Centrica Overseas Holdings Ltd argued that the expenses constituted deductible revenue expenditure, while HMRC maintained that they were capital expenditure and therefore not deductible by virtue of section 1219(3)(a) of the 2009 Act. The Court of Appeal had found in favour of HMRC following a successful appeal by COHL to the Upper Tribunal.

The appeal was heard by Lord Hodge, Lord Stephens, Lady Rose, Lord Richards, and Lady Simler.

No wider purpose

In July 2005, COHL acquired a Dutch company, Oxxio BV, and its four subsidiaries. The investment proved unsuccessful and generated significant losses. As a result, in July 2009 a decision was taken to sell the company, with professional advisors instructed in furtherance of that aim.

In March 2011, the assets of two of the Oxxio subsidiaries and the shares in a third subsidiary were sold off. Between July 2009 and March 2011, COHL paid professional fees in connection with the sale to Deutsche Bank AG London, PwC, and De Brauw, which totalled £2,529,697 COHL claimed relief for this expenditure in its tax return for the accounting period ending 31 December 2011. However, HMRC denied the claim on the basis that the expenditure was not deductible because it was not an expense of management and, even if it was, it was capital in nature.

The First-tier Tribunal dismissed COHL’s first appeal on a basis that was no longer relevant by the time of the Supreme Court appeal. It concluded that most of the expenditure were properly viewed as expenses of management. The Upper Tribunal allowed COHL’s appeal, but the Court of Appeal held on appeal by HMRC that the expenditure was capital in nature.

It was submitted by the appellant that the exclusion in section 1219(3)(a) had a very limited effect. It served only to ensure that there could be no deduction for the acquisition costs of investments made by an investment business, together with a limited category of items of fixed capital, with no wider purpose. Alternatively, the unchallenged findings of the FTT demonstrated that the expenditure was incurred to enable decisions to be made about how to realise value from the Oxxio business, and could not be properly categorised as capital expenditure.

Does not alter reality

In an opinion with which the other judges agreed, Lady Simler began: “I respectfully agree with the Court of Appeal’s judgment and do not accept COHL’s arguments. In summary, there is a clear distinction between the question whether something is an expense of management and the separate question whether that expense is capital in nature and the FTT and UT wrongly conflated the two.”

She explained further: “The primary findings of fact made by the FTT lead to the conclusion that the Disputed 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 (in an objective sense) of the Disputed Expenditure was to obtain advice and services to achieve that disposal. That different options were considered and there was a possibility of the transaction not going through, does not alter the commercial reality that a decision had been taken to dispose of Oxxio.”

Analysing the legislative purposes of the 2009 Act, Lady Simler said: “It is true that Parliament chose to calculate the profits of a property business in the same way as the profits of a trade and therefore incorporated a series of trading provisions by reference in section 210(2). However, that was not done for investment businesses and a different approach was adopted. It simply does not follow that the principles from the revenue/capital case law were not intended to be imported in the clear words used in section 1219(3)(a).”

She concluded on the second ground of appeal: “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 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.”

Accordingly, the appeal was dismissed, with HMRC’s original amendment to COHL’s company tax return upheld.