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Supreme Court Dismisses Appeal In Expenses of Management Case

Tuesday 23rd July 2024

The Supreme Court has issued its judgment on whether adviser fees incurred by a holding company on the disposal of subsidiary companies were deductible expenses of management.

In Centrica Overseas Holdings Ltd v HMRC [2024 UKSC 25], COHL incurred certain professional costs which it claimed were expenses of management.  These related to advice received in connection with the disposal in 2011 of certain assets owned by subsidiary companies of COHL.

COHL was an intermediate holding company in the Centrica Plc group of companies which owned 100% of the share capital of Oxxio BV, a Dutch holding company which itself had four subsidiaries registered in the Netherlands. Assets of two of those subsidiaries and the shares in a third subsidiary were sold to a third party company in March 2011. COHL claimed relief on the disputed expenditure of £2.5m for services rendered by Deutsche Bank AG London, PwC and De Brauw Blackstone Westbroek.

HMRC disallowed COHL’s claim for relief in its entirety on the basis that the disputed expenditure was not deductible under s.1219 CTA 2009 because it was not an expense of management and even if it was, it was capital in any event and so excluded by s.1219(3). COHL appealed that decision.

On appeal, the FTT analysed the professional and advisory services provided to COHL and concluded that most of the fees paid to Deutsche Bank (including a contingent fee) and PwC, and possibly some to De Brauw, were properly viewed as expenses of management. On appeal the Upper Tribunal was satisfied that the FTT had applied the correct legal test and was entitled to reach the conclusion that expenditure on the fees of Deutsche Bank and PwC was expenses of management. There was less clarity about the findings related to the De Brauw fees and this issue was remitted to the FTT for further determination.

The FTT noted that the disposal of the Oxxio business was a capital transaction. Fees for services of Deutsche Bank and PwC incurred up to the offer made by Eneco in January 2011 were nonetheless revenue expenses of management and deductible, whilst those incurred afterwards were incidental to the transaction and capital in nature.

With regard to success fees charged by DB, the UT held 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. 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.

On appeal to the CA, there were two grounds, being:

  • the UT erred in deciding that the disputed expenditure constituted “expenses of management” under s.1219(1), and
  • the UT erred in finding that the disputed expenditure did not constitute “expenses of a capital nature” within the meaning of s.1219(3)(a).

On (i), the CA held that the FTT had correctly directed itself as to the relevant legal principles, carefully considered the facts in detail, applied those legal principles to those facts, and was entitled to reach the conclusion that the expenses were expenses of management.

On (ii), the CA held that the appeal should be allowed because the expenditure was of a capital nature and therefore was taken out of the expenses of management regime by s.1219(3)(a).

When evaluating whether an expense can qualify as an expense of management, generally the nature of the expenditure rather than the timing of it is fundamental. In the Centrica case however, the CA judgment appears to have drawn the line at the earliest date when it was first decided that an investment is to be disposed of. Previously it was usual to treat costs incurred in determining how to carry out a disposal including structures prior to actual implementation as deductible and not capital in nature.

The question on appeal to the SC was whether the professional advisory fees, though accepted as expenses of management, were revenue or capital expenditure for tax purposes.

The SC found that the expenditure was incurred on professional and advisory services and was expenses of management. Whilst they could be revenue or capital in nature, it was necessary to assess the character of the expenditure from the commercial or business transaction for which they were incurred.

The SC held that “once a commercial decision was taken to dispose of the Oxxio business, the services of Deutsche Bank, PwC and De Brauw were obtained precisely to enable management to achieve that disposal and this was confirmed from their letters of engagement. As the clear objective purpose of the disputed expenditure was to assist in bringing about the disposal of an identifiable capital asset, namely the Oxxio business, the disputed expenditure was capital in nature and excluded by s.1219(3)(a).

For further details on this case, please contact Keith Rushen on 0207 486 2378.

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