Centrica Overseas Holdings Ltd v Commissioners for His Majesty’s Revenue and Customs

An expense of managing an investment business may still be capital expenditure. The expressions “expenses of a capital nature” in section 1219(3)(a) and “items of a capital nature” in section 53(1) of the Corporation Tax Act 2009 have the same meaning.

Capital or revenue character is determined objectively under the established principles applicable to trading businesses. No single criterion is decisive. Where expenditure is directed at acquiring or disposing of an identifiable capital asset, it is ordinarily capital. Professional fees take their character from the commercial transaction for which they are incurred. Transactional uncertainty, consideration of alternative structures, or the ultimate failure of the transaction does not by itself convert them into revenue expenditure.

The appellant was an intermediate holding company whose investments were capital assets. After a group decision to dispose of the loss-making Oxxio business, it incurred £2,529,697 in fees for financial, accounting and legal services directed at evaluating and effecting the disposal.

The First-tier Tribunal, [2020] UKFTT 197 (TC), and Upper Tribunal, [2021] UKUT 200 (TCC), treated much of the expenditure as deductible revenue expenses of management. The Court of Appeal, [2022] EWCA Civ 1520, held that all of it was capital and therefore excluded by section 1219(3)(a) of the Corporation Tax Act 2009.

The issues were whether that exclusion incorporated the ordinary capital/revenue principles applicable to trading businesses and, if so, whether the fees were capital on the facts found by the First-tier Tribunal.

1. Appeal dismissed unanimously. Lady Simler, with whom Lord Hodge, Lord Stephens, Lady Rose and Lord Richards agreed, held that none of the disputed expenditure was deductible. HMRC’s closure notice was upheld.

2. The inquiry whether expenditure is an expense of management under section 1219(1) of the Corporation Tax Act 2009 is distinct from the inquiry whether it is capital under section 1219(3)(a). The tribunals had wrongly conflated those questions. An expense can satisfy the former provision yet be excluded by the latter.

3. “Expenses of a capital nature” in section 1219(3)(a) has the same meaning as “items of a capital nature” in section 53(1). The language, statutory context, re-enactment against established case law, explanatory materials and history of the 2004 amendment demonstrated that Parliament intended to align investment and trading companies on capital expenditure. The exclusion was not confined to investment-acquisition costs and a narrow class of fixed-capital expenditure.

4. Whether expenditure is capital or revenue is a question of law, assessed objectively. No single test governs every case. Relevant considerations include the payment’s nature and purpose; the character and lasting quality of the advantage sought; how the advantage is used; whether the outlay is recurrent or once and for all; and what the expenditure is calculated to achieve from a practical and business perspective. Where an identifiable capital asset is acquired or disposed of, expenditure on that transaction is presumptively capital, subject to circumstances displacing that conclusion.

5. Professional fees ordinarily take their character from the commercial transaction for which they are incurred. The Oxxio business was an identifiable capital asset. Once the commercial decision to dispose of it had been made, all three advisers were retained specifically to advance that disposal. Their work remained directed to that objective although alternative structures were examined and completion was uncertain.

6. Expenditure on an abortive capital transaction remains capital. Nor did the holding company’s business of managing investments or its ownership of other investments make these one-off disposal costs recurrent revenue expenditure. Ordinary day-to-day staff, rent, administration and repair costs may nevertheless remain deductible revenue expenses of management.

1. United Kingdom Supreme Court: The appeal was dismissed unanimously. The court upheld the Court of Appeal and HMRC’s closure notice.
2. Court of Appeal: In [2022] EWCA Civ 1520, reported at [2023] 1 WLR 316, the court held that the ordinary capital/revenue principles applied and that all the disputed expenditure was capital.
3. Upper Tribunal: In [2021] UKUT 200 (TCC), reported at [2021] STC 1842, the tribunal upheld the treatment of the Deutsche Bank and PwC fees as expenses of management, disagreed with the First-tier Tribunal’s treatment of the De Brauw fees, and remitted that issue.
4. First-tier Tribunal: In [2020] UKFTT 197 (TC), the appeal was dismissed on a ground no longer material. The tribunal nevertheless found most Deutsche Bank and PwC fees to be expenses of management and divided the expenditure into revenue and capital categories by reference to the transaction’s progress.