s appeal, essentially finding that as the purpose of the transaction was fund raising and the funds were used to make taxable suppliers in the course of operating the hotel. As such the costs were components of the downstream taxable supplies and not part of the price of the shares sold. The price of the shares was determined by the market price and was not affected by the costs of the professional services. As such a direct and immediate link can be made between the costs and the taxable supplies made in the hotel’s operation.

Shares typically have a market value. In this instance, HLT demonstrated that they were unable to raise the share price to reflect the expense of paying its professional advisors. As a result, the sale's net proceeds were decreased, leaving less money on hand to support the downstream activities. Therefore, the professional fees were cost components of the downstream activities and not for the sale of the shares. Therefore the direct and immediate link was not broken.

Additionally, since costs associated with exempt share sales are essentially the same as costs associated with share issues (which are "outside the scope" of VAT), failing to treat them the same way would violate the VAT regime's requirement for fiscal neutrality. This is because share issues and sales are both considered to be business expenses and thus potentially eligible for VAT deductions under the ruling in another case (Kretztechnik).

The appeal was dismissed confirming that the taxpayer was entitled to reclaim the VAT incurred on the costs of the share disposal.

What should be done?

The UT decision is legally binding and opens the door for businesses in the mining and energy sector that have incurred irrecoverable VAT on costs on the sale of companies in the last four years to make repayment claims. These will be dependent on being able to show that the costs were used to make taxable downstream supplies in the course of their business such as in fund raising scenarios. Additionally, any businesses contemplating future transactions should consider whether they will now be able to reclaim VAT on advisers costs.

Crowe can assist your business in reviewing whether the principles of this case apply to your business and whether a VAT reclaim opportunity exists. If one does, we can assist you in preparing, submitting and progressing the claim with HMRC.

For further information, contact Robert Marchant, Ajay Raval, or your usual Crowe VAT contact.