Lasting Powers of Attorney (LPAs) are documents whereby a donor (the person making the LPAs) gives authority to an attorney or attorneys to act on their behalf. There are two types of LPA: Property and Financial, and Health and Welfare. ...
The Supreme Court has ruled that a hotel company could not deduct input VAT on professional fees relating to the sale of a subsidiary company.
The company received management fees from a wholly owned subsidiary which operated a luxury hotel in Birmingham. In 2015 it decided to develop a new hotel in Milton Keynes and to sell its shares in the subsidiary in order to finance the project. It incurred professional fees of £382,900 plus VAT of £76,823 in respect of the sale and claimed deductions for the input VAT. HM Revenue and Customs (HMRC) disallowed the deductions on the grounds that the relevant output transaction to which the inputs closely related was an exempt supply, namely the sale of the shares.
The First-tier Tribunal (FTT) allowed the company's appeal against HMRC's decision, accepting the argument that the direct and immediate link was between the professional fees and the company's taxable general economic activities, not the exempt share sale. The FTT found that the direct and immediate link test is modified when the purpose of a share sale is to raise funds for the overall business, so that the share sale is disregarded and the inputs are linked with the overall business. It also found that the costs of the inputs had not been incorporated into the share price because the shares had been sold for the best price achievable in the market. That decision was upheld by the Upper Tribunal (UT) but subsequently overturned by the Court of Appeal.
Ruling on the company's appeal against that decision, the Supreme Court agreed with the Court of Appeal that the FTT and the UT had erred in their application of case law in relying on the way the price of the shares had been set in order to reject the possibility of there being a direct and immediate link between the inputs and the share sale. There was no reason to examine whether the professional fees were included in the calculation of the price in the share sale when this is not done for any other kind of transaction.
The Supreme Court rejected the argument that there is any modification of the direct and immediate link test in the case of a share sale. In the Court's view, case law firmly rejected the need to focus on the purpose of raising funds. Any such modification would be a recipe for confusion as to where funds used for a certain project come from when a company's receipts go into a common pot, as they usually do. It would also be an invitation for companies to attempt to make it appear that a share sale was or was not linked to a particular project, depending on which suited its tax situation better.
On the facts found by the FTT and applying the direct and immediate link test correctly, the relevant link was between the inputs and the share sale rather than the overall hotel business. Since the share sale was exempt, the input VAT on the professional fees was not deductible.