The Supreme Court has dismissed an appeal by an investment holding company in respect of whether professional fees in connection with selling a business could be deducted from its profits for Corporation Tax purposes.
The company was part of a corporate group and held investments on the group's behalf. It incurred fees of just over £2.5 million for professional advice relating to the disposal of a business, and sought to deduct them as revenue expenses of management of its investment business under Section 1219(1) of the Corporation Tax Act 2009. HM Revenue and Customs (HMRC) refused the deduction on the grounds that the fees were not expenses of management and were in any event capital in nature.
The company's challenge to that decision reached the Upper Tribunal (UT), which agreed with the First-tier Tribunal (FTT) that the fees were expenses of management and found that they were likely to be revenue expenses. HMRC appealed to the Court of Appeal.
The Court of Appeal found that the FTT had been entitled to conclude that the fees were expenses of management. However, the tests for whether expenditure was an expense of management and whether it was capital or revenue in nature were different: the FTT had conflated the two and the UT had failed to correct the error. The Court found that the latter question was a matter of law and the test was the same for an investment business as for an ordinary trading business. The Court concluded that the fees were capital expenditure and thus not deductible.
In its appeal to the Supreme Court, the company argued that the Court of Appeal had been wrong to find that the test for distinguishing capital and revenue expenditure was the same for investment and trading businesses. It also contended that, even if the same test applied, the fees were revenue expenditure.
The Supreme Court found that the prohibitions on deductions for capital expenditure relating to investment business and to trades, contained in Sections 1219(3)(a) and 53(1) of the Act respectively, must mean the same thing. The fees had clearly been incurred to bring about the disposal of an identifiable capital asset, namely the business, and were therefore capital in nature. Finding that the Court of Appeal had made no error of law in reaching that conclusion, the Supreme Court dismissed the company's appeal.