Supreme Court dismisses Centrica’s appeal on management expenses
Adviser fees on the disposal of subsidiary businesses non-deductible as capital in nature
Adviser fees on the disposal of subsidiary businesses non-deductible as capital in nature
The Supreme Court (SC) has dismissed an appeal by Centrica that adviser fees incurred by its UK holding company (COHL) were deductible expenses of management of an investment business under s1219 Corporation Tax Act (CTA) 2009.
The adviser fees were related to COHL’s disposal of its Dutch subsidiary businesses (the Oxxio businesses). The fees comprised amounts paid to: PwC (principally for the preparation of a vendor due diligence report); Deutsche Bank (for advice in relation to the disposal of the Oxxio businesses, which included wide-ranging advice and assistance in relation to strategic alternatives to disposal); and De Brauw for Dutch legal advice.
HMRC did not appeal the Court of Appeal’s (CoA) decision that the adviser fees constituted expenses of management under s1219(1) CTA 2009. The only question for the SC was whether the adviser fees constituted expenses of a capital nature and not deductible due to the exclusion in s1219(3) CTA 2009.
The taxpayer considered that the exclusion for capital expenditure for investment companies applies more narrowly than the exclusion for capital expenditure for trading companies under s53(1) CTA 2009, and that the purpose of the exclusion for expenses of management was only to ensure no deduction is available for acquisition costs of investments and a limited category of fixed capital assets (such as the company’s office building).
The SC disagreed. In applying a purposive approach to interpreting the exclusion, it considered the history of the provision as well as extra-statutory material (explanatory notes to the legislation) to determine parliament’s intention. It held that the capital exclusion for expenses of management of investment companies had the same meaning as the capital exclusion for expenses of trading companies.
The taxpayer further asserted that the relevant case law emphasises that the capital/revenue analysis turns upon the nature of the business in question. In this case, the adviser fees were to procure advice to enable decisions to be made about how to realise value from the Oxxio business and this, in the context of COHL’s business, was revenue in nature.
The SC disagreed. Where a capital asset can be identified, the starting point is to assume that expenditure on its disposal should be regarded as capital expenditure. The SC considered that the advisers were engaged specifically for the purpose of advising on the divestment of the Oxxio business and were engaged only after the decision to divest had been made. The SC considered that the decision to divest was made around the time that Centrica’s management had approved and initiated a plan to sell the Oxxio business in June 2009. Centrica considered that the June 2009 decision only indicated a direction of travel and was not a decision to divest. The SC did not agree based on the First-tier Tribunal’s (FTT) findings. Although it was accepted that it was not certain that the Oxxio business would actually be sold and the advisers considered a range of options for the Oxxio business (such as winding it down), this did not make the advisory expenditure revenue in nature.
The SC differentiated between the position of a ‘Holdco’, which holds shares as capital assets, and a company which has a trade of dealing in shares or investment assets. Based on this distinction, the court limits the permissible deductible management expenses for holding companies more narrowly than for those for a company which has a trade of dealing in shares or investment assets. Although not expressly confirmed, the scope of deductible management expenses would presumably continue to include expenses, including advisory expenses, which are incurred up to the time of the decision to dispose of an investment.
The SC also notes that the taxpayer had not sought to draw any distinction between the different fees for different professional services in the total sum claimed. While only a passing comment, this may suggest that there may have been scope for the taxpayer to have treated certain fees differently.
Finally, it is noted that neither the SC nor the CoA were 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 management expense relief. The FTT had held that, because COHL did not manage the businesses in which it held shares, the expenditure was not deductible. On this point, the Upper Tribunal 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.
