The Supreme Court has handed down its judgment in Centrica Overseas Holdings Ltd v HMRC [2024] UKSC 25. It is a case which considers whether professional advisory fees relating to the sale of an asset can be deducted by an investment holding company for the purposes of calculating its liability to corporation tax. Upholding the decision of the Court of Appeal, the Supreme Court has held that the fees in question were expenses of a capital nature and therefore not deductible under section 1219(3)(a) of the Corporation Tax Act 2009 (“CTA 2009”).

Background

Centrica Overseas Holding Ltd (“COHL”) is an intermediate holding company in the Centrica Plc Group. In 2005, COHL acquired the share capital of Oxxio BV. However, it soon became clear that the acquisition was a mistake and by 2009 Centrica Plc concluded that Oxxio BV should be sold. To help with this process, professional services firms were engaged by Centrica Plc whose fees were borne by COHL as the main beneficiary of their services. The sale was completed in 2011, following which the fees were claimed by COHL as a deduction for ‘revenue expenses of management’ in its company tax return (the fees are referred to in the judgment as the “Disputed Expenditure”).

HMRC denied the claim for relief. Two grounds were offered: (1) the Disputed Expenditure was not an expense of management; and (2) even if it was, it was capital in nature and therefore not deductible by virtue of the exclusion in section 1219(3)(a) of the CTA 2009. That section relates to “expenses of management of a company’s investment business” and makes clear that no such deduction is allowed for “expenses of a capital nature”.

Lower Courts

COHL unsuccessfully appealed to the First Tier Tribunal. On the matters that were the focus of the Supreme Court’s judgment, the FTT held that the Disputed Expenditure constituted management expenses, and that it was capital in nature.

The Upper Tribunal disagreed and upheld COHL’s appeal. Whilst it agreed with the FTT that the Disputed Expenditure constituted expenses of management, it held that it was not capital in nature since, in its view, “the meaning of capital expenditure in the context of expenses of management is necessarily more limited than the meaning in the context of trading businesses” and in this case “expenses of management are likely to be revenue expenses because the test is similar. The expenditure was not one-off in nature because COHL had many capital investments apart from Oxxio Group, which might involve management from time to time including appraising an acquisition, disposal or restructuring, and because Oxxio Group would not necessarily be sold.”

HMRC was granted leave to appeal both whether (1) the UT erred in finding that the Disputed Expenditure was not “capital in nature” for the purposes of the CTA 2009; and (2) whether the Disputed Expenditure constituted management expenses at all.

In reverse order, the Court of Appeal held that the FTT had applied the relevant legal principles to the facts and was entitled to reach the conclusion that the Disputed Expenditure did indeed constitute expenses of management. On the question of whether they were capital expenses, the Court of Appeal overturned the decision of the UT. Delivering the judgment of the court, Lord Justice Singh explained, “the UT fell into error in that passage because they considered that the test for expenses of management and the capital expenditure test are similar. Accordingly, they considered that expenses of management are likely to be revenue expenses. I respectfully disagree. As I have explained when setting out the correct statutory interpretation of section 1219(3)(a) of the CTA 2009, in my view 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 on that distinct legal question over the course of the last century”.

The Supreme Court

By the time the case came before the Supreme Court, it was agreed that the Disputed Expenditure did indeed constitute ‘expenses of management’. Therefore, the only question for the court was whether the Disputed Expenditure was capital in nature.

The Court brushed off attempts by COHL to argued that the meaning of “expenses of a capital nature” as it applies to investment companies (in section 1219(3)(a) of the CTA 2009) is different from, and narrower in scope than, the similar phrase, “items of a capital nature” as it applies to trading companies in section 53(1) of the CTA 2009. As a result, the Court concluded that the meaning in s.1219(3)(a) CTA 2009 “is to be interpreted as requiring the application of well-established principles to distinguish between capital and revenue expenditure”.

The court turned to these “well-established principles” and previous case law, whilst issuing a reminder that “the principles to be derived from the cases are useful provided it is recognised that they cannot automatically be applied to a case involving a different business and different circumstances”. Ultimately, the Court stated that what matters is “the true nature of the payment, for what it was made, and the object or effect of the expenditure”, whilst recognising that these tests are not always straightforward to apply and that “there are many cases, particularly those involving trading companies, where difficulties can arise in determining on which side of the revenue/capital line the expenditure in question falls”.

However, the Court was clear that no such difficulty arose in this case and accordingly dismissed COHL’s appeal: the Disputed Expenditure clearly related to the disposal of a capital asset; the professional services firms were engaged precisely for this process, rather than to advise COHL more generally on its investment business; and their engagement occurred after the commercial decision was taken to dispose of the Oxxio business. Indeed, the Court indicated that even if there was uncertainty that a transaction would go ahead, or it was subsequently aborted, the Disputed Expenditure would still be of a capital nature:

“The fact that there was no certainty that the Oxxio business would be sold does not make the expenditure revenue in nature. There is uncertainty in most transactions, but that does not prevent expenditure on professionals rendered to enable an investment company to reach a decision as to whether or not to make an acquisition or disposal and payable regardless of whether the transaction takes place (being an expense of management and not part of the acquisition or disposal cost itself) from being capital expenditure. Indeed, expenditure on an abortive capital disposal transaction is capital expenditure nonetheless and is the paradigm case of a situation in which there is uncertainty as to whether a transaction will go ahead (see for example ECC Quarries Ltd referred to at paras 73 and 74 above, where the abortive expenditure incurred on the unsuccessful planning application was held nonetheless to be capital expenditure). Nor is this question affected by the consideration, which will often be true, that a commercial business will not be prepared to dispose of its assets at any price. Neither means that the expenditure ceases to be capital.”

 To read the judgment in full, click here.