UK and International Tax news

Court of Appeal Hears Expenses of Management Case

Wednesday 30th November 2022

The Court of Appeal has recently heard an appeal against a decision of the UT allowing a claim for corporation tax relief in respect of expenses of management of an investment business.

In HMRC v Centrica Overseas Holdings Ltd v HMRC [2022 EWCA Civ 1520], 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. HMRC refused such claims and, in particular, considered that COHL had not established a sufficient link between the disputed expenditure and any investment business 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.

On examination of the FTT’s findings of fact, the UT held that COHL was managing its investment business and the Deutsche Bank and PwC fees prior to 22 February 2011, when formal board approval was given to the transaction, were expenses of management. The UT however referred the fees of DBBW back to the FTT for redetermination.

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.

At the CA, there were two grounds of appeal, being:

  • the UT erred in deciding that the disputed expenditure constituted “expenses of management” under s.1219(1) CTA 2009, 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) CTA 2009.

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) CTA 2009.

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.

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

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