Supreme Court Ruling in Hotel La Tour VAT Case: Key Implications for VAT Recovery on Share Sale Costs

17 December 2025 – Landmark VAT Decision in Hotel La Tour Ltd v HMRC

The UK Supreme Court has today delivered its judgment in the long-running VAT dispute between Hotel La Tour Ltd and His Majesty’s Revenue and Customs (HMRC), bringing clarity to a contentious area of VAT law relating to the recoverability of input tax on costs incurred in the sale of shares.

Hotel La Tour Ltd (HLT) operated a group of luxury hotels and, as part of its expansion strategy, planned to develop a new hotel in Milton Keynes. To help fund this project, HLT sold the shares in its subsidiary (Hotel La Tour Birmingham Ltd), a transaction that is exempt from VAT under UK law.

In carrying out that share sale, HLT incurred significant professional fees, including marketing, legal and advisory costs on which it paid VAT. HLT filed for input tax recovery on the basis that the proceeds of the sale were used to fund a VAT-taxable business activity. This argument, if accepted, would have allowed the VAT on related costs to be reclaimed.

The case had already progressed through multiple tribunals and the Court of Appeal before reaching the Supreme Court, making this one of the most closely watched VAT appeals in recent years.

Supreme Court Decision

In today’s decision, the Supreme Court dismissed Hotel La Tour’s appeal, ruling in favour of HMRC. The Court confirmed that:

• The established “direct and immediate link” test remains the fundamental test for input tax recovery.
• The fact that share sale proceeds were used to fund taxable activity does not mean VAT on the professional fees incurred in making the sale can be recovered.
• The relevant professional fees were directly linked to an exempt share sale, and therefore the input VAT on those costs is not reclaimable.

The Supreme Court rejected HLT’s argument that the purpose of the share sale (i.e. funding taxable hotel operations) should alter the test for input tax recovery. Instead, the Court confirmed that even where sale proceeds fund taxable activities, what matters for VAT recovery is which transaction the costs were directly linked to, in this case, the exempt share sale itself.

Why This Matters

This ruling confirms a key VAT principle: the intended use of funds raised does not create a direct VAT recovery right where the costs relate to an exempt supply. The Supreme Court reaffirmed that HMRC and taxpayers must apply the direct and immediate link test strictly, without regard to the wider commercial purpose of a transaction.

Conclusion

The Supreme Court’s ruling in Hotel La Tour Ltd v HMRC provides clarity on the long-debated question of VAT recovery on share sale costs. By reaffirming that the test for input tax deduction must focus on the link between the costs and the exempt transaction itself, rather than the subsequent use of sale proceeds, the decision draws a clear line for taxpayers and advisors navigating complex VAT recovery issues.

If your business is involved in share disposals, corporate reorganisations, or the financing of taxable activities through asset sales, this ruling highlights the importance of early VAT planning and careful assessment of potential input tax recovery.