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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Corporation Tax: management expenses: unallowable purpose

FA04 introduced an unallowable purpose test for determining whether expenses are allowable, which is now included at ICTA88/S75 (4)(b) and (5). It looks at the reason for the company holding the investments. If the investments are held for an unallowable purpose then any expenditure connected with managing those investments is not an expense of management.

The test applies to periods beginning after 1 April 2004 and to the second deemed accounting period in an accounting period which straddles 1 April 2004.

For expenditure paid on or after 20 June 2007, FA07 has introduced ICTA88/S75(5A) which strengthens the business or commercial purpose part of the test.

Section 75 (4) sets out two criteria, which expenses of management must satisfy before they can be regarded as expenses ‘of a company’s investment business’, as required by Section 75 (1):

  1. The expenses are in respect of so much of the company’s business as consists in the making of investments. (The meaning of ‘making of investments’ has been considered by the Courts in the context of the previous definition of an investment company and carries the same meaning in the context of this new legislation - see CTM08050).
  2. The company must not hold the investments concerned for an unallowable purpose during the accounting period.

Section 75 (5) defines what is an unallowable purpose for Section 75 (4)(b). Investments are held for an unallowable purpose during an accounting period to the extent that they are held either:

  • for a purpose that is not a business or other commercial purpose of the company, (CTM08220), or
  • for the purpose of activities in respect of which the company is not within the charge to CT, (CTM08225).

Any apportionment of expenses that only partly meet these requirements is to be made on a ‘just and reasonable basis’ in accordance with Section 75 (10).