CTM08580 | Corporation Tax: management expenses: method of relief and computation

The deduction of management expenses under CTA09/S1219 (1) is mandatory.

S1219 (1) provides that, in calculating the Corporation Tax (CT) to which a company with investment business is liable for an accounting period , its expenses of management are allowed as a deduction from the company’s total profits (Step 2 of CTA10/S4 (2)).

CTA09/S1222 restricts the amount treated as management expenses by any income from sources not charged to tax. This is income that would be taxable except for a specific statutory exclusion, but the restriction does not apply to franked investment income. To the extent that they cannot be deducted, any excess of management expenses of an accounting period is to be carried forward under CTA09/S1223. There is guidance on the use of excess expenses at CTM08620.

As there is no requirement for a claim, the deduction of management expenses in the computation of CT profits does not fall under the rules in TMA70/S42. As long as the assessment for the accounting period is open, there is nothing to prevent a variation of the amount of the deduction for management expenses.

If

• an assessment is final, and

• relief for additional amounts of management expenses is sought,

the only remedy is through a claim for overpayment relief, see SACM12000 onwards.

Accountancy treatment

Usually the accountancy treatment plays only a minor part in a decision on whether an item is an expense of management. In Hoechst Finance Ltd v Gumbrell (1983) 56TC594, the Court of Appeal (Dillon LJ) referred to the weight placed on the accountancy treatment in this case by the High Court, and said (at 612B) ‘the accountancy treatment...by the company's accountants...in my judgement cannot determine whether it is an expense of management.’ But the accountancy treatment will play a bigger role in determining the timing of the relief for periods starting on or after 1 April 2004 (CTM08560).

Trading income computation format

The starting point for the CT computation of a ‘company with investment business’ is the computation of the income and chargeable gains, and not the profit shown in the accounts. But where compurations of an investment company are supplied in a trading income format, they may be accepted if the expenses would qualify as management expenses in any event.

It should, though, be explained to the company, or its agent, that

• the expenses fall under CTA09/S1219 and

• they must be dealt with under that section.

This is especially important where there are excess management expenses in the accounting period. See CTM08620.

VAT

A deduction for management expenses should be inclusive of any VAT payable on the expenses. If the VAT has been relieved as input tax it is not included in management expenses. See BIM31520 regarding input tax.