UK tax deduction available for intermediate holding company

The decision overturns that of the First-tier Tribunal (FTT) in the case, which had decided that the deduction was not available because the intermediate holding company could not show that it, rather than its ultimate parent company, carried out the relevant management activities. However, the Upper Tribunal said that this was not necessary in circumstances where the directors of the intermediate holding company participated in that decision-making, as this was management of the investment business on behalf of the company with the informal approval of its directors.

The case concerned Centrica Overseas Holdings Limited (COHL), an intermediate holding company in the corporate group of energy company Centrica plc, which 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 with four subsidiaries. The fees were payable to PwC, Deutsche Bank and a Dutch law firm. HM Revenue & Customs (HMRC) refused COHL’s claim for a deduction.

The group had initially explored several options for the business, including keeping it, but if it was to be sold it hoped that the shares in Oxxio could be disposed of. However, due to buyer requirements, COHL ultimately sold the businesses of two subsidiaries and the shares in a third subsidiary. COHL realised the value of the investment through the repayment of its loans.

Strategic decisions within the group were made by Centrica plc, which had central teams providing advice and support for the group covering areas such as legal, tax, accountancy, regulatory matters and mergers and acquisitions. COHL had no employees of its own.  Its directors occupied senior positions within the centralised group structure and included the group head of tax and the general counsel.

“It may well be desirable for decision making and any delegations of authority in that context to be recorded in board minutes or correspondence. However, such formality is not necessary in terms of delegation of authority for the purposes of [the relevant statutory provision],” the Upper Tribunal judgment said.

The Upper Tribunal said that it appeared that the FTT was looking for an outward expression that the directors of COHL were making decisions in relation to Oxxio with their COHL ‘hats’ on rather than their Centrica group ‘hats’ on. The Upper Tribunal said that there did not need to be evidence to show that they “changed hats and took decisions in their capacity as directors of COHL”. The judges said that the directors of COHL were clearly participating in the strategic decision-making in relation to Oxxio and in the circumstances that was sufficient to evidence that the disputed expenditure was incurred in relation to COHL’s investment business.

“This decision will be welcomed by other corporate groups because it reflects the reality of how groups operate,” said Jake Landman, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law. “It means that deductions should not be denied where expenditure has been properly incurred by a group just because there is no piece of paper saying a decision by an individual in their group function role was made in their capacity as a director of a subsidiary.”

HMRC had also argued that all the expenses were in connection with implementing a sale and therefore not deductible.

The Upper Tribunal said that there is a distinction between expenses incurred in deciding whether to acquire or dispose of an asset, which will be expenses of management, and expenses incurred on the ‘mechanics of implementation’ once that decision has been taken, which will not be. The judges said that expenditure incurred in assessing how to make an acquisition or a disposal may fall on either side of the line. Depending on the facts, it may be part of the decision whether to proceed or part of the implementation of a decision.

The Upper Tribunal was satisfied that the FTT was entitled to conclude that fees of PwC and Deutsche Bank before a particular date when Centrica had decided in principle to go ahead with a specific transaction with a specific purchaser on specific terms were expenses of management. However, the FTT did not make clear findings in relation to the fees of the Dutch law firm and so the Upper Tribunal decided to remit the issue to the FTT to decide which of that firm’s fees were expenses of management.

The Upper Tribunal dismissed HMRCs argument that the fees payable to Deutsche Bank were part of the cost of disposal because they were only payable on successful completion of the disposal.

The Tribunal said that the FTT was right to find that in substance the fees were for services which enabled COHL to decide whether and how to dispose of the Oxxio business and the fact that the fixed fee was only payable on completion of the transaction did not change the nature of the expense so as to make it part of the cost of disposal and therefore non-deductible.

HMRC had also argued that the fees were capital in nature and therefore non-deductible. The Upper Tribunal said that expenses of management which were capital were “likely to be very limited in nature”. They said the meaning of capital expenditure in the context of expenses of management is necessarily more limited than the meaning in the context of trading businesses.

“In our view it is aimed at expenses which do not normally recur, but which have the effect of creating, enhancing or disposing of a capital investment. It does not exclude expenditure which informs decision-making and the exercise of managerial discretion,” the Upper Tribunal said in its judgment.

The Upper Tribunal said that in a case such as this, expenses of management are likely to be revenue expenses and they considered the FTT was right to conclude that the Deutsche Bank and PwC expenses were not capital in nature.

Pinsent Masons acted for COHL in this case.