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Court of Appeal Sides with HMRC in £75k+ VAT Dispute

Published by Prerana
Posted Date: May 27, 2024 , Modified Date: May 27, 2024

A hotel in Birmingham was involved in a legal dispute with HM Revenue and Customs (HMRC). The battle centred on whether the hotel could reclaim VAT on professional fees incurred during the sale of shares in a property. The case went through multiple tribunals, including the First Tier Tribunal (FTT), the Upper Tribunal, and finally reached the Court of Appeal.

What Was the Main Issue?

The hotel sold its shares in the property to raise capital for future projects. The total professional fees for services, including tax compliance, market research, financial modelling, and legal advice, amounted to £382,899.51, while the total VAT was £76,822.95.  The hotel then sought to reclaim that VAT from the HMRC, but HMRC denied it. This led to a legal battle.

You can reclaim your VAT expenses if you buy products or services for business purposes. However, there are certain conditions where you cannot make the reclaim :

  • If you purchase anything for personal use
  • You or your firm uses goods and services to make VAT-exempt supplies
  • If goods are sold to you under one of the second-hand VAT margin schemes
  • If the purchase is for the hospitality of people, you do business with
  • The business assets are transferred to you as a ‘going concern’

The HMRC rejected the VAT reclaim because it believes that the costs incurred by the sale of shares are exempt from the reclaim provision. So, the matter was sent to the FTT. The FTT sided with the hotel. But the decision was appealed to the Upper Tribunal. The Upper Tribunal again sided with the hotel. So, the matter was put before the Court of Appeal.

The Court’s Decision

The Court of Appeal determined that the professional fees were directly linked to the exempt share sale, meaning the hotel cannot reclaim the VAT expenses. So, it sided with the HMRC, overturning previous rulings by FTT and the Upper Tribunal.

HMRC battle

The hotel argued that the sale of shares was not an economic activity and should not fall under the VAT’s scope. However, the Court rejected this argument, stating that the sale of shares was, in fact, an economic activity.

What Does this Mean for Other Businesses?

The ruling surprised many, including industry experts, especially due to the HMRC’s loss in the lower courts. A VAT expert at the MHA explained the unexpected nature of these rulings and the potential decisions for future cases.

An industry expert and partner at the RSM believed that this decision would affect businesses beyond the hotel industry. So, any business hoping to recover the VAT on costs related to raising funds through the sale of shares should be careful. A similar case of VAT dispute occurred this month, in which the tribunal decided in the favour of the company.

Conclusion

A hotel sold its share of the property, hoping to raise funds for future projects and attempted to reclaim the VAT expenses incurred. HMRC rejected the claim, explaining that the costs were not an economic activity and exempt from the claim. The First Tier Tribunal and Upper Tribunal sided with the hotel determining it can reclaim the VAT expenses. However, the Court of Appeal sided with the HMRC, leading the HMRC to win the case. The decision by the Court of Appeal surprised many industry experts and raised concerns for future cases.

Prerana
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