To what extent are professional advisory fees associated with the disposal of a loss-making investment deductible as management expenses under section 1219 of the Corporation Tax Act 2009 (CTA 2009)?  This was the question before the Supreme Court in Centrica Overseas Holdings Ltd v HMRC. 

It was accepted by this stage that the fees in question were expenses of management. Only the separate question whether the fees were expenditure of a revenue or a capital nature remained (and this was crucial because there is no deduction under section 1219 CTA 2009 for expenditure of a capital nature). The Supreme Court unanimously agreed with the Court of Appeal that the test of whether expenditure is of a capital nature is the same for an investment company as for a trading company and accordingly, the fees were non-deductible capital expenditure.

The facts were as follows. COHL, an intermediate holding company in the Centrica group, wholly owned an unsuccessful Dutch “Oxxio” investment. Following Centrica plc’s decision in principle in mid-2009 that the Oxxio business should be disposed of, it was accounted for in the 2009 accounts as a “discontinued operation” and “held for sale” from 30 June 2009 as it was anticipated that it would be sold by 30 June 2010. But problems with the Oxxio business meant the sale process took longer than expected. Between July 2009 and early 2011, COHL incurred around £2.5m in bank, accountancy and lawyers’ fees on advice ranging from strategic considerations of how best to realise the investment, to the drafting of the sale documentation. Finally, in February 2011, Centrica plc’s board approved in principle a particular third-party offer for the Oxxio business and the transaction completed in March 2011. HMRC disallowed the claim for the £2.5m expenditure incurred from the date Oxxio was “held for sale” in the accounts.

Applying the capital test to the expenditure

The Supreme Court agreed with the Court of Appeal that it is a question of law whether expenditure is capital or revenue in nature and that there is not a different (and more limited) test for capital expenditure for an investment management business. The test is the same as that for capital expenditure of an ordinary trading business. 

The Supreme Court acknowledged that, although there is no single test to be applied in all circumstances, in most cases the objective purpose for which the payment was made, or in other words, what the money was being spent on, is an important indicator and a useful starting point. Where a capital asset is identified (in this case the investment in Oxxio) it can generally be assumed that money spent on the disposal of the asset is capital expenditure (although the Supreme Court notes that this assumption can be displaced by particular features of the transaction or circumstances). Once a commercial decision was taken in 2009 to dispose of the Oxxio business, the fees for the banking, accountancy and legal advice obtained to achieve that disposal were capital in nature and so non-deductible.

When is expenditure incurred in order to achieve a disposal of an asset?

It was a crucial feature on the facts of this case (which are by no means usual) that the strategic decision had been taken in 2009 to dispose of the Oxxio business and to change the accounting of the investment to discontinued operations held for sale. On the facts of this case, the Supreme Court found the services of the bankers, accountants and lawyers were obtained precisely to enable management to achieve the disposal and this was reflected in the terms of the engagement letters. In light of these facts, the taxpayer’s argument that the professional advice was obtained not to bring about a disposal of the Oxxio business but to inform management decisions about how best to do so, did not succeed. “That different options were considered and there was a possibility of the transaction not going through, does not alter the commercial reality that a decision had been taken to dispose of Oxxio.”

COHL had not sought to draw any distinction between the different fees for different professional services encompassed by the total sum claimed, which explains the broad-brush approach taken by both the Court of Appeal and the Supreme Court. Perhaps a more detailed breakdown of the services provided might have drawn out some services that COHL could have argued were not focussed on achieving the disposal.

How sure do you need to be that the disposal will happen and what if it doesn’t?

Uncertainty about whether an asset would be sold does not make the expenditure revenue in nature. As the Supreme Court points out, there is uncertainty in most transactions and that “does not prevent expenditure on professionals rendered to enable an investment company to reach a decision as to whether or not to make an acquisition or disposal and payable regardless of whether the transaction takes place (being an expense of management and not part of the acquisition or disposal cost itself) from being capital expenditure”.

According to the Supreme Court, the possibility of a transaction not going through does not affect the commercial reality that a decision to dispose of the asset had been taken. “Indeed, expenditure on an abortive capital disposal transaction is capital expenditure nonetheless and is the paradigm case of a situation in which there is uncertainty as to whether a transaction will go ahead.”

The key question is, therefore, whether the objective purpose for which the money is spent is to assist in bringing about the disposal of an identifiable capital asset, which will depend on the facts.

If you have any questions about how this decision might affect your company and how to respond to an HMRC challenge to the deductibility of investment management fees, please contact me or your usual Slaughter and May contact.