In its 16 July 2024 tax judgment in Centrica Overseas Holdings Ltd v Commissioners for His Majesty’s Revenue and Customs, the Supreme Court found that the test for determining whether an investment company’s management expenses were capital or revenue in nature is the same as for an ordinary trading company, and that professional fees incurred by the appellant holding company in connection with a contemplated disposal of an investment fell on the revenue side of that equation.

The appellant, COHL, acquired the share capital of Oxxio BV, a Dutch holding company with four subsidiaries, in July 2005. About 4 years later, COHL’s parent company resolved to sell Oxxio. The process took just under 2 years, when COHL disposed of the assets of two of the subsidiaries and the shares in a third subsidiary to a purchaser. From the decision to sell until the final disposition terms were approved, COHL incurred professional advisory fees for bankers, financial advisers, and lawyers in connection with planning and structuring the disposition, which it claimed as a deduction when calculating its tax liability for the relevant year.

COHL relied on section 1219 of the Corporation Tax Act 2009, which provides that an investment company can deduct “expenses of management” from its total profits except where those expenses are “of a capital nature”. HMRC disallowed the deduction, and COHL appealed to the First-tier Tribunal. By the time the matter reached the Supreme Court, the issues in play to determine whether the professional fees were capital or revenue expenses were:

• Whether the “expenses of a capital nature” in section 1219(3)(a) means the same thing as “items of a capital nature” under section 53(1) so that the same test applies to investment companies as to ordinary trading companies.
• Whether the unchallenged factual findings made by the First-tier Tribunal lead to the conclusion that the professional fees were revenue in nature.

Writing for the Court, Lady Simler (joined by Lord Hodge, Lord Stephens, Lady Rose, and Lord Richards), agreed with the Court of Appeal’s judgment and dismissed COHL’s challenge. Starting with the guiding principle of statutory interpretation that the court must ascertain the meaning of the words used in light of their context and purpose of the provision, Lady Simler found that the language used in section 1219(3)(a) must mean the same thing as in section 53(1). The judgment traces the legislative history and explanatory notes underpinning section 1219 for the conclusion that both sections were “plainly intended to carve out those expenses which are capital in nature by reference to the well-established principles developed by courts on that distinct legal question”.

A helpful discussion followed on the nature of the test to distinguish between revenue and capital expenses. The Court noted that the decided authorities make clear that the question of whether a given expense is capital or revenue in nature is not subject to a single decisive test in all circumstances, and acknowledged that the borderline can be difficult. However, the case law is useful to provide illustrations of the approach and illuminate the principles to be applied. The context of a particular company’s business will also come into play. Here, COHL’s professional fees were clearly related to a fixed or capital asset, and “[w]here a capital asset … is obtained or can be identified, the starting point is to assume that money spent on the acquisition or disposal of the asset should be regarded as capital expenditure”.

Turning to the specific facts found by the First-tier Tribunal, the Court noted that the revenue/capital distinction is a question of law that it was required to resolve on its own view. In the shortest part of the judgment, Lady Simler found that the professional fees were easily labelled as capital expenses. While COHL did not dispose of the Oxxio assets directly, the effect of the transaction was to dispose of its failing investment and it received a benefit on the sale. Once the decision had been taken to dispose of the investment, the professional fees were objectively intended to bring about that result. Rather than a recurring management expense, these were one-off spends to achieve the desired purpose of a capital asset disposal. The appeal was accordingly dismissed and HMRC’s disallowance upheld.

The key fact that the Court’s analysis turned on appears to be that COHL’s parent company had resolved to dispose of the Oxxio investment before engaging the professional advisers to assess options and to structure a transaction. Lady Simler’s judgment does not rule out recurring fees relating to investment management being deductible as revenue expenses, and as noted several times in the judgment, business context will be king in making that determination. Nonetheless, the judgment does provide a useful statement of principles and wraps several lower court decisions into a Supreme Court analysis.

At the Supreme Court, COHL was represented by James Rivett KC and Ronan Magee, both of Pump Court Tax Chambers, and Pinsent Masons LLP in London. HMRC was represented by David Ewart KC, James Henderson, and Barbara Belgrano, all of Pump Tax Court Chambers, and HMRC Solicitors Office & Legal Services in Stratford. The neutral citation is [2024] UKSC 25.