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HMRC internal manual

Company Taxation Manual

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HM Revenue & Customs
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Corporation Tax: management expenses: take-over bid defence costs

There is guidance on this issue in the Case I context at BIM46460 and at BIM38260 onwards. Similar considerations apply to investment companies.

Where an investment company incurs expenditure on resisting a change in the ownership of its own share capital, there is an argument for saying such expenditure is not allowable for tax purposes. However the company is likely to contend that the investment company was resisting a change in the ownership of its shares because it thought the new shareholders would radically change the way the company carried on its investment business. (Such a contention was made in Morgan v Tate & Lyle 35TC367, which involved a trading company.)

A parent company may claim that, if the take-over goes ahead, the operations of the subsidiary companies, whose shares are held as investments, would be changed radically. This radical change would affect the income and business of the parent company. It may then contend that take-over bid defence costs were an expense of managing its investments.

In such a case you will normally need to undertake a detailed and comprehensive fact-gathering exercise, and examine all the available documentary evidence to establish the circumstances in which and the purpose(s) for which the company incurred the expenditure. You need to get at all the purposes for which the company decided to mount a defence to a take-over bid. The types of documentation you might want to see include:

  • Defence documents issued to existing shareholders.
  • Correspondence and notes of discussions with advisers.
  • Internal company memos and minutes of meetings.

You should argue that a clear distinction can be made between:

  • expenses of managing the business of making investments,

and

  • expenses incurred in determining the ownership of the company.

In law the company is a completely different person from the shareholders. It is the company that owns the investments and carries on the investment business. That is not changed by a mere change in the ownership of its own share capital, even though the new owners may alter the company’s policy.