VAT on a business's professional costs can generally be recovered only if those costs were incurred in the course of making taxable supplies. Share sales are VAT-exempt, so one might think VAT on professional costs associated with a share sale would not be recoverable. Some taxpayers have tried to argue that where the share sale proceeds were then used to fund some taxable "downstream" activity (e.g., the continuance of a taxable trade by the remaining group) the VAT on the associated professional fees was recoverable. In BLP Group plc v HMRC (Case C-4/94) the Court of Justice of the European Union ("CJEU") was clear that this was not permitted: the exempt share sale was a "chain-breaking" event which meant that subsequent uses of the funds were irrelevant; the VAT was just not recoverable.

Hotel La Tour Limited was a hotel operator. It tried to claim back VAT on its professional costs in making a share sale because it had used the proceeds of that sale to develop a new hotel (the operation of that new hotel being something which would be subject to VAT). BLP would seem to be a complete answer to Hotel La Tour's claim; since the share sale pre-dated Brexit, EU law still applied. But the First-Tier Tribunal and the Upper Tribunal agreed with the taxpayer, saying HMRC had to refund the VAT. HMRC appealed to the Court of Appeal. In Hotel La Tour [2024] EWCA Civ 546 the Court of Appeal has found that the Tribunals were wrong: no VAT refund for Hotel La Tour.

Why did the Tribunals agree with the taxpayer, and ignore BLP? The answer is the judgment of the CJEU in Skatteverket v AB SKF (Case C-29/08). SKF was a Swedish company which decided to sell some of its subsidiaries off as part of a restructuring of its (generally taxable) business. It asked to get the VAT back, the Swedish tax authorities disagreed, and the Swedish courts referred the question to the CJEU. The CJEU provided some guidance on what the right test was, then remitted the case back to the Swedish courts to decide. The problem was the CJEU judgment was rather opaque. Hotel La Tour, and the Tribunals, thought that SKF meant that, as long as you were undertaking your share sale to fundraise for onward taxable supplies, you could get the VAT back on the costs of that share sale. HMRC, and, it turns out, the Court of Appeal, disagreed.

The Court of Appeal in Hotel La Tour said that SKF was "not easy to understand" and that "taken out of context, phrases and sentence can be found in the judgment to support both parties' submissions". The Court of Appeal ultimately interpreted SKF as follows:

1. The referring Swedish court had said that SKF's costs were attributable both to the share sale and its general taxable supplies.
2. But the CJEU in SKF thought that it is an "either–or" test: either the costs are attributable to the share sale, and not recoverable, or the costs are attributable to the general taxable supplies, and recoverable.
3. The reference from the Swedish courts was therefore an impossibility. They couldn't be attributable to both. So the CJEU sent the case back to the Swedish courts to sort out which was correct factually: were the costs linked to the share sale or the general taxable supplies?

Based on this, the Court of Appeal said the position has moved on from BLP, but only slightly. The exempt share sale might not be "chain breaking" and stop the analysis altogether. SKF now opens the door to the argument that the costs involved in a share sale might not be attributable to that share sale, and might be attributable instead to other taxable supplies. But the door is only just ajar, and it will be hard to sneak through.

The decisions of the Tribunals were surprising to VAT experts, and so the Court of Appeal has restored the status quo ante in some respects: this may be disappointing for taxpayers, including Hotel La Tour, but the position is for now clearer.

But this may not be the final word. The Supreme Court, in a case about fundraising using Scottish agricultural subsidies called Frank A Smart [2019] UKSC 39, found for the taxpayer and allowed VAT recovery. Hotel La Tour may therefore seek to appeal to the Supreme Court and argue based on analogy with Frank A Smart that VAT on the costs of its fundraising share sale should also be allowed.