Wholly and exclusively: companies: take-over bids: investment companies
S54 Corporation Tax Act 2009 (CTA 2009)
Distinction between expenses of managing a business and expenses incurred in determining ownership of that business.
An investment company (as defined in S1218 CTA 2009) will seek relief under S1219 CTA 2009 so neither the wholly and exclusively test in S54(1)(a) CTA 2009, nor the capital expenditure test in S53 CTA 2009, are relevant.
The question is whether expenditure incurred in resisting a takeover bid can be said to be ‘expenses of management’. That is to say, expenses of managing the business of making investments, see CTM08050.
In the case of Sun Life Assurance Society v Davidson  37 TC 330 Viscount Simonds approved the view that the words ‘expenses of management’ were words of qualification or limitation and indicated it was not all of the expenses incurred by an investment company which would be deductible. It is well established that the purchase price of investments and those incidental expenses, which are not severable from acquisition or sale, are not management expenses. At page 360, Lord Reid remarked:
`I do not think that it is possible to define precisely what is meant by “expenses of management”. It has not been argued that these words have any technical or special meaning in this context. They are ordinary words of the English language, and, like most such words, their application in a particular case can only be determined on a broad view of all relevant matters…. It is not enough to show negatively that a particular sum does not fall into any other class; it must be shown positively that it ought to be regarded as an expense of management…. It appears to me that the phrase has a fairly wide meaning, so that, for example, expenses of investigation and consideration whether to pay out money either in settlement of the claim or in acquisition of an investment must be held to be expenses of management.’
By reference to these words of Lord Reid, the cost of considering or resisting a bid for the purchase of one of a company’s investments would be an expense of managing its business. However, in the takeover situation, the bidder is trying to acquire all the shares held by the investment company or more commonly, the share capital of the investment company itself. There is a clear distinction between expenses of managing a business of holding investments and expenses incurred in determining ownership of that business or in determining ownership of the investment company itself.
Where an investment company incurs expenditure on resisting a change in the ownership of its own share capital, then, just as in the case of a trading company, such expenditure is not allowable.
The contention is likely to be put, however, that the investment company was resisting a change in the ownership of its shares because it thought that the new shareholders would radically change the way the company carried on its investment business.
For example, a parent holding company might argue that the operations of the subsidiary companies whose shares were held as investments might be changed so radically as to affect the income and business of the parent company. The argument would then be that the defence expenses were expenses of managing the company’s investments.
As the above conclusion demonstrates, the crux of the matter for investment companies is not very different from that for trading companies even though the legal route is different. It follows that the practical guidance given above about the analysis of expenditure, the nature of evidence to be sought, and the interpretation of that evidence holds good for examining management expenses computations as well.