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HMRC internal manual

Business Income Manual

Wholly and exclusively: companies: take-over bids: introduction: contents

S54 Corporation Tax Act 2009

Introduction and layout of guidance

In the guidance that follows the bidding company will be referred to as the ’acquirer’ and the company that it wishes to acquire as the ‘target’.

The expenses incurred by both sides in a takeover, particularly when such is contested, can be very substantial; at times running into tens of millions. Both sides may seek to deduct some or all of the costs. In the majority of cases, the bidding company’s expenditure is disallowable on the grounds that it is capital. That the takeover may, in the event, be unsuccessful does not change matters. Abortive expenditure on a takeover would be capital following ECC Quarries v Watkis [1975] 51 TC 153 (see BIM35325).

During a takeover bid, costs are incurred on many different types of service. These may be bought in or undertaken by the company’s own staff. These costs may be charged under a number of different heads in the accounts. The costs may include some or all of the following:

  • profit forecasts put together in consultation with merchant banks and accountants, usually the company’s own auditors
  • merchant bankers and stockbrokers providing general advice and on such matters as researching the track record and financial soundness of the bidder/target
  • legal advice will also be needed - for example, an attempt may be made to have a bid referred to the Competition Commission (formerly the Monopolies and Mergers Commission) and, in any event, regulations governing conduct during a bid are long and complex
  • an advertising campaign may be launched to maintain shareholder loyalty
  • public relations consultants may be retained to brief the media, major institutional investors, lobby Parliament, etc
  • the costs of printing and distributing defence documents can themselves be substantial

The acquirer’s costs will normally be capital expenditure, i.e. the cost of acquiring a capital asset.

The target’s costs may be:

  • capital (where expenditure is concerned with ownership of the shares for example), or
  • revenue (where expenditure is concerned with protecting the trade or trade assets)

The guidance that follows covers: