The simplest situation is that of a trading company incurring
expenses directly in order to ward off a bidder for its own issued
shares. In practice matters may not be that straightforward. The
additional considerations this generates are considered below.
Often bid defence expenditure will be incurred and ultimately
borne by a group parent company which carries on an ordinary trade
with third parties. Where there are other trading companies in the
group you should consider whether one of the purposes in incurring
the expenditure was to protect the trades of other group members.
If so the expenditure in question will be inadmissible, see
particularly
BIM37050 onwards, and also
BIM37600 and
BIM42105. In Garforth v Tankard Carpets
Ltd [1980] 53TC342 (see
BIM37065) Walton J made some helpful
remarks (at page 349H of 53TC) about the difficulties the directors
must necessarily have in segregating the purposes of the various
companies for which they are responsible.
You should not accept the argument that expenditure is
admissible because it was intended to protect the value of the
shares in the subsidiary trading companies appearing in the parent
company’s balance sheet. Outside the financial sector those
shares would not be assets of the parent company’s trade.
They would be held as investor and not as trader.
Often some (though not necessarily all) bid defence
expenditure will be incurred by a company which carries on an
established trade of providing various management services to other
group members.
You may accept the bid defence costs are incurred wholly and
exclusively for the purposes of the service trade if those costs
were reflected in sums charged out to other group members on some
reasonably commercial basis. But you should then consider whether
the recharged expenses are allowable deductions in the computation
of the companies charged for the services provided.
If the group service company bears some of the charges itself
the expenses must be incurred for the sole purpose of promoting the
management company’s own trade and not for the purposes of
the trades carried on by other group members nor for some wider
group purpose.
If overseas group members are not being charged on the same
basis as UK customers it may be possible to impute trading receipts
from the non-residents to the service company under the transfer
pricing legislation ICTA88/S770, see INTM430000 onwards and
INTM460000 onwards for detailed guidance on transfer pricing.
