In Centrica Overseas Holdings Limited v HMRC [2024] UKSC 25, the Supreme Court (SC) confirmed that professional fees incurred in relation to the disposal of a subsidiary were management expenses. However, the SC agreed with the Court of Appeal (CoA) that these expenses were capital in nature and should therefore be disallowed.
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.
- Centrica Overseas Holdings Limited (COHL) was part of the Centrica Plc group and was used to acquire a Dutch group, Oxxio.
- COHL subsequently decided to sell Oxxio and engaged three advisors to assist with transaction structuring, vendor due diligence and legal matters.
- The expenditure for the advisers was Claimed as deductible in the tax return.
- HMRC issued a Closure Notice, disallowing the expenditure and COHL Appealed to the First Tier Tribunal (FTT).
- The FTT dismissed the appeal finding that expenditure was not actually incurred by COHL but by Centrica Plc instead. It did go on to consider whether the expenditure would have been expenses for management and concluded that they would. COHL appealed to the Upper Tribunal (UT).
- The UT allowed the appeal on the basis that COHL had incurred the costs but as it did not have a bank account, the fees were initially paid for by Centrica Plc. HMRC appealed to the Court of Appeal (CoA)
- The CoA found that costs incurred with a view to the disposal of an asset, by whatever means, must be capital in nature and not deductible as an expense of management.
- COHL appealed to the Supreme Court (SC).
The SC found that:
- There is a clear distinction between the question of whether something is an expense of management and the separate question of whether that expense is capital in nature.
- The principles used to distinguish between capital and revenue expenditure for trading companies equally apply when determining whether management expenses should be excluded as expenses of a capital nature.
- The expenditure, while constituting expenses of management of COHL’s business, was of a capital nature.
- A commercial decision was taken to sell the Oxxio business, an identifiable capital asset.
- The object and purpose of the expenditure was to obtain advice and services to achieve that disposal.
- The expenditure was one-off in nature.
- Day-to-day costs of staff dealing with the business of management, rents, administration costs and repairs are all deductible revenue expenses of management and not capital in nature.
The appeal was dismissed.
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Expenses of Management: No decisions, no deductions
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.
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.
Expenses of management disallowed as capital in nature
In HMRC v Centrica Overseas Holdings Limited [2022] EWCA Civ 1520, the Court of Appeal confirmed that professional fees incurred in the run-up to the disposal of a subsidiary were expenses of management but also agreed with HMRC that they were also capital in nature as so to be disallowed.
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