Camas Plc v HM Inspector of Taxes

For an investment company, expenditure may qualify as expenses of management even where it is capital in nature. The relevant distinction is between expenditure that is part of the cost of acquiring an investment and expenditure severable from that cost. Advice and preparatory work undertaken to investigate a possible acquisition and decide whether to proceed are management expenses where they are payable whether or not the acquisition occurs. Expenditure does not become part of the acquisition cost merely because it is directed towards, or prerequisite to, a proposed acquisition. Costs intrinsically linked to completion, such as brokerage, stamp duty, financing costs and success fees, remain acquisition costs. The abortive nature of the transaction is relevant to the characterisation of expenditure but does not itself determine the result.

Camas Plc, an investment company, appealed against the Special Commissioners’ decision dated 30 September 2002. It sought corporation tax relief under ICTA 1988 s.75 for professional fees incurred while considering and preparing a possible takeover of Bardon Group Plc.

The proposed transaction was abandoned after Bardon rejected an indicative offer. The disputed expenditure comprised advice on strategy, valuation, due diligence, financing, regulatory matters, directors’ responsibilities and preparation for a possible bid. The central issues were whether s.75 allowed capital expenditure and whether the fees were expenses of management or costs of acquiring Bardon.

1. Appeal allowed. The professional fees, excluding sums already accepted as incidental costs of loan finance, were deductible as expenses of management under ICTA 1988 s.75.
2. Section 75 does not exclude expenditure merely because it is capital in nature. Its wording, read with the interaction between s.75 and TCGA 1992 ss.38 and 39, permits qualifying capital expenditure to be deducted against total profits where it is not otherwise deductible in computing chargeable gains.
3. The governing question, derived from Sun Life Assurance Society v Davidson [1958] AC 184, is whether the expenditure is part of the cost of acquisition or is severable from that cost and properly regarded as an expense of management. The words “expenses of management” have a wide meaning, but the taxpayer must positively establish that the expenditure falls within them.
4. The Special Commissioners misapplied that test. They treated expenditure as acquisition cost because it was directed at, and necessary for, the proposed acquisition. That was a causative test which did not distinguish between expenditure incurred to make the acquisition and expenditure incurred to decide whether to make it.
5. The professional services were used to investigate and evaluate a possible investment, advise the board and determine whether to proceed. They were payable whether or not the purchase occurred. The fact that the bid was abandoned therefore supported, but did not alone establish, their severability from the acquisition cost.
6. Costs directly and necessarily linked to completion, including brokerage, stamp duty, financing costs and success fees, would not be expenses of management. The claim was allowed on the facts found by the Special Commissioners.

The Special Commissioners decided the matter on 30 September 2002 and disallowed the disputed expenditure. The High Court allowed Camas Plc’s appeal.