CTM08200 - Corporation Tax: management expenses: take-over bid defence costs

There is guidance on this issue in the context of trading income 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 indeed made in Morgan v Tate & Lyle (1954) 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 officers will generally 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 or purposes for which the company incurred the expenditure.  This will need to be a comprehensive enquiry aimed at all the purposes for which the company decided to mount a defence to a take-over bid.  The types of documentation required might include

  • defence documents issued to existing shareholders,
  • correspondence and notes of discussions with advisers, and
  • internal company memos and minutes of meetings.

A clear distinction should be drawn 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 different legal person from the shareholders.  It is the company that owns the investments and carries on the investment business.  That is not altered by a mere change in the ownership of company share capital, even though the new owners may modify the company's policy.