In HMRC v Centrica Overseas Holdings Ltd  EWCA Civ 1520, the Court of Appeal (CoA) confirmed that certain professional fees incurred in the run-up to the disposal of a subsidiary were expenses of management but also capital in nature and therefore not deductible for Corporation Tax purposes.
Centrica Overseas Holdings Ltd (COHL), is an intermediate holding company. Between July 2009 and March 2011, expenses were paid for professional services to Deutsche Bank AG London (Deutsche Bank), PricewaterhouseCoopers (PwC) and De Brauw Blackstone Westbroek (De Brauw). In its company tax return for the accounting period ending 31 December 2011, COHL claimed relief on £2,529,697 (the Disputed Expenditure).
In July 2005, COHL acquired 100% of the share capital in Oxxio BV (Oxxio), a company with four subsidiaries in the Netherlands. This was not a successful investment and COHL incurred significant losses as a result. By the summer of 2009 the board of Centrica Plc (COHL's ultimate parent company) had decided that it wanted to dispose of Oxxio and was taking steps to do so. This process was expected to be complete by the end of June 2010. However, circumstances meant that the sale became difficult, and it was decided that an asset sale would be more attractive to potential purchasers.
In March 2011, an asset sale took place whereby the assets of Oxxio Nederland were purchased by Eneco Group NV.
Deutsche Bank, PwC and De Brauw were engaged throughout the process to provide certain services. The fees were paid by Centrica Plc (as COHL did not have a bank account) and the costs incurred in this way were charged to an another entity by way of appropriate book entries. The Disputed Expenditure was included as an accrual in the financial statements of COHL for the period ended 31 December 2011.
In December 2016, HMRC issued a closure notice to COHL amending its company tax return on the basis that none of the Disputed Expenditure was deductible under section 1219, Corporation Tax Act 2009 (CTA 2009). COHL appealed to the First-tier Tribunal (FTT).
The FTT dismissed COHL's appeal on the basis that the expenditure was not actually incurred by COHL but by its parent company instead. It did go on to consider whether the expenditure would have been expenses of management and concluded that it 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. On that basis, the FTT's decision that the expenditure was expenses of management was upheld.
The FTT had concluded that the De Brauw expenditure was capital in nature, as it was incurred closer in timing to the final transaction. The UT disagreed and remitted that point back to the FTT.
HMRC appealed to the CofA. The following two issues were before the CofA for determination:
1. whether the expenditure constituted expenses of management; and
2. if it did, was the expenditure capital in nature.
The appeal was allowed.
The expenses of management issue
The CoA dismissed HMRC's arguments on this issue, which it considered did not raise a pure question of law. The CoA agreed with the UT that the FTT had correctly directed itself as to the relevant legal principles and applied those principles to the facts of the case. Accordingly, the CoA found that the FTT was entitled to reach the conclusion that the Disputed Expenses were expenses of management under section 1219(1), CTA 2009.
The CoA found that all the Disputed Expenditure, including the De Brauw costs, fell within the exception in section 1219(3)(a), CTA 2009 and set aside the order made by the UT to remit the issue relating to the De Brauw fees to the FTT.
2. The capital expenditure issue
The CoA agreed with HMRC on this issue, finding that the Disputed Expenditure was of a capital nature and therefore was taken out of the expenses of management regime and was excluded from relief by section 1219(3)(a).
In the view of the CoA, the UT erred in considering that the test for expenses of management and the capital expenditure tests are similar and therefore that expenses of management are likely to be revenue expenses. The CoA considered that in relation to section 1219(3)(a), the clear intention of Parliament was to carve out of the expenses of management regime those expenses which are capital in nature by reference to the well-established principles which have been developed by the courts in relation to that distinct legal question.
This decision provides helpful guidance on the treatment of expenditure on professional fees incurred in the context of M&A transactions. The CofA's judgment suggests that when a decision is made to buy or sell an asset, professional fees incurred from that point onwards may not be deductible for corporation tax purposes. Accordingly, it is necessary to determine whether a firm decision to sell has in fact been taken. A distinction can be drawn between professional fees incurred in order to help inform the decision as to whether to sell a business, rather than how to sell it. Depending on the exact purpose of the relevant fees, they may be deductible.
Anyone involved in M&A transactions should carefully consider this decision.
The judgment can be viewed here.