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.

• Centrica Overseas Holdings Limited (COHL) was part of the Centrica Plc group and was used by the group to acquire a Dutch group, Oxxio, in 2005.
• A decision was made in 2009 that Oxxio should be disposed of and PwC, Deutsche Bank and De Brauw were engaged as advisers covering transaction advice, vendor due diligence and legal advice. Their remit was to consider the state of the Dutch business and if a sale were not feasible, what other options were there.
• The group was finally sold in March 2011 and the expenditure incurred in relation to the three sets of advisers was Claimed as deductible in the tax return for the period ended 31 December 2011.
• HMRC issued a Closure Notice in relation to the return, disallowing the relevant expenditure and COHL Appealed to the First Tier Tribunal (FTT).
• The FTT dismissed the 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 did conclude 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 the point back to the FTT.
• HMRC were allowed to appeal on the following grounds:
  • The UT erred and the expenditure did not constitute expenses of management.
  • The UT erred in finding that the expenditure was not capital in nature.

The Court of Appeal found that:

• Case law sets out:
  • 'Expenses of management' are ordinary words with a wide meaning. There is also no 'Wholly and exclusively' test, so the expenditure can have a dual purpose.
  • Expenses of an investigation into and consideration of, a deal, are expenses of management. Costs of acquisition or disposal must be incurred on the 'mechanics of implementation'.
• On this basis, the FTT and the UT were correct in their findings that the expenditure was expenses of management.
• The case law was decided before the current legislation was introduced in 2004 (now found at s.1219 CTA 2009). The inclusion of wording excluding capital expenditure from allowable expenses shows that Parliament specifically meant for such expenditure to be excluded in light of the previous case law.
• The Explanatory Notes to the legislation showed that the meaning of capital in nature was to follow the same principles as the rules for trading income.       
• The FTT and UT had erred in assuming the test for identifying expenses of management was similar to that of identifying capital expenditure. Expenditure could be capital in nature without being incurred for the 'mechanics of implementation' of a transaction.         
• As expenses of management can be capital or revenue in nature, costs incurred with a view to the disposal of an asset, by whatever means, must be capital in nature. This also reflected the commercial reality that the Centrica Plc group had decided it no longer wanted to own the Oxxio business.

The CoA dismissed the first ground of appeal but upheld HMRC's appeal that the expenditure was capital in nature.

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External links

HMRC v Centrica Overseas Holdings Limited [2022] EWCA Civ 1520