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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Corporation Tax: management expenses: capital exclusion - acquisitions and disposals - periods from 1 April 2004

Particular issues may arise in the area of expenses concerned with the possible acquisition of an investment, especially in connection with the processes by which companies acquire other companies.

Expenditure on appraising and investigating investments will in general be revenue in nature. However, the process of appraisal will eventually reach the stage where the company will decide which, if any, companies it is seeking to acquire.

It is necessary to look at the immediate commercial effects of the expenditure rather than looking at its more distant purpose. See BIM35320 for the development of this approach in the context of trades. In the case of abortive expenditure it is necessary to look at what the company would have got for its money if the expenditure had been successful.

Following these principles, expenditure up to the point at which a decision is made to acquire a particular investment (in the sense explained further below) will generally be non-capital. For example, expenses incurred on obtaining preliminary reports and profit forecasts for a number of investment options, such as any prudent investor might obtain, are not capital expenditure because at this point the company is merely appraising its investment opportunities.

Once the decision to acquire is made then the expenditure is capital in nature and therefore disallowed by ICTA88/S75 (3). At any earlier stage in the process the link between the expenditure and the asset would generally be too tenuous to regard the expenditure as being made on the asset and therefore capital in nature.

The point at which a decision to acquire is made will depend on the particular facts in each case. Deals do not always progress in exactly the same way. In the context of a take-over the making of any offer to the target company, including an indicative or conditional offer, would suggest that a decision to acquire that investment has been made and any expenditure incurred thereafter would be capital in nature. In the case of portfolio investments the decision to purchase would be the cut-off point. In this case there would be likely to be a much tighter time-scale between the decision and the transaction taking place than in the case of a take-over.

A success fee is likely to be capital in nature. It is also unlikely to be an expense of management on first principles, see CTM08190.

Expenditure connected with the disposal of an investment

Similar considerations apply where it is a disposal rather than an acquisition that is being considered. Once it has been decided to dispose of an investment in some way, any costs incurred after that point will be costs of the disposal and therefore capital. We would generally consider the decision to dispose of an asset to be the point at which a decision was taken to market it.

Abortive expenditure

An abortive acquisition or disposal is no different, in terms of the nature of expenditure, from a successful acquisition/disposal. If the expenses would be capital if the asset were acquired, they would not change their nature because the attempt to acquire it was unsuccessful. This view is well supported by case law. In Lothian Chemical Company Ltd v Rogers 11TC508 it was said:

‘The expenditure does not change its nature according to whether it be successful or unsuccessful.’

In addition in ECC Quarries Ltd v Watkis 51TC153, Brightman J said at page 171:

To use the words of Lord Wilberforce in the Carron case 43TC1 at page 53, the planning permission, if obtained, would in some sense have been an intangible asset of a capital nature. If that is right, money expended in seeking to acquire such an asset must equally be expenditure of a capital nature.

Therefore the fact that a purchase/sale does not ultimately go through has no bearing on whether expenditure is capital or revenue.

Project development costs

The principles involved in considering the costs of a project which does not involve the acquisition of a pre-existing entity, but the creation of an entirely new investment (for example by forming a new company and subscribing for its shares), are similar to those which are considered in looking at take-overs etc. Expenditure up to the point at which a decision has been made to go ahead with the investment will generally be non-capital.

The point at which this decision is made will depend on the particular facts. But it will normally be the case that once the phase of the project has been reached at which it is not a question of whether it will go ahead, but how, then the expenses will be capital from that point.