Constable VAT Focus 4 August 2023


Fulfilment House Due Diligence Scheme registered businesses list
This guidance can be used to check if businesses storing goods in the UK are registered with the Fulfilment House Due Diligence Scheme. The list has been updated with 4 additions and 2 removals.


Upper Tribunal

1. Input VAT incurred on sale of shares

This case concerned the input VAT incurred by Hotel LA Tour Ltd (HLT) on the sale of shares in its subsidiary, Hotel LA Tour Birmingham Ltd (HLTB). HLTB owned and operated a hotel in Birmingham and HLT supplied management services to HLTB.

HLT sold all of its shares in HLTB in order to raise funds for the building of a new luxury hotel. HLT incurred professional fees including marketing, solicitors and accountants fees in relation to the sale of shares and it sought to recover the VAT incurred on these costs in the sum of £76,822. HMRC disallowed the input VAT claimed on the grounds that the costs related to the exempt share sale. HLT appealed this decision arguing that the relevant services received were directly and immediately linked to its downstream taxable activities, mainly being the development of the new luxury hotel.

The FTT ruled in the favour of HLT, and HMRC appealed the FTT’s decision. HMRC referenced the BLP Group Plc decision where the costs incurred were attributed to the exempt share sale rather than to BLP’s wider taxable activities. However, the Upper Tribunal (UT) considered various other cases such as SKF and Frank A Smart, in which it was ruled that a VAT exempt share sale in order to raise funds did not prevent input VAT deduction if:

  • The purpose in fund-raising was to fund its economic activity.
  • The funds are later used to make taxable supplies.
  • The cost of the services are cost components of downstream activities which are taxable

The UT concluded that the FTT was correct when it applied the above approach. HLT’s share sale was to fund its development of a new hotel and all proceeds generated from the share sale were in fact allocated to this activity. Therefore, the input VAT incurred on marketing and legal fees was recoverable and HMRC’s appeal was dismissed.

Constable Comment: This case considered whether input VAT incurred on the sale of shares is recoverable, given that the proceeds from the sale will be allocated to a taxable activity of developing a new hotel. Both the FTT and UT ruled in favour of the taxpayer.

This decision may have a wider implication than initially anticipated as this will not only affect businesses operating in the hotel sector but potentially any businesses considering the sale of shares in a subsidiary. Any business that has not recovered VAT on the sale of shares in the previous 4 years, where the funds raised from the share sale were used, or intended to be used, in making taxable supplies, should give due consideration to the decision in this case and seek professional advice if necessary. In the wider context, and potentially impacting on other sectors including charities and organisations with non-business activities, if the eventual intention of funds raised in a particular transaction is to generate taxable supplies (in the case of HLT selling shares to construct a hotel in Milton Keynes) this decision suggests that VAT incurred in the original transaction can be viewed as a cost component of taxable business supplies.       


2. Medical care or cosmetic treatments

This case concerned Epem Limited’s (EL) appeal against HMRC’s decision to compulsorily register EL for VAT on the grounds that EL was making standard rated supplies in excess of the VAT registration threshold. EL argued that it was providing exempt medical services and the value of taxable supplies has never exceeded the VAT registration threshold.

HMRC initially contacted EL in 2009 to establish its VAT status, requesting a breakdown of services provided. EL did not provide the requested information, and HMRC registered EL for VAT and issued assessments for VAT. However, EL appealed to the FTT on the grounds that it made VAT exempt supplies. The issue for determination by the FTT was whether the services were exempt medical services provided for the primary purpose of the protection, maintenance, or restoration of health of individuals.

The FTT reviewed all submissions and concluded that EL did not discharge the burden of proof upon it to show that it should not be VAT registered. The FTT reached this conclusion for various reasons including that the Care Quality Commission (CQC) refused EL’s registration application on the grounds it was not providing regulated services. Whilst not definitive, this suggested to the FTT that EL’s services is not medical care for VAT purposes.

The FTT discussed the difference between clinical treatments and cosmetic treatments as EL argued it was treating issues which were affecting the patients life. The FTT stated that it is possible that, in some cases, a physical condition may cause clinical psychological problems for a patient; however, dissatisfaction with appearance does not automatically mean that the patient has a health disorder.

The FTT concluded that EL did not provide sufficient documentary evidence to prove that its services were VAT exempt medical care. As a result, EL should have been VAT registered and the appeal was dismissed.

Constable Comment: This decision provides some useful analysis on what constitutes clinical treatments as opposed to cosmetic treatments and beautician services. This is an interesting case for businesses involved in this industry. There can be potential ambiguity regarding the correct VAT treatment of such services, and we would recommend seeking professional advice to establish the correct VAT liability of services. A final point to note is that this case was heard, and decision released recently; however, the disputed decision dates to 2013 and HMRC raised VAT assessments from 1 May 2007, over sixteen years ago. This case acts as a reminder that it is very important for any business to establish its correct effective date of VAT registration (EDR). If a businesses EDR is wrong, HMRC will amend this and seek to reclaim output VAT that should have been accounted for, less any input VAT properly reclaimable.    

Please note that this newsletter is intended to provide a general overview of the subject. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.