In Centrica Overseas Holdings Limited v HMRC [2020] TC7683, the First Tier Tribunal (FTT) denied Corporation Tax deductions for fees incurred on the disposal of a subsidiary business by an investment company. The decision to sell was not made by the company but by its ultimate parent.
S.1219 CTA 2009 deals with Corporation Tax deductions for expenses of management and provides that no deduction is allowed for expenses of a capital nature.
- Unlike trading expenses, expenses of management do not have to be ‘wholly and exclusively’ incurred. They must be expenses incurred by a company in managing its investments.
Centrica Overseas Holdings Limited (COHL) was an intermediate holding company within the Centrica Plc group.
- COHL incurred professional fees in connection with the sale of a Dutch trading subsidiary. These included:
- Advice as to strategy and transaction structure, investor presentations and marketing (Deutsche Bank).
- Vendor due diligence (PwC).
- Dutch legal advice, drafting and negotiation of the sale and purchase agreement.
- The transaction started in June 2009 with a deal finally being approved by the Centrica board in February 2011.
- It was common practice for strategic decisions for the group to be made by Centrica. No COHL board minutes noting or implementing the decision to sell the business were produced to the Tribunal.
- COHL claimed a deduction for fees of £2,529,697 as expenses of management under s.1219.
In determining whether the costs were deductible for Corporation Tax, the FTT considered:
- When was the decision to sell made? This determined whether the expenses were part of the cost of sale itself which would be capital in nature or whether they were 'severable' from the costs of sale.
- What were the expenses 'for'? What work was carried out to earn those fees and did it fall on the implementation side of the line or not?
HMRC contended that the decision to sell was made in 2009, whereas COHL said it was not until 22 February 2011, which the FTT agreed with. The judge found that:
- Those fees issued by Deutsche Bank before February 2011 could be expenses of management. The work took place before the decision to sell was made and whilst they were wholly contingent on the transaction completing, this did not stop them from being capable of being management expenses.
- PwC’s final report was dated just before the decision to sell was made so arguably their fees might be deductible in full as they were of a revenue nature, though COHL had only claimed a time-apportioned part.
- Only a relatively small amount of the Dutch lawyers’ work took place before 22 February 2011. Their fees were therefore almost entirely costs of sale and capital in nature.
The FTT had to disallow all of the fees because it found that COHL had not itself taken any relevant management decisions. The decision to sell had been made by Centrica plc and the fees were therefore not expenses of management of COHL’s investment business.
Comment
It is not uncommon in large groups for key decisions to be taken by the ultimate parent company whilst costs are borne according to who undertakes the transaction, who has the funds at the relevant time or even which company has an appropriate bank account from which to make payment. Often the deductibility of transactional fees is overlooked when such decisions and payments are made, at the risk of losing tax relief which would otherwise have been available.
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