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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Wholly and exclusively: companies: take-over bids: trading companies

S54 Corporation Tax Act 2009 (CTA 2009)

Trading companies involved in takeover bids - two issues to consider

You need to consider two issues:

  • whether the sums in question are incurred wholly and exclusively for the purposes of the trade of the company bearing the expenditure and therefore deductible under S54(1)(a) CTA 2009, and
  • whether the expenditure is capital (see BIM38295)

As ever, the company’s purpose is a question of fact to be determined by examination of all the relevant evidence (see BIM37050 onwards and BIM38210). Where the purpose of the expenditure is to benefit shareholders otherwise than by benefiting the trade (normally by increasing the bid price) then this is an inadmissible purpose.

The facts are closest in Morgan v Tate and Lyle [1954] 35 TC 366 (see BIM35570). In that case, the expenditure satisfied the test of exclusive purpose because it was incurred to prevent the company’s assets and business from being compulsorily acquired by the government. The evidence of the president of the board of directors, that he assumed nationalisation would take that form rather than acquisition of the company’s share capital, was accepted by the Commissioners. But the company conceded that, if nationalisation had been expected to take the form of a share-acquisition, the expenditure would have been inadmissible. Lord Reid explained the point at page 421:

`It was admitted for the Respondents that expenditure to resist the latter form of nationalisation would not be expenditure for the purposes of the trade, and it was argued for the Appellant [the Crown] that, as there is no substantial difference between these forms of nationalisation in the result, it would be anomalous if expenditure to resist one form were deductible while expenditure to resist the other form were not. But in law there is an essential difference; the company is held in law to be a person entirely different from the shareholders, and the company is the trader, not the shareholders. By the first form of nationalisation the company, the trader, is deprived of its assets. But by the latter form the company’s position is unchanged; it retains its assets and continues to carry on its business. All that happens is that the new shareholders can alter its policy; but a change of shareholders does not interest the company as a trader, and expenditure to prevent a change of shareholders can hardly be expenditure for the purposes of the trade.’

At first sight, it may seem therefore that whenever expenditure is incurred to fend off a bid for the shares of a company (and not its assets) the matter is concluded: the expenditure is inadmissible. But if you establish that the sole purpose of the directors in resisting a change in the ownership of its shares is to ensure the trade prospers in the hands of the company, then the expenditure is not disallowed by S54(1)(a) CTA 2009, no matter what means are used to reach that goal. See, for example, Lord Denning MR’s comments in Heather v P-E Consulting Group [1972] 48 TC 293 on page 322:

`One of the objects here was to remove the possibility of outside interference with the business of the Company. Does this alter the nature of the payments? I think not. Here we have guidance from another case in the House of Lords, but it was not cited to the Judge. It is Commissioners of Inland Revenue v Carron Company [[1968] 45 TC 18, see BIM35565]. It came from Scotland. A company had a charter and constitution which was out of date, so much so that it was inimical to the good running of the company. They could not get good managers or staff. The company paid considerable sums to amend the charter and to get rid of dissentient shareholders. Those payments were held to be revenue expenditure and not capital expenditure. On the cases, therefore, it seems to me that the payments to the trust were revenue, and not capital expenditure.’

On the other hand, if prevention of changes in the shareholdings is one of the purposes of the expenditure it is inadmissible even though the primary purpose may be to preserve the company’s future trading position (see BIM38285).