Whether expenditure incurred by an investment company in the de-listing of its shares from the stock exchange was deductible for corporation tax purposes as an expense of management

Dawsongroup Limited was the parent of a group of trading companies and its shares were listed on the London Stock Exchange in 1988. During the year 2000, the company ceased to be listed and reverted to private company status. The taxpayer sought a corporation tax deduction in the amount of approx. £434,000 mainly comprised of professional fees paid to advisers and independent directors in computing its liability to corporation tax.

HMRC denied the deduction and the First-tier tribunal upheld this decision on the grounds that the taxpayer was not an investment company within Section 130 ICTA 1988 and that the expenses of de-listing were not expenses of management within Section 75 ICTA 1988. The taxpayers appealed that decision.

The Upper Tribunal stated that it was necessary to reconsider the argument whether the company was an investment company within Section 130. They stated that an investment company was a company whose business consisted wholly or mainly in the making of investments and that as the taxpayer's business was plainly not “wholly” the making of investments, then the question was whether it could satisfy the “mainly” element of the test.

The critical question was therefore whether the holding of assets to produce a profitable return was merely incidental to the carrying on of some other business or was the very business carried on by the taxpayer.

The Upper Tribunal concluded that on the evidence the overall picture was of a company which was primarily a holding company and which also happened to provide services to the rest of the group. This main activity gave a degree of real control over the rest of the group therefore most of those controls fell to be characterised for these purposes as holding investments, that was the main activity.

The case then turned to considering whether the expenditure satisfied the definition of ‘expenses of management’ within Section 75. Whilst there was no statutory definition of the expression, guidance could be found in other cases though these were not directly comparable to the present situation. The emphasis had to be on ‘management’ of the business of the company which had to be mainly investment business. The expenditure was intended to improve the business in a broad sense by making sure that there were more assets within the business and by giving the business more freedom in making business decisions and therefore did not relate to management of the investment business.

The Upper Tribunal upheld the First-tier Tribunal decision that the expenses of the investment company in delisting from the stock exchange were not expenses of management within Section 75 and therefore were not deductible for corporation tax.