Key Takeaways
- Hotel La Tour confirms that VAT on professional fees incurred specifically for an exempt subsidiary share sale is normally irrecoverable.
- Using sale proceeds to fund taxable trading does not make input VAT on share-sale costs deductible.
- When buying a business, the share sale v asset sale decision must weigh permanent VAT costs alongside liabilities, contracts, employees and other taxes.
- A share buyer takes on the company’s historic liabilities, while an asset buyer can choose which assets and liabilities it assumes.
- Our solicitors can compare deal structures, model VAT leakage and negotiate clear contractual allocation of irrecoverable transaction costs.
- If HMRC disallows a VAT claim, seek specialist advice promptly, because an appeal to the tribunal ordinarily has a 30-day deadline.
- Go Legal is rated Excellent with over 300 five-star reviews and 5/5 on Trustpilot and Google, placing our solicitors among the best-reviewed litigation lawyers in England and Wales.
Buying a Business: Share Sale v Asset Sale, What Does Hotel La Tour Mean for VAT?
A share sale can leave a business with a VAT bill it cannot recover. In Commissioners for His Majesty’s Revenue and Customs (Respondent) v Hotel La Tour Ltd (Appellant) [2025] UKSC 46, the Supreme Court unanimously disallowed £76,823 of input VAT on professional fees incurred to sell a subsidiary. It did so even though the net sale proceeds funded a new taxable hotel project.
For anyone buying or selling a business in England and Wales, the choice between a share sale and an asset sale now calls for a hard look at VAT on adviser fees. That cost sits alongside inherited liabilities, contracts, employees and stamp taxes, and it affects the price, the net proceeds and who bears which risk.
Our solicitors can help you compare the commercial and tax risks before you agree heads of terms. If HMRC has already refused your VAT claim, act promptly, because the tribunal appeal deadline is ordinarily 30 days. Call 0207 459 4037 or book a free consultation for advice on your proposed share sale or asset sale.
What Is the Background to the Share-Sale VAT Decision?
The dispute arose after a holding company sold its hotel-operating subsidiary to fund a new hotel and then tried to recover £76,823 of VAT on the sale advisers’ fees.
Why did Hotel La Tour seek to recover VAT on professional fees?
Hotel La Tour Ltd (HLT) owned all the shares in Hotel La Tour Birmingham Ltd (HLTB), which leased and operated a luxury hotel in Birmingham. HLT charged HLTB for management services, which were taxable supplies.
In mid-2015, HLT decided to build a new hotel in Milton Keynes at a projected cost of £34.5 million. It planned to fund the project by selling HLTB and borrowing the shortfall from a bank.
HLT instructed advisers to carry out market research, shortlist prospective buyers, prepare financial models and advise on tax compliance. Their fees totalled £382,900, plus VAT of £76,823. HLT sold the shares in HLTB in July 2017 at the best price achievable in the market. The price was not increased to cover the advisers’ fees. All the net proceeds went into the Milton Keynes project.
HLT then sought to deduct the £76,823 as input VAT against the output VAT on its taxable hotel business. HMRC refused. It said the fees were directly and immediately linked to the sale of shares, which was exempt. HLT argued that the fees were overheads of its taxable hotel business.
HLT and HLTB were also members of a VAT group under section 43 of the Value Added Tax Act 1994. HLT later argued that this changed the VAT treatment of the share sale.
HLT won before the First-tier Tribunal and the Upper Tribunal. The Court of Appeal allowed HMRC’s appeal, and the Supreme Court dismissed HLT’s further appeal.
What Questions Did the Supreme Court Decide About Input VAT on Share-Sale Costs?
The Supreme Court had to decide whether HLT’s professional fees were linked to the exempt share sale or to its wider taxable hotel business. That turned on four questions.
Did a market-set share price break the link with the sale?
HLT argued that its fees were not “cost components” of the share sale, because they were not built into the price. The price was set by the market. HMRC argued that the concept of cost components does not require a mathematical mark-up or proof that the fees affected the sale price.
Were the fees linked to the share sale or the taxable business?
A transaction-specific cost is incurred to carry out a particular deal, such as marketing a subsidiary, finding buyers and completing the sale. A general overhead supports the business as a whole.
HLT argued that its costs were general overheads. It said exempt share sales and share sales outside the scope of VAT should be treated alike, so the costs should follow its taxable business. HMRC argued that HLT’s paid management services made the sale part of HLT’s economic activity. The sale was therefore within the scope of VAT but exempt, and the fees were linked to that exempt transaction.
Did using the sale proceeds for taxable growth change the VAT position?
HLT argued that the sale was a fundraising exercise for a taxable project, so the costs should follow the VAT treatment of the project the proceeds funded. HMRC argued that the intended use of the money did not alter the objective link between the professional services and the exempt sale.
Did the VAT group change the character of the sale?
HLT argued that section 43(1)(a) required its management services to HLTB to be disregarded. Without them, the sale would be a mere disposal of shares outside the scope of VAT, and the fees could be attributed to HLT’s taxable business. HMRC argued that VAT grouping did not erase the underlying economic activity.
What Did the Supreme Court Decide About VAT on Share-Sale Advisory Fees?
The Supreme Court unanimously held that HLT could not deduct the £76,823, because the professional services were directly and immediately linked to the exempt sale of HLTB’s shares.
What is the direct and immediate link test?
The Court started from the principle, drawn from Investrand BV v Staatssecretaris van Financiën Case C-435/05, [2008] STC 518, that the deduction system is meant to relieve traders entirely of VAT incurred in their economic activities. However, input VAT is deductible only where a cost is directly and immediately linked to taxable outputs, or forms part of the general overheads of taxable activity. Where inputs relate to exempt supplies, the input VAT is not deductible.
Share sales sit in an unusual place. Buying, holding and selling shares is outside the scope of VAT where it is not an economic activity. Where it is an economic activity, the sale is within scope but exempt. HLT’s paid management services to HLTB made the sale part of its economic activity, so the sale was in scope and exempt.
The Court stressed that exempt status alone does not decide where costs belong. The test is applied to the objective connection between the inputs and the transaction:
“One must still argue forwards from an analysis of the connection between the inputs and the share sale to decide whether they are directly and immediately linked to that sale or to the general business.”
HLT’s advisers were used in the process of selling HLTB. Their work was not a general cost of running hotels, so it was attributable to the exempt disposal.
Does a market share price break the link?
No. The Court held that “cost components” means an objective economic link, not proof that a fee was added to the price. Shares are rarely priced on a cost-plus basis, and the Court saw no reason to treat them differently:
“There is no reason why one should examine whether the costs were included in the calculation of the price when considering sales of shares when one does not do so for any other kind of transaction.”
Why did the new hotel project not create a sufficient link?
The Court refused to create a special rule for fundraising transactions. The intended or actual use of the money raised does not generally decide whether the costs of raising it are linked to the fundraising transaction or to the wider business:
“I therefore reject the submission that there is any modification of the direct and immediate link test in the case of a share sale.”
The Court was concerned that HLT’s approach would create uncertainty where money goes into a common fund. It could also encourage businesses to shape their correspondence or accounts to achieve a preferred tax result.
Purpose still matters in one narrower situation. Where a business has not yet started trading and incurs costs with an objectively evidenced intention to use them in a future taxable business, those costs can be deductible. That principle did not help HLT, whose costs were used in an existing exempt share sale.
What is the effect of VAT grouping?
VAT grouping did not help. Grouping is mainly an administrative simplification and anti-abuse mechanism. It does not change the conditions that decide whether economic activity exists:
“Similarly here, although they were members of the same VAT group, HLT and HLTB retained their individual identities. Economic activity was still taking place between them because HLT was engaged in managing its subsidiary and that amounts to economic activity for this purpose.”
How Does Hotel La Tour Affect Buyers, Sellers and Holding Companies?
Businesses should treat VAT on sale-specific adviser costs as a likely permanent cost and price it in before agreeing heads of terms.
What should sellers of subsidiaries do?
Sellers should include VAT on legal, tax, financial and corporate-finance fees in their net-proceeds model from the start. On HLT’s figures, irrecoverable VAT added £76,823 to the cost of the sale.
That cost may affect:
- the minimum acceptable sale price;
- whether a share sale or an asset sale is preferable;
- the scope of work given to advisers; and
- negotiations over who bears transaction costs.
What should buyers consider?
A buyer should not assume the seller’s VAT position is neutral. A seller facing substantial irrecoverable VAT may push for a higher price or prefer an asset sale.
The buyer’s own advisory costs need separate analysis. Costs connected to acquiring shares may also be irrecoverable, which raises the true acquisition cost. Model adviser fees, VAT exposure, due diligence, tax risks and post-completion liabilities alongside the headline price.
Where a disposal leads to disagreement over price, costs or contractual allocation, our solicitors also advise on commercial disputes.
What should holding companies and investment funds review?
Holding companies, private equity funds and other investment vehicles should treat VAT on deal costs as a structural cost of acquiring and disposing of portfolio companies. Repeated across a portfolio, it can affect fund economics, investor returns and exit proceeds. VAT grouping does not cure the problem where a parent makes an exempt disposal of a subsidiary’s shares.
What does the decision mean for advisers?
Advisers should explain at the outset that VAT on fees for an exempt share sale is generally a permanent cost, and model it across different structures during early planning. Arguments that share-sale costs are really overheads of a wider taxable business are unlikely to succeed where the work was objectively done to carry out the share transaction.
What should a business do after HMRC disallows a claim?
Act quickly. An appeal against an HMRC indirect-tax decision to the First-tier Tribunal (Tax Chamber) ordinarily must be made within 30 days. Time runs from the date printed on the decision or assessment, not the date you receive it. Where HMRC has carried out a review, time runs from the review conclusion letter.
Review engagement letters, invoices, time records, board papers and deal correspondence. HMRC cannot treat every cost as linked to the sale merely because the sale was exempt. Work that genuinely supported a separate taxable activity may be attributed differently. However, arguments that transaction-specific costs are general overheads now face binding Supreme Court authority.
If a party relied on incorrect VAT advice when structuring the deal, our solicitors can also advise on professional negligence claims.
Buying a Business: Share Sale v Asset Sale in England and Wales
A share purchase transfers the whole company with its history, while an asset purchase transfers only the assets and liabilities identified in the agreement.
| Issue | Share purchase | Asset purchase |
|---|---|---|
| What transfers | The company itself, with its assets, contracts, employees and liabilities | Only the assets and liabilities listed in the agreement |
| Historic liabilities | Stay with the company, so the buyer takes them on | Generally stay with the seller unless expressly assumed |
| Contracts, leases and licences | Remain with the company | May need assignment, novation, consent or replacement |
| Employees | Remain employed by the same company | Commonly transfer to the buyer under the TUPE rules |
| VAT on the sale | Generally exempt where part of an economic activity | May be a transfer of a going concern with no VAT, or a taxable supply |
| Stamp taxes | Stamp duty or Stamp Duty Reserve Tax, generally at 0.5% of the consideration | SDLT on land and buildings, with other assets taxed according to type |
| Due diligence focus | The company’s full history: tax, employment, contracts, litigation, regulatory and insolvency | The assets acquired, the liabilities assumed, employee transfers and consents |
What does a buyer acquire in a share purchase?
The buyer acquires continuity, but also the company’s past. The share purchase agreement should allocate historic risk through warranties and indemnities, with specific protection for any known tax, litigation or regulatory issue.
What does a buyer acquire in an asset purchase?
The buyer can choose what it takes, while the seller keeps the company and anything excluded. The trade-off is practical: key contracts, leases and licences may not move without third-party cooperation, and employee transfers need early planning to avoid disruption at completion.
When can an asset sale avoid VAT?
An asset sale may qualify as a transfer of a business as a going concern, in which case no VAT is charged on the transfer. HMRC’s guidance sets out the conditions, which include:
- the assets must be transferred as part of a business carried on as a going concern;
- the buyer must intend to carry on the same kind of business;
- the buyer must be, or become, taxable where required;
- a transferred part must be capable of separate operation; and
- there must not be a series of immediately consecutive transfers.
A transfer of shares, where the company continues to own its assets, is not itself a transfer of a going concern. If VAT is charged on an asset sale, a VAT-registered buyer may be able to recover it, subject to the normal rules.
How should you model VAT on share-sale costs?
Start with evidence for each adviser cost, not a broad label such as “fundraising” or “corporate overhead”.
- List every anticipated professional cost: legal work on sale documents, tax structuring advice, accounting and financial modelling, buyer search and corporate finance, and any wider group or operational advice.
- Test each invoice objectively: check the engagement letter, scope, deliverables, time records and board approvals. Documents created when the cost was incurred carry more weight than descriptions prepared after HMRC raises a query. Split mixed invoices by workstream.
- Compare both structures side by side: VAT on fees, going-concern treatment, stamp and property taxes, historic liabilities, warranties and indemnities, employees, consents, continuity of trading and tax attributes such as losses, capital allowances and group relief.
- Allocate irrecoverable VAT in the agreement: state which party bears its own professional costs and the VAT on them, and say expressly if the cost affects the price, completion accounts or indemnity package.
Frequently Asked Questions
Get Expert Help With VAT on Share Sale Costs
After Hotel La Tour, VAT on professional fees for an exempt share sale should be treated as a likely permanent cost. Leaving it out of the model until late in a deal can cost a seller part of its proceeds, cost a buyer a higher price, and lose either side the chance to choose a better structure. If HMRC has already issued a decision, missing the 30-day appeal window can end the chance to challenge it.
Our solicitors help directors, shareholders, holding companies and investors assess transaction risk, support negotiations and respond to disputes with HMRC or other deal parties. Call us on 0207 459 4037 or book a free consultation to discuss your share sale or asset sale.
