This month’s Chartered Accountants Tax Case digest looks at an Upper Tribunal (UT) decision which examined if advisers’ fees incurred by an intermediate UK holding company in relation to a potential disposal of the assets of a subsidiary were deductible expenses of management on the basis that the management decision, to make the disposal, was taken by the parent entity.

As yet, no announcement has been made on whether HMRC plan to appeal the decision of the UT, which held that the advisers’ fee were deductible management expenses.

Background

Centrica Overseas Holdings Limited (COHL) is an intermediate holding company in the Centrica Plc group of companies. COHL owned 100 percent of the share capital of Oxxio, a Dutch holding company. It claimed a corporation tax deduction for expenditure on advisers’ fees in relation to the disposal of Oxxio’s shareholding in another company as management expenses, because it was an investment company.

The company had explored several options in relation to its investment in Oxxio, including retaining the investment and the potential disposal of the Oxxio businesses. Eventually assets of two subsidiaries and the shares in a third subsidiary were sold.

In respect of the accounting period ended 31 December 2011, COHL claimed a corporation tax deduction of over £2.5 million, which it stated was in accordance with section 1219 of the Corporation Tax Act 2009. Section 1219 reads as follows:-

“...in calculating the corporation tax to which a company with investment business is liable for an accounting period, expenses of management of the company’s investment business which are referable to that period are allowed as a deduction from the company’s total profits”.

In December 2016, HMRC issued a closure notice amending COHL’s 2011 corporation tax return and denying the deduction for the advisers’ fees because Deutsche Bank advised on the structure of the transaction, identified potential purchasers, and assisted with managing the transaction, PwC prepared the due diligence report and De Brauw provided legal advice and prepared the legal documentation. COHL appealed against the closure notice in May 2017.

In the appeal first heard by the First Tier Tribunal (FTT), one of HMRC’s key arguments was that UK tax legislation works on an entity basis. This meant that in order for the expenses to be deductible, they must relate only to the business of a specific entity.

HMRC also argued that Section 1219 was “a closely targeted relief aimed at expenses incurred in managing the investments held as part of a specific investment business” and that management expenses were deductible as expenses of management of a company’s investment business only to the extent that they were “in respect of so much of the company’s business as consists in the making of investments”.

HMRC also further argued that “in respect of” was required to be interpreted as a restriction on what qualifies as management expenses i.e., it referred to such expenses incurred by reference to a particular part of the company’s business. HMRC denied that the drafting of the legislation was intended to be wider and required only a loose connection between the expenses and the investment business. HMRC had also argued that the fees were capital in nature and therefore non-deductible.

The FTT found that all strategic decisions in respect of COHL were made by the parent company 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 and its directors occupied senior positions within the centralised group structure which included the group head of tax and general counsel.

For these reasons, the FTT upheld HMRC’s arguments and found that the advisers’ fee paid by COHL as an investment holding company in respect of the Oxxio business sale were not deductible as management expenses because they did not relate to management activities carried on by the company itself. COHL appealed against the FTT decision.

Decision

The UT found that it was not necessary to have formal board decisions at the company level in order to determine that investment activities had been taking place. The FTT was wrong to seek an outward expression that the directors of COHL were making decisions in relation to Oxxio “with their COHL hats on rather than their Centrica Plc group hats on”.

There did not need to be evidence to show that they “changed hats and took decisions in their capacity as directors of COHL”. 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.

The expenses of management which were capital were likely to be very limited in nature, as the meaning of capital expenditure in the context of expenses of management is more limited than the meaning in the context of trading businesses.

The UT 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.

For the reasons the UT allowed the taxpayer’s appeal in relation to the expenses of Deutsche Bank and PwC which it stated qualifies for relief under section 1219. COHL’s underlying appeal against HMRC’s decision to refuse relief was allowed.

The full judgment is available from:- https://www.bailii.org/uk/cases/UKUT/TCC/2021/200.pdf