A recent important Supreme Court decision in Centrica Overseas Holdings Limited v HMRC addresses the deductibility of expenses incurred by a company.
The decision puts beyond doubt that such expenses may be non-deductible by virtue of being capital in nature. Until recently it was generally thought that transaction-related expenses should, if incurred before a firm decision is taken to proceed with a specific transaction on specific terms, usually be deductible expenses of management. The Supreme Court has now confirmed that a more nuanced approach is required, to establish whether the expenditure is capital or revenue in nature.
The Centrica case concerned the treatment of an aborted transaction and the financial, legal and other advisory costs it sought to deduct as expenses of management. The Supreme Court noted ‘expenditure on an abortive capital disposal transaction is capital nonetheless’, and so it does not matter that there may be uncertainty as to whether a proposed transaction will proceed to a successful conclusion.
We have often seen costs such as professional fees related to a development, acquisition or disposal be treated as deductible costs by clients and their accountants where they are deemed to be abortive costs. This judgement demonstrates that the bar for obtaining deductions has been raised considerably.