Centrica plc, the utility company, has lost its case at the Court of Appeal (CoA) regarding deductions from income for corporation tax purposes in relation to investment management expenses.  One of Centrica’s subsidiaries (the taxpayer) held the shares of a Dutch utility group but this group was performing poorly.  Eventually a decision was made to dispose of the companies either by way of share sales of asset sales.

The taxpayer incurred certain expenses from investment bankers, accountants and lawyers in looking for a buyer for the assets or shares and claimed a deduction against income holding that the expenses were investment management expenses.

Since 1915 investment companies have been able to deduct management expenses from the investment company profits, the idea at the time was to put investment companies on the same footing as trading companies.  Dissimilar to trading expenses, expenses incurred in the management of investments do not have to incurred ‘wholly and exclusively’ meaning an expense can be deductible even if there is a duality of purpose.

In 2004 Parliament amended the investment management expenses legislation to ensure that when considering whether an expense is of a capital or revenue nature that consideration is taken of the extensive case law relating to trading expenses and whether they are capital or revenue.  The capital / revenue test for investment management expenses purposes was to follow the same legal principles as developed by case law for trading expenses over the last century.

The CoA confirmed that the question whether an expense is revenue or capital was purely a question of law and therefore it had the ability to remake the lower tribunals decision.  The CoA found that all the expenses incurred were incurred after the decision to dispose of the group had taken place so that all of the expenses should be considered capital and therefore deducted from any sale proceeds when determining the gain or loss on the disposal of the Dutch utility group as opposed to general income.  The CoA held that the lower tribunals had confused themselves by mixing the duality of purpose of investment management expenses issue with the traditional capital / revenue distinction.

The decision can be found at: Commissioners for HMRC v Centrica Overseas Holdings Limited – Find case law (nationalarchives.gov.uk)

Please contact us if you have any questions on corporation tax, management expenses or available reliefs.  These deductions can be valuable.