Summary

In deciding whether expenditure constituted "expenses of management" within the meaning of the Income and Corporation Taxes Act 1988 s.75(1), the expression "expenses of management" was to be treated as an ordinary expression which was incapable of detailed definition. The question was whether the expenditure positively, rather than by default, fell within its fairly wide definition and an expense could be a general expense of the business without being an expense of management.

Facts

The appellant company (D) appealed against a decision of the first-tier tribunal ((2009) UKFTT 137 (TC), (2009) SFTD 435) upholding a decision of the respondent Revenue that it could not deduct expenses incurred in procuring its de-listing from the London Stock Exchange when computing its profits for the purposes of corporation tax. D was the holding company of a group of companies in the business of renting vehicles and specialist equipment. It owned the shares of the other companies in the group, receiving their dividends and controlling their activities. In addition, it conducted its own trading activities, namely the provision of services to the rest of the trading companies in the group. Those services included centralised treasury functions, company secretarial services, IT and legal services. D was a largely family-owned company, but 25 per cent of its shares had been floated on the London Stock Exchange. When its share price fell it was decided that the family should buy out the external shareholders, thereby removing the company's public status. The costs of investigating and implementing that buy-out were the expenses which D sought to deduct. The tribunal held that D was not an investment company for the purpose of the Income and Corporation Taxes Act 1988 s.30, finding that it was a trading company which carried on its business by means of subsidiaries that it controlled. It also found that D's business was wholly unaffected by the de-listing of the company and that the sums sought to be deducted were therefore not expenses of management for the purposes of s.75(1) of the Act. D submitted that the tribunal had applied the wrong test in relation to both the "investment company" and the "expenses of management" questions and had reached a conclusion that was impermissible on the evidence.

Held

(1) D was an investment company for the purposes of s.30. A company could carry on a trade and still be an investment company. Where a company carried on both activities, the question of whether it was an investment company involved a consideration of whether one was ancillary to the other. The proper test, which was whether, in essence, the main activity of the company was investment activity or trading activity, was set out in Medway Housing Society Ltd v Cook (Inspector of Taxes) (1997) STC 90 Ch D, Cook considered. The tribunal, having correctly identified the test, had, however, gone on to misidentify the activities to which it applied. It was common ground that D's trading activities were the provision of services to the rest of the group. The Revenue's stance was that if D had not provided services to the group, its remaining activities would have amounted wholly or mainly to the making of investments for the purposes of the section. It argued, however, that the provision of those services constituted D's main activity. That was not a contrast on which the tribunal had drawn. In referring to D as a trading company that carried out its business by means of the subsidiaries it controlled, the tribunal seemed, erroneously, to think that D's trading activities involved its control over its trading subsidiaries. Its decision was therefore flawed. The evidence presented an overall picture of D's primarily being a holding company that provided services to the rest of the group. The latter activity was carried on for the benefit of the rest of the group and was therefore ancillary to the former. (2) The expenses sought to be deducted were not expenses of management within the meaning of s.75(1). The expression "expenses of management" was to be treated as an ordinary English expression which was incapable of detailed definition and the question was whether the expenditure positively, rather than by default, fell within its fairly wide definition, Sun Life Assurance Society v Davidson (Inspector of Taxes) (1958) AC 184 HL and Camas Plc v Atkinson (Inspector of Taxes) (2004) EWCA Civ 541, (2004) 1 WLR 2392 applied. There was a distinction between the expenses of management and the general expenses of the business; an expense could be the latter without being the former, and the emphasis had to be on the "management" of the business of the company. Managing investments was not the same as management for the purposes of s.75(1). The tribunal applied the correct test and was correct in its finding that the expenditure sought to be deducted did not have the necessary connection with the investment business. The overall picture was that the principal motivation behind the de-listing was concern for D's share price and third party perceptions of D's position in the market, followed by the belief that taking its shares out of the market would enable the group to retain more of its profits. Though the attendant saving of costs and governance activities was also perceived as a benefit, that was an additional benefit flowing from a process which was principally justified on another basis. The expenditure was not incurred in order to manage the business but was to improve its investments. So far as it was designed to remove an undervaluation of D's shares it did not have anything to do with the management of the business.

Appeal dismissed