HMRC internal manual

Business Income Manual

BIM38285 - Wholly and exclusively: companies: take-over bids: group situations

S54 Corporation Tax Act 2009

Consider for whose purpose the expenditure was incurred

The simplest situation is that of a trading company incurring expenses directly in order to ward off a bidder for its own issued shares. In practice, matters may not be that straightforward. The additional considerations this generates are considered below.

Often bid defence expenditure will be incurred and ultimately borne by a group parent company which carries on an ordinary trade with third parties. Where there are other trading companies in the group you should consider whether one of the purposes in incurring the expenditure was to protect the trades of other group members.

If so, the expenditure in question will be inadmissible, see particularly BIM37050 onwards and BIM42105. In Garforth v Tankard Carpets Ltd [1980] 53 TC 342 (see BIM37065) Walton J made some helpful remarks (at page 349H of 53TC) about the difficulties the directors must necessarily have in segregating the purposes of the various companies for which they are responsible.

You should not accept the argument that expenditure is admissible because it was intended to protect the value of the shares in the subsidiary trading companies appearing in the parent company’s balance sheet. Outside the financial sector, those shares would not be assets of the parent company’s trade. They would be held as investor and not as trader.

Often some (though not necessarily all) bid defence expenditure will be incurred by a company which carries on an established trade of providing various management services to other group members.

You may accept the bid defence costs are incurred wholly and exclusively for the purposes of the service trade if those costs were reflected in sums charged out to other group members on some reasonably commercial basis. However, you should then consider whether the recharged expenses are allowable deductions in the computation of the companies charged for the services provided.

If the group service company bears some of the charges itself, the expenses must be incurred for the sole purpose of promoting the management company’s own trade and not for the purposes of the trades carried on by other group members nor for some wider group purpose.

If overseas group members are not being charged on the same basis as UK customers it may be possible to impute trading receipts from the non-residents to the service company under the transfer pricing legislation in Part 4 Taxation (International and Other Provisions) Act 2010, see INTM410000 onwards and INTM440000 onwards for detailed guidance on transfer pricing.