New HMRC rules on VAT: What you can and can't claim on investment costs

This guide explains what's changed, how it impacts your business, and what you can still reclaim under the current VAT rules.

Why the rules have been clarified

In the past, businesses often claimed VAT on fundraising or investment-related costs because they believed raising capital supported overall business growth. The courts, in HMRC v Hotel La Tour Ltd, have confirmed that this general approach does not work where the cost is directly linked to an exempt transaction, such as selling shares, even if the money raised funds a taxable business.

Under the long-standing “direct and immediate link” test, VAT is only recoverable if the cost is linked to taxable business activities. If an expense does not contribute to VATable sales or services, it is no longer eligible for recovery.

The focus has shifted from how funds are raised to how they are used. The money you raise must support a taxable business outcome, not just general growth or financial stability. For more on recent VAT regulation updates, read our detailed article on important VAT changes UK businesses must know.

What this means for businesses

This rule change affects a wide range of UK businesses, mainly:

• Startups raising seed or Series A funding
• Established companies undergoing mergers or acquisitions
• Businesses that attract external investors
• Firms with holding structures or mixed taxable and exempt activities

If your business regularly raises funds to expand or restructure, you'll now need more precise documentation to justify VAT recovery.

Understanding VAT on Investment Costs

Professional services and other costs incurred when raising capital for your business are covered by VAT on investment costs. This includes:

• Fees for legal counsel and share issuance or investor attraction
• Advisory fees for acquisitions or fundraising
• Restructuring-related financial services or management fees

These days, HMRC handles these expenses differently based on its goals and results.

Costs you can likely claim

You can still recover VAT on certain investment-related costs if they are directly related to a VAT-able activity. These include:

• Legal expenses incurred when issuing shares can be reclaimed if the funds raised are later spent on activities that generate VATable income.
• Advisory or consultancy costs tied to launching a taxable product or service
• Costs incurred while restructuring or reorganising VATable business operations

The deciding factor is whether the cost supports a taxable supply. You must show a clear link between the investment cost and the revenue-generating activity that attracts VAT.

Costs you likely can't claim

Certain costs are now excluded from VAT recovery because they don't directly contribute to taxable outputs. These include:

• Fees for legal counsel or advice when selling stock or changing ownership
• Campaigns for investor relations, branding, or public relations that try to raise money
• Fundraising initiatives that don't have a definite VATable outcome, like equity raised only to settle debt or accumulate reserves

The test is still straightforward: VAT recovery will be rejected if the expense does not contribute to the creation of taxable sales.

How to determine eligibility

HMRC uses the "direct and immediate link" test to decide whether VAT on investment costs can be reclaimed. To meet this test, businesses should be able to show:

• The cost supports a taxable business activity
• Documentation links the expense to a specific product, project, or service
• There's no indirect or purely financial purpose for the spending

General claims such as "this funding supports growth" are no longer sufficient. You must prove that each cost was incurred for a purpose that leads to VATable sales.

Who faces the most risk

• Holding companies without direct trading activity
• Startups raising external capital for general use
• Firms involved in cross-border investments
• Groups with subsidiaries where funding is transferred internally

Keeping costs associated with investments separate and clearly labelled makes it easier to show HMRC how they link to your activities.

How to protect your VAT claims

If you've previously made investment-related VAT claims, it's worth reviewing them now. Use the following steps to stay compliant under the new rules:

1. Recheck past claims: Review all allegations made on fundraising, restructuring, or advisory costs. If they can't be tied directly to VATable business activity, you may need to adjust them.
2. Maintain clear documentation: Record exactly how funds raised are used. For example, if funds supported a taxable product launch, retain invoices, contracts, and correspondence showing the link.
3. Separate investment expenses: Maintain separate accounting records for costs related to funding or share issuance. Avoid grouping them with operational or administrative fees.
4. Get expert advice: A VAT specialist should review complex structures involving multiple subsidiaries or cross-border activities. Professional advice helps prevent future disputes or penalties.

Can you still reclaim VAT on equity funding?

Yes, but only under certain conditions. If the money raised is used for VATable business purposes, like:

• Introducing new taxable goods or services
• Entering new businesses that are registered for VAT
• Buying supplies or machinery for VATable trading

If the money is used for non-VATable purposes, such as:

• Paying back loans or outstanding debts
• Increasing reserves or paying dividends
• Funding tax-exempt supplies or financial services

HMRC looks at the purpose of the spending, not just the transaction itself.

Digital VAT compliance under MTD

With Making Tax Digital (MTD), HMRC relies more heavily on digital data analysis. This enables VAT audits to be conducted more efficiently and thoroughly. Businesses still using manual or paper-based systems risk being flagged for review if their VAT trail contains gaps.
Under MTD:

• VAT submissions must be entirely digital
• Missing or inconsistent data may trigger compliance checks

Ensure your records clearly show, and ensure you can cross-check claims with your financial activity. Ensure that your records clearly indicate how investment funds and related costs support taxable trading activities.

Why this matters for financial planning

• Understanding what qualifies for VAT recovery helps businesses manage cash flow and avoid costly errors. Incorrect claims can lead to penalties or delays in refunds.
• If your company regularly raises funds, build VAT analysis into your investment strategy. Before paying advisory or legal fees, assess whether each expense contributes to taxable business output.
• This approach puts you in a stronger position if HMRC examines your records.

Final thoughts

• The courts have now confirmed how the VAT rules apply to investment costs. Businesses can still recover VAT, but only if the expenses are directly linked to VATable trading activity. A clear record trail, accurate documentation, and structured digital filing are now essential to avoid claim denials or audits.
• VAT recovery is no longer automatic: it depends on how effectively you connect each expense to your taxable business outcomes.

Don't wait for an HMRC letter

The court decisions apply now. If you've raised funds or plan to, now's the time to act:

• Know precisely where the funds go
• Document their use clearly
• Use a VAT tool that aligns with current HMRC rules

Fundraising is crucial for growth. But VAT recovery now hinges on how investment costs are used. You can't just assume a claim will pass. You must show how costs support taxable trading.

If you need help checking your VAT on investment costs, start a free trial of Swift VAT Pro or speak to our support team today

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Frequently asked questions

Reviewed against HMRC v Hotel La Tour Ltd [2025] UKSC 46 and HMRC guidance VIT40600, VATFIN4250 and VAT Notice 706. October 2026.

What did the Supreme Court decide in Hotel La Tour?

That VAT on the costs of selling shares in a subsidiary is not recoverable. In HMRC v Hotel La Tour Ltd [2025] UKSC 46, decided on 17 December 2025, the Supreme Court unanimously dismissed the company's appeal, upholding the Court of Appeal. The advisers' fees were directly and immediately linked to the exempt share sale, and whether the fees were reflected in the share price (the "cost component" argument) is not part of the test. [Read the Supreme Court judgment](https://supremecourt.uk/cases/judgments/uksc-2024-0086).

We sold a subsidiary to fund taxable work. Can we recover the VAT on the sale costs?

No. Using the proceeds for a taxable business does not change the answer. This was the company's central argument in Hotel La Tour, and it failed: the sale of shares is an exempt supply, the transaction costs are linked to that sale, and reinvesting the money in a taxable trade does not make the VAT on those costs recoverable. See the at-a-glance table.

Which deal costs may still be recoverable after Hotel La Tour?

Costs that are not directly linked to the exempt sale. Fees for the sale itself, such as work on the sale agreement and transaction-specific due diligence, are linked to the exempt supply and blocked. Wider advisory or restructuring work for the continuing taxable business can still be recoverable, so ask advisers to scope and invoice the two kinds of work separately. See the at-a-glance table.

Can I reclaim VAT on the costs of issuing new shares?

Generally yes, if your business makes taxable supplies. Issuing new shares to raise money is not a supply for VAT, so the VAT on legal, broker and listing costs is treated as a general overhead of the business. A fully taxable business can recover it in full; a partly exempt business recovers it under its partial exemption method (VAT Notice 706, section 10.1). GOV.UK: partial exemption (VAT Notice 706).

Can you reclaim VAT on legal and advisory fees when acquiring a company?

Often yes, but only where the buyer makes taxable supplies. Under HMRC's guidance, the buyer must have contracted for, used and paid for the advice, and either provide genuine management services to the new subsidiary for a fee that is more than nominal, or buy it as a direct extension of its own taxable business, such as a competitor or key supplier. Buying shares purely as an investment does not support recovery. HMRC manual VIT40600: holding companies.

Can a holding company recover VAT on its costs?

Only if it is in business for VAT. A holding company that only holds shares for dividends or a later gain cannot recover VAT on its costs. One that charges its subsidiaries for real management services, under an agreed fee, can. Fees that depend on the subsidiaries' profits do not count, and joining a VAT group does not turn a passive holding company into a business. HMRC manual VIT40600: holding companies.

What records support a claim on deal costs?

Evidence of what each piece of work was for. Keep engagement letters and VAT invoices addressed to the company that is claiming, with scopes that separate work on a share sale from work for the continuing taxable business. A holding company should also keep its management services agreement, its invoices to subsidiaries and evidence of its intention to make those supplies. An invoice that only says "transaction advisory" is hard to defend. Get the free Supreme Court briefing.

What should private equity-backed groups review?

Two things. First, any VAT recovered on share sale costs because the proceeds funded taxable activity: that basis failed in the Supreme Court. Second, whether each company that claims VAT actually received the supplies and makes taxable supplies of its own, with agreed fees that are more than nominal. HMRC can normally assess VAT up to 4 years back, and longer where an error was careless. Get the free Supreme Court briefing.

Where does VAT on deal costs go on my VAT return?

Recoverable VAT goes in Box 4, with the net cost in Box 7. VAT you cannot recover, such as VAT on share sale costs, stays out of Box 4, but the net cost still goes in Box 7. If you are partly exempt, only the share your partial exemption method allows goes in Box 4. See how Swift VAT Pro files your return.