Court of Appeal disallows management expense relief for advisor fees.

In Centrica Overseas Holdings Limited v HMRC [2022] EWCA Civ 1520, the Court of Appeal (CoA) was unanimous in overturning the decision of the Upper Tribunal (UT) which initially held that advisor fees incurred by an intermediate UK holding company (COHL) in the Centrica Plc group were deductible expenses of management under section 1219 CTA 2009. The advisor fees related to a potential disposal of Dutch subsidiary businesses (Oxxio businesses). The CoA held that while the expenses constituted expenses of management, because the expenses were also capital in nature, they could not be deductible due to the capital exclusion in section 1219(3)(a) CTA 2009.

The advisors’ fees comprised:

£172,423 to PwC, principally for the preparation of a Vendor Due Diligence Report;
€3,550,515.32 to Deutsche Bank AG London for advice in relation to the disposal of the Oxxio businesses. This included wide-ranging advice and assistance in relation to strategic alternatives for the various businesses; and
€766,328 to De Brauw Blackstone Westbroek for legal advice on matters of Dutch law.

The CoA had to consider two grounds of appeal. First, whether the UT erred in deciding that the expenses in question constituted expenses of management. Second, whether the UT erred that the expenses in questions did not constitute expenses of a capital nature.

For the first ground, the CoA considered the relevant case law on expenses of management and held that the First-tier Tribunal (FTT) was correct in its approach. Consequently, the UT was correct in deciding that the expenses constituted expenses of management.

For the second ground, the CoA held that both the FTT and the UT erred in finding that the advisor fees were not capital in nature. Both the FTT and the UT confused the two different legal issues before them: the expenses of management issue and the capital expenditure issue. The CoA accepted HMRC’s submissions that the capital exclusion in section 1219(3)(a) CTA 2009 had the same meaning as the capital exclusion for trading companies. As a result, the long history of case law determining whether items were of a capital nature was relevant in deciding the capital issue. The crucial feature was that in June or July 2009, COHL decided from a commercial point of view that the Oxxio businesses had to be disposed of. This meant that advisor fees incurred past this point were held to be capital in their entirety.

Finally, it is notable that the CoA was not asked to consider the decisive issue in the FTT that an absence of formality in relation to the decision-making of COHL precluded a claim for relief. On this point, the UT had overturned the FTT and held that the fees were deductible on the basis that the directors of COHL had participated in the decision-making in their capacity as heads of group functions.

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