Tribunal: no UK tax deduction as company did not carry on management activities itself

• Tribunal says tax deduction for expenses of management only available if company can show it carries on investment management activities itself
• Fees for advice on how to bring about a sale not capital in nature
• Centrica Overseas Holdings Limited v HMRC [2020] UKFTT 00197 (TC) (82-page / 2.1MB PDF)

Centrica Overseas Holdings Limited (COHL), a company in the corporate group of energy company Centrica plc, claimed a corporation tax deduction for expenditure on the fees of three professional firms in connection with the disposal of its investment in Oxxio BV, a Dutch energy business. The group had initially hoped to be able to sell the shares in Oxxio, but a buyer for all the businesses could not be found. Ultimately, COHL realised the value of the investment through the repayment of its loans even though the actual transactions were carried out within the Oxxio group and COHL retained the Oxxio shares.

A company, such as a holding company, whose business consists wholly or partly of making investments can claim a corporation tax deduction for expenses of management of its investment business, provided they are not expenses of a capital nature.

However, HM Revenue & Customs (HMRC) refused the deduction arguing that the disputed expenditure was not an expense of COHL’s investment business as the advice was not provided to COHL and was not used by COHL to make any decisions. HMRC also argued the deduction was not available because COHL did not actually sell any investments as Oxxio made the disposals which occurred. A further HMRC argument was that the expenses were in connection with implementing a sale and therefore not deductible. HMRC also argued that the expenditure was capital in nature, and costs of implementation rather than management. Finally HMRC argued that a portion of the expenses were not deductible on the basis they amounted to a success fee.

First–tier Tribunal judge Marilyn McKeever rejected HMRC's argument that COHL was not entitled to the deduction because it did not itself sell any assets. She said that a holding company’s investment business did not consist solely in the purchase and sale of shares, it was to maximise the value and returns from its investments and this included the procuring of transactions by the company’s subsidiaries where those transactions inure for the benefit of the holding company by enabling the subsidiary to repay loans it owes to the holding company.

The fact that COHL itself did not dispose of anything was therefore not, of itself, a bar to the disputed expenditure being an expense of management of COHL’s investment business, the judge said.

The legislation relating to deductions for expenses of management does not expressly require the management of the company’s investment business to be undertaken by the company itself. However, the judge said it was implicit that it must be the company itself which manages its own business and the management must be carried out by the company, acting by its directors.

She said that the disputed expenditure was arranged by Centrica plc and "taking a realistic view of the facts it was Plc which made all the decisions, strategic and otherwise". The directors of COHL were senior employees of the Centrica group, but the judge said that when they were making decisions they made them "with their Plc Head of Tax/General Counsel hats on".

As part of considering whether the disputed expenditure was an expense of management of COHL's investment business the judge considered, by reference to case law, when the necessary decision to sell was made. This assisted with determining whether the expenses were management costs or whether they were part of the costs of sale itself, in other words, implementation costs, which were not deductible. The judge agreed with COHL that the "cut off point" when the board decided to go ahead with the disposal took place on 22 February 2011 when the board were asked to approve the transaction and to delegate authority regarding signing the relevant documents. Therefore expenses for actions prior to this date were potentially deductible subject to the other requirements below.

The nature of the fee arrangements with the professional firms was also considered by the judge. This included consideration of the success fee arrangement with Deutsche Bank. Regarding these fees, the judge concluded that Deutsche Bank's fees were not excluded from being expenses of management simply because they were expressed to be contingent on completion of the Oxxio disposal.

Considering HMRC's argument that the expenditure was disallowable as being capital in nature, the judge said that the effect of the advice which COHL obtained from PwC and Deutsche Bank was not to bring about a disposal of the Oxxio businesses, but to inform the management decisions about how best to do so. She said the costs of such advice and assistance were part of the ongoing management expenses of COHL and were therefore mainly revenue in nature. However, she found that the fees of the Dutch legal advisers were wholly capital in nature and therefore disallowable.

Pinsent Masons, the law firm behind Out-law, acted for COHL in the First-tier Tribunal.