Centrica Overseas Holdings Ltd v Commissioners for HM Revenue and Customs

Heard on 19 March 2024

Lady Simler ( with whomLord Hodge, Lord Stephens, Lady RoseandLord Richardsagree):

This appeal raises the question whether professional advisory fees can be deducted by a holding company with investment business when calculating its profits for the purposes of determining its liability to corporation tax in the circumstances described below. The deduction of “expenses of management” is provided for by section 1219 of the Corporation Tax Act 2009 (“the 2009 Act”). Like trading companies which can deduct revenue expenses (albeit in their case, only when incurred wholly and exclusively for the purposes of their trade), investment companies cannot deduct expenses of management if they constitute capital expenditure because there is an express carve out in section 1219(3)(a) for expenses of management “of a capital nature”. The question on this appeal, accordingly, is whether the professional advisory fees, though now accepted as expenses of management, were revenue or capital expenditure for deduction purposes.

The question arises in the context of an investment holding company within a corporate group. That context is important. An investment holding company is different from an investment dealing company or trading business. The principal activity of an investment holding company, whether the “topco” of a group or an intermediate holding company, is to hold investments. Its investments are capital investments held in its subsidiaries for the purposes of long-term investment, from which it derives value. Its investment business is the holding of shares and the arrangement of the affairs of its subsidiaries which that holding enables, including the disposal and acquisition of companies, the general control of the subsidiaries to ensure their value is maintained, and the bringing in of income in the form of dividends from those subsidiaries. In other words, its business is to manage its capital assets, not to trade with them.

The appellant is Centrica Overseas Holdings Limited (“COHL”), an intermediate holding company in the Centrica Plc group. In July 2005, COHL acquired the share capital of Oxxio BV (“Oxxio”), a Dutch holding company with four subsidiaries. Centrica Plc resolved to sell Oxxio in June or July 2009. In March 2011, following a lengthy process, the assets of two of the Oxxio subsidiaries and the shares in a third subsidiary were sold by COHL to the Eneco Group NV (“Eneco”). Between July 2009 and March 2011, COHL paid professional fees in connection with that transaction for services ranging from considering how best to realise value from the Oxxio business to advice on structuring and preparing the details of the final transaction. The services were provided by Deutsche Bank AG London (“Deutsche Bank”), PricewaterhouseCoopers (“PwC”) and De Brauw Blackstone Westbroek (“De Brauw”).

The fees disbursed by COHL for those services up to 22 February 2011 totalled £2,529,697. The fees were claimed by COHL as a deduction for revenue expenses of management of its investment business under section 1219 of the 2009 Act in its company tax return for the accounting period ending 31 December 2011. I shall refer to these fees, as they have been referred to below, as “the Disputed Expenditure”.

COHL's claim for relief was disallowed in its entirety by the Commissioners for His Majesty's Revenue and Customs (“HMRC”) on the basis that the Disputed Expenditure was not deductible under section 1219 because it was not an expense of management and even if it was, it was capital in any event and so excluded by section 1219(3)(a) of the 2009 Act. COHL appealed that decision.

Although COHL's appeal to the First-tier Tribunal (Judge Marilyn McKeever, “the FTT”) was dismissed on a basis that is no longer relevant, in a detailed and careful decision dated 23 April 2020 [2020] UKFTT 197 (TC), the FTT analysed the professional and advisory services provided to COHL and concluded that most of the fees paid to Deutsche Bank (including a contingent fee) and PwC, and possibly some to De Brauw, were properly viewed as expenses of management. On appeal the Upper Tribunal (Fancourt J and Judge Jonathan Cannan, “the UT”) was satisfied that the FTT had applied the correct legal test and was entitled to reach the conclusion that expenditure on the fees of Deutsche Bank and PwC was expenses of management. There was less clarity about the findings related to the De Brauw fees and this issue was remitted to the FTT for further determination: [2021] UKUT 200 (TCC), [2021] STC 1842.

So far as the capital expenditure question is concerned:

(i) The FTT noted that the disposal of the Oxxio business was a capital transaction. Fees for services of Deutsche Bank and PwC incurred up to the offer made by Eneco in January 2011 were nonetheless revenue expenses of management and deductible; those incurred afterwards were incidental to the transaction and capital in nature. The UT agreed, stating that, in a case like this, 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 which might involve management from time to time including appraising an acquisition, disposal or restructuring; and because the Oxxio business would not necessarily be sold.

(ii) However, the FTT found that the De Brauw fees were in a different category. Their work was all, or mostly, to do with a potential or actual transaction, its effect being to bring about the disposal of the Oxxio business. The FTT held that the De Brauw fees were therefore capital in nature. The UT disagreed: to the extent that the De Brauw fees were expenses of management because they informed decision-making about the disposal of the Oxxio business, the UT held they were revenue in nature and the FTT was wrong to hold otherwise. The correct treatment of the De Brauw fees was remitted to the FTT.

In the Court of Appeal, Singh LJ (with whom Newey LJ and Sir Launcelot Henderson agreed) held that the FTT was entitled to conclude that the Disputed Expenditure constituted expenses of management within section 1219(1) of the 2009 Act. There is no appeal from that decision. On the separate question whether the fees were capital in nature, the Court of Appeal held that the applicable test in this context is different from the test for whether expenditure is an expense of management. The FTT had conflated the two in error of law and the error was not corrected by the UT. The test is the same as that for capital expenditure for an ordinary trading business. Whether an item of expenditure is revenue or capital in nature is a question of law and accordingly, the Court of Appeal was required to resolve this question applying the findings of fact made by the FTT. It held that the Disputed Expenditure was capital in nature and not deductible as an expense of management accordingly: [2022] EWCA Civ 1520, [2023] 1 WLR 316.

COHL now appeals to the Supreme Court on the capital expenditure question only. There are two grounds of appeal:

(1) Ground 1 contends that the Court of Appeal erred in finding that, in the context of section 1219 of the 2009 Act, the scope of “expenses of management” of an investment business which are of “a capital nature” and therefore excluded by section 1219(3)(a) is to be identified on the basis of the principles which apply for the identification of expenditure which constitutes “items of a capital nature” incurred by a trading company and excluded by section 53(1) of the 2009 Act.

(2) Ground 2 contends that the Court of Appeal failed in any event to identify that, based on the unchallenged findings of primary fact made by the FTT, the Disputed Expenditure did not constitute expenses “of a capital nature” for the purposes of section 1219(3)(a) even if the applicable principles are those that apply in the context of section 53(1) of the 2009 Act.

COHL's case in essentials is that the exclusion for expenditure of a capital nature in section 1219(3)(a) of the 2009 Act is different to that in section 53(1) and has very limited effect. It serves only to ensure that there is no deduction for the acquisition costs of investments made by an investment business, together with a limited category of items of fixed capital (such as the acquisition costs of a building from which the investment business is conducted). The exception was enacted simply to make plain that a taxpayer with investment business cannot deduct this narrow category of expenditure which might constitute expenses of management (given the width of that concept as interpreted by the courts). It serves no wider purpose. On this basis, the Court of Appeal was not entitled to interfere with the evaluation of the specialist tribunals that the Disputed Expenditure was not capital expenses of management and not therefore excluded by the provisions of section 1219(3)(a).

COHL's alternative case, if its primary argument is rejected, is that existing case law in relation to section 53(1) of the 2009 Act itself emphasises that the capital/revenue analysis turns in large part upon the nature of the business in question, and investment businesses present a very different context to the business of trading companies. Applying that approach, the circumstances are such that...