One common area of dispute between companies and the HM Revenue and Customs (HMRC) is that of deductibility of expenses. One of the hottest areas of dispute is often whether an expense is a trading expense (deductible as part of the day-to-day running costs of the company) or a capital expense, which is normally allowable only through the capital allowances regime, if at all.
In a recent case, the Court of Appeal considered the position of an investment company which had incurred significant professional fees securing advice on the possible acquisition of another company.
The position arose because the company claiming the tax relief on the expenditure had identified another company as a possible merger or acquisition target. After obtaining a great deal of accounting, legal and financial advice in order to evaluate the merits of the proposed acquisition, they made an offer to the board of the other company. The offer was rejected and was not pursued.
HMRC denied the company's claim for tax relief on the bills for the professional advice. The decision turned on the question of the treatment of the expenditure. Were the expenses management expenses deductible under the Taxes Act (S 75(1) ICTA 1988) or were they, as the Revenue claimed, capital expenses and thus not allowable as deductions in the corporation tax computation?
The judges accepted the company's argument, accepting that even if the acquisition had gone ahead, the expenditure would have been treated as a trading expense and not as part of the cost of the purchase of the target company. It was therefore a revenue item, not a capital item, and was deductible for corporation tax purposes.
The tax authorities not infrequently will fight taxpayers on issues in spite of their own arguments not being strong. A robust approach from the taxpayer can often be effective. To achieve the best result, sound advice is essential.