Upper Tribunal allows professional fees on sale of Centrica subsidiary

In Centrica Overseas Holdings Limited v HMRC [2021] UKUT 0200, the Upper Tribunal allowed the cost of professional fees incurred on the disposal of a subsidiary by an investment company. The directors were acting on behalf of the company that incurred the expenditure and not for its ultimate parent when they approved the sale. The expenses were not capital in nature.

Centrica Overseas Holdings Limited (COHL) was an intermediate holding company within the Centrica Plc (Plc) group.

• COHL incurred professional fees in connection with the sale of the business of a Dutch trading subsidiary including:
  • Advice about strategy and transaction structure.
  • Vendor due diligence.
  • Dutch legal advice.
• The transaction commenced in 2009. The approval for the deal was made by the Plc board in February 2011. No COHL board minutes covering the decision to sell the subsidiary’s business were ever produced.
• COHL claimed a deduction for fees of £2.5 million as expenses of management under s.1219 CTA 2009.
• The First Tier Tribunal (FTT) disallowed all of the fees because it found that COHL had not taken any relevant management decisions and in particular there was no formal documentation of its decisions. The decision to sell had been made by Plc so the fees were not expenses of management of COHL’s investment business.
• The FTT considered whether the expenses were revenue or capital in nature finding that it was likely that most of the Dutch legal fees would have been disallowable as capital expenses although the information provided was not conclusive. All of the other fees, including contingent fees, were revenue expenditure as management expenses except to the extent that they were incurred after February 2011.
• COHL’s key Ground of Appeal was that the FTT was wrong to find that, for expenses to be deductible, the management activities referred to in s.1219 CTA 2009 must be undertaken by the company whose investment business it is, in this case by COHL’s directors acting formally in their capacity as COHL directors, and not in their other capacity as directors of Plc.

The Upper Tribunal (UT) allowed the appeal. COHL, and not Plc, was managing its own investment business and the FTT was wrong to conclude otherwise.

• There is no reason why the investment business of an intermediate holding company should not be managed on behalf of that company by individuals employed by the ultimate holding company especially when those individuals are also directors of the intermediate company and have fully participated in the decision-making process.
• The FTT was wrong when it decided that a minimum degree of formality was necessary to document the decisions made about the transaction before the expenditure could be treated as expenses of management. In particular, there was no need for the directors to formally ‘change hats’ to distinguish when they were acting as COHL directors as opposed to when they were acting for Plc. S.1219 does not require this level of formality.

The Upper Tribunal went on to consider to what extent the different expenses were expenses of management and to what extent they were Costs of disposal of the subsidiary’s business, or expenses that were capital in nature, and therefore disallowable.

• The UT said that the meaning of capital expenditure in the context of expenses of management is more limited than the meaning in the context of trading businesses. It is aimed at expenses that do not normally recur, but which have the effect of creating, enhancing or disposing of a capital investment.
• It agreed with the FTT’s analysis except in relation to the Dutch legal fees which it remitted back to the FTT for the original judge to revisit. The UT found that legal fees informed the decision making in relation to COHL’s investment business and, as this was an ongoing activity, the fees did not amount to one-off, non-recurring expenditure and were therefore not necessarily all capital.

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External link

Centrica Overseas Holdings Limited v HMRC [2021] UKUT 0200