Centrica Overseas Holdings Ltd v Revenue and Customs [2024] UKSC 25 (16 July 2024)
Citation:Centrica Overseas Holdings Ltd v Revenue and Customs [2024] UKSC 25 (16 July 2024)
Rule of thumb: If you are a business & overloaded with work to do, so rather than do it yourself you sub-contract & pay another business in the same sector to do the work for you, is this a deductible expense from profits? No, this expense is not deductible – it is of a ‘capital nature’ meaning that this was not a ‘deductible’ ‘expense’ in this instance.
Background facts: The basic facts of this case were that Centrica were a holding company. They sought advice from accountants on how best to sell some of their assets, which was supposed to be the line of work they did themselves. They accrued £2.25m in advisory fees for this. They sought to deduct this as an expense of their business.
Court held: The Court held that these were not deductible ‘expenses’. This was what Centrica’s business was so they could not pay others to do this work for them then deduct this from their profits as an ‘expense’ – it was ‘capital’ in nature.
Ratio-decidendi:
‘The question arises in the context of an investment holding company within a corporate group. That context is important. An investment holding company is different from an investment dealing company or trading business. The principal activity of an investment holding company, whether the "topco" of a group or an intermediate holding company, is to hold investments. Its investments are capital investments held in its subsidiaries for the purposes of long-term investment, from which it derives value. Its investment business is the holding of shares and the arrangement of the affairs of its subsidiaries which that holding enables, including the disposal and acquisition of companies, the general control of the subsidiaries to ensure their value is maintained, and the bringing in of income in the form of dividends from those subsidiaries. In other words, its business is to manage its capital assets, not to trade with them.
The appellant is Centrica Overseas Holdings Limited ("COHL"), an intermediate holding company in the Centrica Plc group. In July 2005, COHL acquired the share capital of Oxxio BV ("Oxxio"), a Dutch holding company with four subsidiaries. Centrica Plc resolved to sell Oxxio in June or July 2009. In March 2011, following a lengthy process, the assets of two of the Oxxio subsidiaries and the shares in a third subsidiary were sold by COHL to the Eneco Group NV ("Eneco"). Between July 2009 and March 2011, COHL paid professional fees in connection with that transaction for services ranging from considering how best to realise value from the Oxxio business to advice on structuring and preparing the details of the final transaction. The services were provided by Deutsche Bank AG London ("Deutsche Bank"), PricewaterhouseCoopers ("PwC") and De Brauw Blackstone Westbroek ("De Brauw").
The fees disbursed by COHL for those services up to 22 February 2011 totalled £2,529,697. The fees were claimed by COHL as a deduction for revenue expenses of management of its investment business under section 1219 of the 2009 Act in its company tax return for the accounting period ending 31 December 2011. I shall refer to these fees, as they have been referred to below, as "the Disputed Expenditure"…
89. In conclusion, the introduction of the exclusion for management expenditure of a capital nature in 2004 was intended to align the position of trading companies and investment companies so far as capital expenditure is concerned. That exclusion in section 1219(3)(a) is to be interpreted in accordance with well-established capital/revenue principles. Applying those principles to the facts found by the FTT leads to the clear conclusion that the Disputed Expenditure in this case was capital in nature. 90. I would therefore dismiss this appeal and uphold HMRC's closure notice issued on 19 December 2016 amending COHL's company tax return on the basis that none of the Disputed Expenditure was deductible under section 1219 of the 2009 Act’.
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