The Supreme Court (SC) has confirmed the decision of the Court of Appeal (CA) in the case of Centrica Overseas Holdings Limited (COHL) v HMRC [2024] to deny the taxpayer a tax deduction for circa £2.5m of expenses incurred in relation to the disposal of an investment business.
In 2005, COHL purchased a Dutch group of companies but the investment proved loss making and so in 2009, at a 'kick-off meeting', discussions were held to explore a possible sale of the group. After a lengthy disposal process, COHL made the disposal in March 2011 having approved the final terms of the disposal at a meeting on 22 February 2011. Between 2009 and 22 February 2011 COHL incurred around £2.5m of expenditure on professional advisers' fees for various services including how best to realise value from the proposed disposal to advice on structuring and preparing the details of the final transaction. These fees were claimed by COHL to be revenue in nature and tax deductible as an expense of management. HMRC disagreed. COHL did not try and claim that fees incurred after 22 February 2011 were expenses of management and instead, accepted that these were capital expenses related to the sale of the group.
Until the decision of the CA, HMRC had argued that the fees did not constitute an expense of management. The CA however decided against HMRC on this point and refused leave to appeal it. This left HMRC with the sole argument before the SC that even if the fees were expenses of management, they were not in any event tax deductible as revenue costs as they were in fact capital in nature.
While COHL argued that the exclusion for capital expenses for investment companies should be construed more narrowly than the exclusion for capital expenses for trading companies, the SC agreed with HMRC and concluded that whether expenditure is treated as a revenue/capital cost should be interpreted in accordance with the well-established revenue/capital principles.
The SC confirmed that professional fees which are expenses of management are capable of being revenue or capital and such fees take their character from the commercial or business transaction for which they are incurred. The SC concluded that once the decision was made to dispose of an identifiable capital asset, namely the Oxxio group, fees incurred on advice to enable COHL's management to achieve that disposal, in whatever form that disposal ultimately took and regardless of whether the disposal actually took place, were capital in nature.
Taxpayers should consider carefully when decisions to dispose of capital assets are taken in light of this case as such decisions might have unexpected adverse tax consequences.
If you require any advice in connection with any business disposals, please contact our tax specialists.
