Relief for management expenses

In Centrica Overseas Holdings Ltd v HMRC [2024] UKSC 25, the Supreme Court held that expenditure on professional advisory fees incurred by an investment holding company in relation to the disposal of a business was capital in nature and therefore not deductible for corporation tax purposes. Significantly, the Supreme Court confirmed that the capital test for an investment company was the same as for a trading company as well as determining that, in the taxpayer's case, its expenditure became capital when a commercial decision to pursue a disposal was made, even if at that point a disposal was not certain to happen. The wording of the professional advisers' engagement letters was closely examined and found to support the view that the fees incurred by the taxpayer related to assistance in bringing about the disposal of a capital asset.

Facts

Centrica Overseas Holding Limited (Centrica) was an investment holding subsidiary of Centrica Plc Group whose sole purpose was the holding of investments. One of these investments was the share capital of Oxxio BV (Oxxio), a Dutch company.

After a period of poor performances, a decision to dispose of Oxxio was made, with board minutes from 28 July 2009 stating that Oxxio "would be treated as a discontinued business held for sale". This followed a 'kick off' meeting on 10 July 2009, attended by representatives from several professional service firms, to discuss the disposal of Oxxio. The same firms then provided services in relation to the disposal of Oxxio, with Deutsche Bank as the investment bank, PwC as accountants and Dutch law firm De Brauw Blackstone Westbroek (De Brauw) providing legal advice. These services ranged from initial advice on how to structure the disposal to detailed transactional work preparing the sale agreement, with the sale completing in March 2011, following acceptance of the final offer from the purchaser in January of that year. Across the ca. two year period, fees from across the three professional service firms amounted to £2,529,697, in respect of which Centrica claimed a deduction for revenue expenses of management under section 1219 of the Corporation Tax Act 2009.

This claim was disallowed by HMRC in its entirety, on the basis that the expenditure was not deductible for two reasons:

1. it was not 'expenses of management', given that the expenditure had been incurred in disposing of a capital asset; and
2. even if it was an expense of management, it would not be deductible as it was capital in nature, given that again, it had been incurred in disposing of a capital asset.

Issues

Having been unsuccessful in the Court of Appeal, the taxpayer appealed to the Supreme Court on two grounds, namely:

• that the Court of Appeal had been mistaken in holding that the scope of 'expenses of management' which are 'of a capital nature' is to be identified on the basis of principles which apply to trading companies; and
• that in any event the Court of Appeal should have found that, based on the findings on facts made by the First-tier Tribunal, the expenses were of a capital nature.

Findings

The Supreme Court held that, in determining whether or not expenditure was capital or revenue in nature, the well-established principles applicable to determining the nature of expenditure incurred by a trading company applied equally to an investment company.

In applying the above principles to the facts found by the FTT, the Supreme Court held that Centrica's expenditure was non-deductible.

The court highlighted that the decision to dispose of Oxxio had been made prior to the 'kick off' meeting where all three professional service firms were present, and the purpose of that meeting was to start the divestment process, including identifying necessary workstreams.

The decision noted that the engagement letter for each firm evidenced that the instruction was related to the disposal of Oxxio:

• PwC – the engagement letter reflected its appointment in connection with "your proposed disposal of Oxxio", with PwC being engaged for due diligence for use by a purchaser;
• Deutsche Bank – the engagement letter highlighted that the bank would look at "strategic alternatives for the Oxxio business that may lead to a possible transaction through sale"; and
• De Brauw – the engagement letter was entered into having "regard to the envisaged divestment of the Oxxio group, as a whole or in parts".

This supported a finding that the clear objective purpose of the expenditure was to assist in bringing about the disposal of a capital asset, and the expenditure should therefore be regarded as capital in nature.

Reflections

The Supreme Court's decision has reinforced the position taken by the Court of Appeal and provides a clear set of principles in relation to how professional services fees incurred in the course of disposals and acquisitions are to be treated for corporation tax purposes.

Of these, perhaps the most notable is that expenditure is likely to be treated as capital in nature from the time when a decision to sell or buy (as applicable) is made. Related to this, it will be important going forwards for taxpayers to pay attention to when a decision is made and also to capture clearly the reason for engaging advisers and whether their roles are to support the decision-making process or to implement the decision when made.