Dawsongroup Plc v Revenue & Customs

A company may be both a trading company and an investment company. The question under section 130 of the Income and Corporation Taxes Act 1988 is whether its business consists wholly or mainly in making investments. The court must identify the company’s activities correctly and form an overall view of their nature, purpose and relative importance. Active supervision and control of subsidiary investments do not, without more, turn investment activity into trading.

“Expenses of management” is a broad ordinary expression, but it does not include every general business expense. The expenditure must have a sufficient connection with the management of the company’s investment business. Expenditure directed principally to improving investments, retaining funds or enhancing share value is not necessarily expenditure of management.

Dawsongroup appealed from the First-tier Tribunal (Tax Chamber), whose determination dated 9 June 2009 ([2009] UKFTT 137 (TC)) rejected its claim to deduct approximately £433,000 incurred in taking the company private.

The company operated as a holding company for a group whose trading businesses were conducted through subsidiaries. It also supplied central services to group companies. The expenditure related to the de-listing and purchase of shares held by external shareholders. The issues were whether Dawsongroup was an investment company under section 130 of the Income and Corporation Taxes Act 1988, and whether the expenditure was an expense of management under section 75(1).

1. Investment company. The appeal succeeded on the first issue. A company may carry on a trade and still be an investment company. The relevant comparison was between Dawsongroup’s admitted trade, namely the provision of central services, and its investment activities, including holding and supervising subsidiary shareholdings, arranging acquisitions and disposals, maintaining subsidiary value and receiving dividends.
2. The active exercise of control over subsidiaries did not itself prevent the activities from being investment activities. The court identified three possibilities: trading may be the main business and investment ancillary; investment may be the main business and trading ancillary; or neither activity may be main. On the evidence, the provision of services was not the company’s raison d’être. Dawsongroup was primarily a holding company which also provided services. It was therefore an investment company under section 130.
3. Expenses of management. The appeal failed on the second issue. The expression in section 75(1) is an ordinary, broad expression incapable of precise definition. It remains necessary to show positively that expenditure is an expense of management, rather than merely showing that it falls outside another category. Management means management of the company’s investment business, not merely management of the investments themselves.
4. The expenditure was principally directed to share valuation, the removal of minority shareholders and the retention of funds for the benefit and growth of the group’s subsidiaries. Those purposes improved or maintained the investments, rather than managing the investment business. The saving of listing and compliance costs was an additional benefit, not a real objective sufficient to characterise the expenditure as an expense of management.
5. The appeal was dismissed. The taxpayer was ordered to pay the Revenue’s costs of the appeal. Costs below were left undetermined by the court.

• High Court (Chancery Division): Appeal from the First-tier Tribunal’s determination dated 9 June 2009, [2009] UKFTT 137 (TC). Appeal dismissed.