Commissioners for HM Revenue and Customs v Centrica Overseas Holdings Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Singh,Sir Launcelot Henderson,Lord Justice Newey |
| Judgment Date | 18 November 2022 |
| Neutral Citation | [2022] EWCA Civ 1520 |
| Docket Number | Case No: CA-2021-000232 |
| Court | Court of Appeal (Civil Division) |
[2022] EWCA Civ 1520
Lord Justice Newey
Lord Justice Singh
and
Sir Launcelot Henderson
Case No: CA-2021-000232
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
Mr Justice Fancourt and Upper Tribunal Judge Cannan
Royal Courts of Justice
Strand, London, WC2A 2LL
David Ewart KC, James Henderson and Barbara Belgrano (instructed by HMRC Solicitor's Office and Legal Services) for the Appellants
James Rivett KC and Ronan Magee (instructed by Pinsent Masons LLP) for the Respondent
Hearing dates: 26 and 27 October 2022
Approved Judgment
This judgment was handed down remotely at 10 a.m. on 18 November 2022 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
Introduction
The two issues in this appeal are whether: (1) the expenses in question (“the Disputed Expenses or Expenditure”) were “expenses of management” for corporation tax purposes under section 1219 of the Corporation Tax Act 2009 (“ CTA 2009”) (the “Expenses of Management” issue); and (2) the Disputed Expenses were “expenses of a capital nature” (the “Capital Expenditure issue”). Section 1219 of the CTA 2009 enables a company with an investment business to deduct the expenses of management of that business in calculating its profits for the purpose of determining its liability to corporation tax.
At the hearing before us we heard submissions from Mr David Ewart KC, who appeared with Mr James Henderson and Ms Barbara Belgrano for the Appellants, the Commissioners for His Majesty's Revenue and Customs (“HMRC”); and from Mr James Rivett KC, who appeared with Mr Ronan Magee for the Respondent. I express the Court's gratitude to them all.
Factual Background
Both the tribunals below set out the facts in detail. The Upper Tribunal (Tax and Chancery Chamber) (“UT”) set out the relevant factual background at paras. 2 and 12–43, and the factual findings of the First-tier Tribunal (Tax Chamber) (“FTT”) can be found at paras. 13–147 and 336–363. At this stage I will outline the salient facts.
Centrica Overseas Holdings Limited (“COHL”, which is the Respondent to this appeal) is an intermediate holding company in the Centrica group which holds shares in multiple subsidiaries. Its immediate parent is GB Gas Holdings Limited and the ultimate parent company is Centrica plc.
Between July 2009 and March 2011 expenses were paid for professional services to Deutsche Bank AG London (“Deutsche Bank”), PricewaterhouseCoopers (“PwC”) and De Brauw Blackstone Westbroek (“De Brauw”). In its company tax return for the accounting period ending 31 December 2011 COHL claimed relief on the Disputed Expenditure, totalling £2,529,697.
On 1 July 2005, COHL had acquired 100% of the share capital in Oxxio BV (“Oxxio”), a company with four subsidiaries in the Netherlands. The four subsidiaries were Oxxio Nederland BV, Centrica Energy Netherland BV (“CEN”), Oxxio Tolling BV, and Oxxio Metering BV. The investment was not a success and caused the Respondent significant losses.
By June or July 2009 the board of Centrica plc had decided that it wanted to sell the Oxxio business in principle and was taking steps to do so. The FTT noted, at para. 20 of its judgment, that Centrica plc's annual report and accounts for 2009 stated that: “It is anticipated that the sale of Oxxio …will complete by 30 June 2010.” The report went on to say that “Oxxio … was classified as a discontinued operation from 30 June 2009”. Although the accounts stated that Oxxio was to be treated as a discontinued business from 30 June 2009, it seems that the formal decision was taken on 28 July 2009 at a board meeting of Centrica plc.
As the FTT noted at para. 23 of its judgment, “held for sale” is an accounting term of art and is defined by IFRS5. A “disposal group” is to be classified as “held for sale” if its value is to be recovered principally through a sale transaction. The disposal group must be “available for immediate sale in its current condition” and a sale must be “highly probable”. The FTT continued:
“For this to apply, management must be committed to a plan to sell the asset and must have initiated an active programme to locate a buyer and complete the plan. It must be actively marketed for sale at a price which is reasonable in relation to its current fair value. It should be expected that the sale will complete within a year.”
As the FTT observed at para. 24:
“Clearly, the board of Centrica had decided, in June 2009, that it wanted to sell the Oxxio business and it was taking steps to do so.”
Although initially the plan was to sell the shares in Oxxio the group considered other options such as selling the assets of the business, rectifying the problems of the business and winding the business down rather than selling it. At para. 218 the FTT said:
“In the present case, the initial intention was for COHL to sell the shares in Oxxio BV. … In fact, it became clear fairly early on that the sale of the shares was more of an aspiration than an intention. Although that aspiration continued until the time of the Eneco transaction, the evidence shows that consideration was, from an early stage, given to other ways of realising value from the Oxxio business and those alternatives continued to be considered. We heard that options included selling the assets of the business, rectifying the problems in the business with a view to a future share sale and not selling the business at all but winding it down. Whilst Centrica had taken a strategic decision to exit the Dutch market, this was not something to be done at any price. The aim was to realise as much value as possible from the investment in a commercial way. …”
The significant losses, accounting irregularities and poor risk management practices of Oxxio meant that the sale became difficult. As things progressed, an asset sale seemed more attractive to purchasers than a share sale.
In September 2010 Eneco first made an indicative offer in September 2010, which was rejected, and may have made another offer, which was also rejected in December 2010. In January 2011 Eneco made a final offer, which was approved by the board of Centrica plc at a meeting on 22 February 2011, at which they delegated authority to agree the final terms of the deal to certain board members including the CEO, CFO and General Counsel.
In March 2011 the final transaction took place, which involved an asset sale involving partial de-mergers, whereby the assets of Oxxio Nederland and CEN were demerged and purchased by Eneco Group NV, which also acquired the entire shareholding in Oxxio Metering from Oxxio. The Respondent continued to own Oxxio and provide financial support.
I turn to the fees that were incurred for the services provided by Deutsche Bank, PwC and De Brauw. These were summarised at para. 31 of the UT judgment:
“Deutsche Bank, PwC and De Brauw were involved throughout the process. Each firm was engaged by Centrica plc to provide certain services. In the first instance, the fees were paid by Centrica Plc as COHL did not have a bank account. This was usual practice within the group and costs incurred in this way would then be charged to what was considered the appropriate entity by means of book entries. The Disputed Expenditure was included as an accrual in the financial statements of COHL for the period ended 31 December 2011. It was accepted by HMRC that COHL had borne the cost of the fees. The fees paid were as follows:
PWC — £172,423
De Brauw — €766,328
Deutsche Bank — €3,550,515.32”
Deutsche Bank's fee consisted of a fixed fee of €2.5m payable “in the event the Oxxio Transaction [a defined term] is completed” and an additional incentivisation fee of €1m payable in Centrica's sole discretion. The incentivisation fee was paid but COHL did not claim any deduction for that fee in its tax return. The Respondent observes that the structure of the Deutsche Bank fee “was typical for this type of transaction and gave Deutsche Bank an incentive to get the deal over the line.”
The nature of the services that were provided was set out by the UT at paras. 36–42:
“36. Deutsche Bank's role was to advise, provide information and make recommendations in relation to the disposal of the Oxxio businesses. This included wide-ranging advice and assistance in relation to strategic alternatives for the various businesses, for example the possibilities of share or asset sales and asset swaps, structuring, negotiating, planning and managing the disposal process and identifying and evaluating potential purchasers. …
37. By June 2010, Eneco had been identified as a potential purchaser and by October 2010 a virtual data room had been set up, co-ordinated by Deutsche Bank to provide information to Eneco. Eneco made an initial offer in September 2010 which was rejected, and it was not until 24 March 2011 that the transaction with Eneco completed. Deutsche Bank continued to be involved with the transaction until that time, advising in relation to other options for the disposal in case the deal with Eneco fell through.
38. PwC's role was principally in the preparation of a Vendor Due Diligence Report (‘the VDD Report’) to be made available to potential purchasers. VDD Reports are generally obtained where there are difficulties in the business being sold. PwC were given full access to Oxxio's management and financial records. The VDD Report was available to Centrica but was primarily intended for the preferred bidder on the basis that PwC would assume a duty of care to the preferred bidder in relation to the report. In fact, the VDD Report helped Centrica understand what was going on in the Oxxio...
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David Keighley v (1) Information Commissioner (2) British Broadcasting Corporation
...statutory concept was a familiar one. To give a recent example, in Centrica Overseas Holdings Ltd v Revenue and Customs Commissioners [2022] EWCA Civ 1520, [2023] 1 WLR 316 the issue was whether certain expenses that the taxpayer had incurred constituted ‘expenses of a capital nature’ withi......