Centrica Overseas Holdings Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 April 2020 |
| Neutral Citation | [2020] UKFTT 197 (TC) |
| Date | 23 April 2020 |
| Court | First Tier Tribunal (Tax Chamber) |
[2020] UKFTT 197 (TC)
Judge Marilyn McKeever
Mr James Rivett QC and Mr Ronan Magee, Counsel, instructed by Pinsent Masons LLP, appeared for the appellant
Mr James Henderson, Counsel and Ms Barbara Belgrano, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – Investment company – Deduction of expenditure under CTA 2009, s. 1219 – Whether expenditure expenses of management or expenses of disposal of assets – Whether expenditure expenses of the appellant's investment business – Whether expenditure capital in nature – Contingent fees – Appeal dismissed.
The First-tier Tribunal (FTT) found that fees paid by an investment holding company with regard to the sale of a business were not deductible as expenses of management as they did not relate to management activities carried on by the company.
Centrica Overseas Holdings Ltd (COHL) was an investment holding company that was part of the Centrica plc (PLC) group. It held 100% of Oxxio BV (Oxxio) which itself owned four subsidiaries. In July 2009, it was decided that COHL would sell its interest in Oxxio. However, this was not possible and instead Oxxio sold the assets of some of its subsidiaries by means of a partial de-merger to a company referred to as Eneco. The decision to proceed with the sale to Eneco was taken in February 2011 and the transaction was completed in March 2011.
COHL had incurred expenditure (the “disputed expenditure”) in making payments to Deutsche Bank AG (Deutsche Bank), PricewaterhouseCoopers (PwC) and De Brauw Blackstone Westbroek (De Brauw) in respect of services provided to it in connection with the transaction. Broadly, Deutsche Bank advised on the structure of the transaction, identified potential purchasers and assisted with managing the transaction; PwC prepared the due diligence report and De Brauw provided legal advice and prepared the legal documentation. HMRC issued a closure notice amending COHL's tax return on the basis that none of the disputed expenditure was deductible under CTA 2009, s. 1219 (Expenses of management of a company's investment business).
It fell to the FTT to determine the questions set out below.
- Was the expenditure incurred in respect of COHL's investment business?
- Did the disputed expenditure represent expenses of management or expenses of implementing the decision to sell the business? In addressing this point, the FTT found that it was required to consider two related questions:When was the decision to sell made?What was the disputed expenditure for?
- Was the fee paid to Deutsche Bank prevented from being an expense of management because it was contingent on the transaction being completed and so was inextricably linked to the completion of the deal?
- Did s. 1219(3)(a) (prohibition on capital expenditure) apply to prevent a deduction for the disputed expenditure?
With regard to the first question, HMRC accepted that COHL was an investment company and that COHL had incurred the disputed expenditure (the fees had been paid by PLC and charged to COHL by way of book entries). HMRC argued that: (1) COHL did not own the businesses which were sold and so the transaction could not be regarded as part of the management of COHL's own investment business; and (2) COHL did not carry on any management activities as everything was done by PLC. The FTT rejected the first strand of HMRC's argument, finding that the transaction benefited COHL's investment business, and accepted the second strand, finding that PLC, not COHL, carried out the management activities in relation to which the disputed expenditure was incurred. Therefore, the FTT dismissed COHL's appeal, finding that the expenditure was not deducible under s. 1219. The FTT went on to consider the remaining questions in case it was wrong with regard to the first question.
With regard to the second question before it, the FTT found that the decision to sell was taken in February 2011 and so that expenses relating to services provided up to that point could be expenses of management subject to meeting all of the other conditions. Applying this conclusion to the disputed expenditure, the FTT found that the fees paid to PwC were expenses of management; that the fees paid to Deutsche Bank were expenses of management to the extent that they related to the period up to February 2011; and that with regard to the fees paid to De Brauw, COHL needed to provide a breakdown of the work done.
The fee paid to Deutsche Bank was made up of two parts: a fixed fee contingent on the transaction being completed and an “incentivisation” fee payable at COHL's discretion. COHL had not sought a deduction for the incentivisation fee. HMRC had denied a deduction for the contingent fee on the basis that it could not be severed from the costs of sale. The FTT rejected HMRC's argument, finding that the fee structure had not been necessitated by a sale or by an inherent part of the process of sale, in the same way that stamp duty is necessitated by a purchase of shares; rather, it was normal practice in the sector.
Finally, the FTT found that, with regard to the expenditure relating to Deutsche Bank and to PwC, the dividing line between revenue and capital was when COHL decided to accept the offer made by Eneco. Due to the nature of the services provided by De Brauw, the fee paid to De Brauw was capital expenditure.
In summary, the FTT found that the disputed expenditure was not expenses of management of COHL's investment business. COHL's appeal was dismissed.
This is an interesting case concerning the conditions which must be met if a deduction for expenses of management is to be allowed for professional fees incurred in relation to the sale of a business.
The expenses were not expenses of management because the company was unable to show that it had carried on the relevant management activities; the activities had been carried on higher up the corporate chain. Judge McKeever made the following observation: “group companies must be conscious of the need for the “corporate plumbing” to be properly installed and must ensure that the relevant investment company manages its own investment business, even if strategic decisions are taken elsewhere in the group”.
[1] This case concerns whether Centrica Overseas Holdings Limited (which I shall refer to as “COHL”) is entitled to deduct the sum of £2,529,697 from its profits for Corporation Tax purposes for the period ended 31 December 2011 as “expenses of management” under section 1219 Corporation Tax Act 2009 (“CTA”) (“section 1219”).
[2] COHL is a company in the Centrica plc group (“Centrica” or “Plc”).
[3] The expenditure (“the disputed expenditure”) relates to fees paid to three professional firms, Deutsche Bank AG, London (“Deutsche Bank”), PricewaterhouseCoopers (“PwC”) and De Brauw Blackstone Westbroek (“De Brauw”) in connection with the disposal of certain companies owning gas and power businesses.
[4] On 19 December 2016, HMRC issued a closure notice amending COHL's company tax return on the basis that none of the disputed expenditure was deductible under section 1219. The Appellant appealed against this decision on 11 May 2017.
[5] I had before me five bundles of documents and a further bundle of authorities. I also heard witness evidence from Ms Charlotte Radcliffe, Centrica plc's Group Head of Tax, Mr Richard McCord, Finance Director of Centrica plc and Mr Christophe Defert, the Centrica Innovations Director in Centrica's ventures team in San Francisco.
[6] The hearing in May 2019 was part heard and after that hearing, both parties prepared Notes on the Evidence. Following the resumed hearing in October 2019 HMRC produced written submissions on the legislation and the Appellant submitted a written reply.
[7] The relevant legislation is set out in Part 16 CTA which relates to companies with investment business. The terms “company with investment business” and “investment business” are defined in section 1218 CTA:
(1) In this Part “company with investment business” means a company whose business consists wholly or partly of making investments.
(2) But a credit union is not a company with investment business for the purposes of this Part.
(3) References in this Part to a company's investment business are to be construed in accordance with section 1219(2).
But this subsection does not affect the interpretation of the expression “company with investment business”.
[8] The crucial provision is section 2019 which confers the relief for the expenses of management which the Appellant claims. It provides, so far as material:
[(1) In calculating the corporation tax to which a company with investment business is liable for an accounting period, expenses of management of the company's investment business which are referable to that period are allowed as a deduction from the company's total profits.
(1A) A deduction under subsection (1) is to be made before any other deduction at Step 2 in section 4(2) of CTA 2010 (deductions from total profits).]
(2) For the purposes of this section expenses of management are expenses of management of a company's investment business so far as–
- they are in respect of so much of the company's investment business as consists of making investments, and
- the investments concerned are not held for an unallowable purpose during the accounting period to which the expenses are referable.
(3) But–
- no deduction is allowed under this section for expenses of a capital nature, and
- no deduction is allowed under this section for expenses so far as they are otherwise deductible from total profits, or in calculating any component of total profits …
[9] Certain items are treated, under section 1221 and Chapter 3 of Part 16 of the...
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