Input VAT Recovery On Share Sales And Other Fundraising Costs: Is The Direct And Immediate Link Test Modified?

Abstract

It is trite law that Value Added Tax (VAT) paid on purchased goods or services is only recoverable as input tax if there is a direct and immediate link to a taxable activity. VAT paid on advisory services relating to a VAT-exempt share sale would therefore prima facie not be deductible. The United Kingdom (UK) courts and tribunals however now claim to have found an exception to that principle in the case-law of the Court of Justice of the European Union (CJEU) insofar as fundraising is concerned: Rather than the nature of the exempt fundraising transaction itself, it is allegedly the purpose to which the raised funds are applied which determines input tax deduction – exceptionally, even direct use for an exempt transaction has then no chain breaking effect, i.e., the effect that an exempt transaction breaks the chain between a supply and the taxable person’s taxable economic activities (See UKUT Commissioners for His Majesty’s Revenue and Customs v. Hotel La Tour Ltd [2023] UKUT 178 (TCC), para. 64.). The present contribution seeks to investigate the merits of this view, and whether it is one that the CJEU should also endorse. VAT, Input Tax, Deduction, Deal Costs, Fundraising, Direct and Immediate Link, SKF