Corporation Tax: management expenses: method of relief and computation
The deduction of management expenses under ICTA88/S75 (1) is mandatory.
Section 75 (1) says that in computing the total profits for any accounting period starting on or before 31 March 2004 there ‘shall be deducted’ any sums disbursed as management expenses. For periods starting on or after 1 April 2004 Section 75 (1) says that a deduction ‘is to be allowed’ for management expenses referable to that period.
However, under ICTA88/S75 (6), (up to 31 March 2004 Section 75 (2)), the amount treated as management expenses is restricted by any income from sources not charged to tax. This is income that would be taxable except for a specific statutory exclusion but the restriction does not apply to franked investment income. Different rules applied before the FA04 changes and if required details can be obtained from CTIAA (Technical).
To the extent that they cannot be deducted, any excess of management expenses is to be carried forward under ICTA88/S75 (9) (up to 31 March 2004 Section 75 (3)). There is guidance on the use of excess expenses at CTM08620.
As there is no requirement for a claim, the deduction of management expenses in the computation of CT profits does not fall under the rules in TMA70/S42. As long as the assessment for the accounting period is open, there is nothing to prevent a variation of the amount of the deduction for management expenses.
- an assessment is final, and
- relief for additional amounts of management expenses is sought,
the only remedy is through an error or mistake relief claim under TMA70/S33.
For accounting periods beginning before 2 July 1997 there is guidance at CT862 on the method of relief and computation of a claim under ICTA1988/S242 (set off against surplus franked investment income).
Usually the accountancy treatment plays only a minor part in a decision on whether an item is an expense of management. In Hoechst Finance Ltd v Gumbrell 56TC594, the judge in the Court of Appeal referred to the weight placed on the accountancy treatment in this case by the High Court, and said (at page 612B) ‘the accountancy treatment…by the company’s accountants…in my judgement cannot determine whether it is an expense of management.’ The accountancy treatment will play a bigger role in determining the timing of the relief, however, for periods starting on or after 1 April 2004 (CTM08560).
Case I computation format
The starting point for the CT computation of an investment company (or, on or after 1 April 2004, a ‘company with investment business’) is the computation of the income and chargeable gains, and not the profit shown in the accounts. But where you receive computations of an investment company in a Case I format, you need not raise any objections if the expenses would qualify as management expenses anyway.
However you should make clear to the company, or its agent, that:
- the expenses fall under ICTA88/S75, and
- you must deal with them under that section.
This is particularly important where there are excess management expenses in the accounting period. There is guidance on excess management expenses at CTM08620.
A deduction for management expenses should be inclusive of any VAT payable on such expenses. If the VAT has been relieved as ‘input tax’ it is not included in management expenses. There is guidance on input tax at BIM31520.