Supreme Court confirms no tax deductions on costs associated with disposal of a business

The Supreme Court’s decision (32-page PDF/313KB) has implications across sectors including energy, life sciences, healthcare and beyond on the basis that intermediate holding companies carrying on business as investment companies are extremely common.

The Supreme Court dismissed the appeal against an earlier decision by the Court of Appeal. Its ruling set out the principles to be considered in determining the distinction between whether an expense is “of a capital nature” or “of a revenue nature” in the context of investment companies.

Jake Landman, tax law expert at Pinsent Masons, said: “The Supreme Court has given some guidance on when expenses related to investments which are capital assets will be revenue rather than capital in nature, but the decision is very much focused on the holding company’s decision to sell".

The case concerned Centrica Overseas Holdings Limited (COHL), an intermediate holding company in the corporate group of energy company Centrica plc, which claimed corporation tax deductions for expenditure on the fees of three professional firms in connection with advice on its investment in Oxxio BV, a Dutch energy business with four subsidiaries. The fees were payable to PwC, Deutsche Bank and a Dutch law firm. HMRC refused COHL’s claim for tax deductions, and COHL first challenged the decision before the First-tier Tribunal (FTT).

COHL had succeeded in earlier decisions on the question of whether the expenditure incurred should be treated as “expenses of management” at all.

"The prior expenses of management issue was not the subject of the Supreme Court appeal, however the Court's comments on that point do suggest approval that these costs were expenses of management," said Landman.

The only question remaining to be considered by the Supreme Court was whether the expenditure should nevertheless be excluded from deduction on the basis that it was capital in nature.

In its judgment, the Supreme Court decided that the exclusion for “expenses of a capital nature” in section 1219(3)(a) of Corporation Tax Act 2009, which applies to “companies with investment business” such as COHL, has the same meaning as “items of a capital nature” in section 53(1) of the same Act, which applies to exclude deductions for such expenditure for trading companies.

This means that the body of case law that has developed over many years relating to the capital and revenue divide in the context of trading companies applies to companies with investment business.

The Supreme Court recognised that the borderline between the two categories of capital and revenue can be difficult to find, but that existing case law has provided a series of useful principles. However, they are not strict tests that can be applied in every scenario and these principles are all entirely objective in nature, so the subjective intentions of the company are irrelevant.

The court noted that intermediate holding companies, such as COHL, are in the business of holding and managing investments in subsidiaries, such as shareholdings and loans. The investments were therefore considered to be capital assets. The court distinguished this from share trading companies where shares are typically revenue assets rather than capital assets.

The court said that where a capital asset can be identified, the presumption is that money spent on acquiring or disposing of that asset is capital in nature, but the presumption can be displaced.

The Supreme Court applied those principles to COHL’s fact pattern, as established by the FTT, and found that the expenditure was capital in nature. The decision was based on the facts that:

• the business disposed of was a clearly identifiable capital asset;

• the expenditure was not recurring; and
• the commercial decision to dispose of the asset had been made before the expenditure was incurred, which was supported by the terms in the engagement letters with the advisers.

The court did not accept that the FTT had found that there was not a true decision to sell until later; or that what the advisers were doing was advising on management of investments. The FTT findings of fact were not viewed by the court in that way.

The court also commented that the fact that there was no certainty that the business would be sold does not alter the analysis – expenditure on an abortive capital transaction can still be capital in nature.

Pinsent Masons acted for COHL in this case.