CTM08190 | Corporation Tax: management expenses: changing investments - general test

The direct costs of changing investments do not qualify as management expenses. The direct costs of changing investments include

• brokerages, and

• stamp duties.

These costs are not admissible on the authority of

• Capital and National Trust Ltd v Golder (1949) 31TC265, and

• Sun Life Assurance Society v Davidson (1957) 37TC330.

Companies can incur substantial amounts of expenditure on less direct costs relating to acquisitions and disposals. When considering whether this expenditure qualifies for relief as an expense of management there are two arguments to consider

• is the expenditure an expense of managing the investment business, and

• is the expenditure capital in nature?

The specific exclusion for capital expenditure was introduced for periods from 1 April 2004 (CTA09/S1219 (3)(a)). For periods before this date only the first argument can be applied (see CTM08240 for an explanation). The issue has been tested in the recent case of Camas PLC v Atkinson [2004] EWCA Civ 541. The Courts considered whether such expenditure was an expense of management. They reviewed the earlier management expenses cases and in particular the ‘severability’ test which had formed the basis of the decision in the Sun Life case.

Using that test the Revenue had contended that expenditure could not be severed from the costs of acquisition of an investment once a particular target had been identified. This view had been supported by the Irish Supreme Court case, Hibernian v MacUimis [2000] IESC 41.

This argument was rejected. The courts concluded that expenditure does not form part of the acquisition costs until, at the earliest, the date of the decision to acquire the investment. Before that date the expenditure is generally preparatory to a decision to acquire and as such is not closely enough linked to the acquisition to form part of the acquisition costs. Expenditure does not cease to be on management simply because a target has been identified.

Even after there has been a decision to acquire, expenditure could still qualify for relief as expenses of management - see below.

Expenditure preparatory to making a decision to purchase will generally be an expense of management. Once the decision to acquire has been made then the expenditure is likely to fall into the category of ‘costs of implementation of a purchase already decided upon’ and will therefore not be an expense of management.

The decision to acquire/purchase would normally be evidenced at the latest by (for example) an offer being made to the target company, when the expenditure ceases to be on decision making and becomes part of the implementation of a purchase already decided upon. Up to that point the expenses are generally all on decision-making and are not sufficiently direct costs of the acquisition.

But the date of the decision to acquire does not necessarily provide an absolute cut-off point in deciding whether expenditure of this nature is an expense of management or not. In this context the differentiation is between decision making expenditure and costs of implementation of a purchase already decided upon, the former being expenses of management and the latter not.

In each case the detailed facts should be considered as they are crucial. If expenditure relates to managerial decision making then even if the expenditure occurs after the date of the decision to acquire/dispose, it could be expenses of management. Only costs of implementation of a purchase already decided upon will not be expenses of management.

The principles established apply equally to acquisitions and disposals and to abortive as well as to successful expenditure.

For periods starting on or after 1 April 2004 the capital exclusion must also be considered.

Success fees/contingency fees

Some deals are structured in such a way that a large proportion of the expenditure for advice and similar is only payable on a successful outcome, whether that be acquisition or disposal. These expenses can only become due once a decision to acquire has been made and therefore they fall on the side of ‘costs of implementation of a purchase already decided upon’. Such fees are also likely to be capital in nature and would therefore fall within the capital exclusion in section CTA09/S1219 (3)(a).