Midweek Tax News

In the case of Centrica Overseas Holdings Limited (COHL), the Supreme Court has considered the deductibility of ‘management expenses’ for professional services incurred in relation to the disposal of a subsidiary. The Court considered the operation of s1219 CTA 2009 and, in particular, the correct way to identify expenses of management of an investment business which are “expenses of a capital nature" and therefore excluded from being deductible. The Court then went on to determine whether the disputed expenses in this case were expenses of a capital nature.

The Court has unanimously dismissed COHL’s appeal. It held that the disputed expenditure was capital in nature, and therefore not deductible. It rejected the taxpayer’s argument that the words “expenses of a capital nature” in section 1219(3)(a) have a more limited meaning than the similar phrase in section 53(1) and were intended only to exclude the acquisition costs of investments themselves (together with expenditure not separable from those costs) and a limited category of fixed capital costs such as buildings.

Finding against this argument, the Court took the view that the words of section 1219(3)(a) are “clear and straightforward, as is their statutory context”. The words “expenses of a capital nature” in s1219(3)(a) and “items of a capital nature” in section 53(1) must mean the same thing. Both were intended to carve out expenses which are capital in nature by reference to the concept of expenditure of a capital nature already well-established in the tax code and the case law.

The Court noted that Parliament could be taken to have been aware of the established capital/revenue case law when it first legislated to introduce the capital exclusion in 2004. There was nothing to indicate that the exclusion for capital expenditure was intended to have a special narrower meaning either from the supporting material around the original legislation or from the way it was re-enacted in section 1219(3)(a).

The Court noted that previously decided cases on whether expenditure is capital or revenue reflect that expenditure which is borderline can be difficult to assign between these two broad categories. The correct classification depends on the circumstances and the specific facts in each case. The purpose for which the payment is made, i.e. what the money is being spent on, was seen as a good starting point. This must be assessed objectively, and not according to the subjective motive or purpose of the taxpayer.

The Court noted that, in general, the investments of a holding company are capital assets, and its business is to manage those assets. COHL’s investments were capital assets, and this included its investment in the company disposed of. Where a capital asset is identified, it can generally be assumed that money spent on the acquisition or disposal of the asset should be regarded as capital expenditure. In addition, the Court noted that while different options were considered and there was a possibility of the transaction not going through, that did not alter the commercial reality that a decision had been taken to dispose of the loss-making investment. The Court also noted that the disputed expenditure was one-off in nature. The fact that COHL had many capital investments (in addition to the business it was exploring disposing of) did not alter that.

Applying these principles to the facts found by the First-tier Tribunal, the disputed expenditure was incurred on professional and advisory services and was expenses of management. The subsidiary was an onerous capital asset which was to be disposed of. The disputed expenditure was directed at and focused on bringing about the disposal, in whatever form that transaction ultimately took. The Court concluded that since money expended to achieve the disposal of a capital asset is properly regarded as being of a capital nature, the disputed expenditure was capital in nature. It was not therefore deductible as an expense of management.

As a reminder, the King’s Speech later today, Wednesday 17 July 2024, will set out the new Government's proposed policies and legislation for the coming session. This could include proposals for the reform of employment practices (including a ban on exploitative zero-hours contracts and enhanced protection for employment rights), planning reform and further powers for the Office for Budget Responsibility. The Speech usually makes only passing reference to any Finance Bills but it is possible that alongside the Speech we may get an announcement on the date of the Government’s first Budget. The expectation is that the Parliamentary Summer Recess will now begin on 30 July, allowing the Government to make a start on some of its priorities.

At HM Treasury, the official responsibilities for the new Treasury ministerial team have been updated. Responsibility for the UK tax system has been given to the new Exchequer Secretary (XST), James Murray. Generally, this role has been held by the Financial Secretary (FST). The shift in responsibilities aligns with Murray’s experience on tax issues as the Shadow Financial Secretary. Lord Livermore, the new FST, has been given a non-tax portfolio with a focus on growth, productivity and investment.

On 4 July 2024 the Australian Government introduced three Bills into Parliament to implement Australia's adoption of the OECD/G20 Pillar Two solution, being an Income Inclusion Rule (IIR) applying to years starting from 1 January 2024; an Undertaxed Profits Rule (UTPR) applying to years starting from 1 January 2025; and a domestic minimum tax applying to years starting from 1 January 2024.There are a number of areas in which changes have been made to the exposure drafts released in March 2024.

All three Bills have been referred to the Senate Economics Legislation Committee for inquiry with a report due by 14 August 2024. Following this, the Bills should advance quickly through the remaining legislative process and be enacted. Further details of these measures are available in our global tax alert, which outlines the key aspects of the primary legislation, the major changes from the EDs released in March 2024 and the implications of those changes.

The latest edition of Trade Talking Points, our fortnightly newsletter on trade insights from EY's Trade Strategy team, is available. This edition includes updates on the new UK government, the new Agreement on Climate Change, Trade and Sustainability (ACCTS), and the EU’s electric vehicles duties.