An investment company (as defined in ICTA88/S130) will seek
relief under ICTA88/S75 (1) so neither the test in ICTA88/S74
(1)(a), nor the familiar Case I distinction between capital and
revenue, are relevant. The question is whether expenditure laid out
on resisting a take-over bid can be said to be ‘
expenses of management’; that is
to say, expenses of managing the business of making investments,
see CTM08050.
In the case of Sun Life Assurance Society v Davidson [1937]
37TC330 at page 354 Viscount Simonds approved the view that the
words ‘
expenses of management’; were
words of qualification or limitation and indicated it was not all
of the expenses incurred by an investment company which would be
deductible. It is well established that the purchase price of
investments and those incidental expenses, which are not severable
from acquisition or sale, are not management expenses. At page 360
of the Sun Life Case, Lord Reid remarked:
I do not think that it is possible to define precisely what is meant by ‘expenses of management’. It has not been argued that these words have any technical or special meaning in this context. They are ordinary words of the English language, and, like most such words, their application in a particular case can only be determined on a broad view of all relevant matters…. It is not enough to show negatively that a particular sum does not fall into any other class; it must be shown positively that it ought to be regarded as an expense of management…. It appears to me that the phrase has a fairly wide meaning, so that, for example, expenses of investigation and consideration whether to pay out money either in settlement of the claim or in acquisition of an investment must be held to be expenses of management.
By reference to these words of Lord Reid, the cost of
considering or resisting a bid for the purchase of one of a
company’s investments would be an expense of managing its
business. However, in the take-over situation, the bidder is trying
to acquire all the shares held by the investment company or more
commonly, the share capital of the investment company itself. There
is a clear distinction between expenses of managing a business of
holding investments and expenses incurred in determining ownership
of that business or in determining ownership of the investment
company itself. Where an investment company incurs expenditure on
resisting a change in the ownership of its own share capital, then,
just as in the case of a trading company, such expenditure is not
allowable.
The contention is likely to be put however that the
investment company was resisting a change in the ownership of its
shares because it thought that the new shareholders would radically
change the way the company carried on its investment business. A
parent holding company, for example, might argue that the
operations of the subsidiary companies whose shares were held as
investments might be changed so radically as to affect the income
and business of the parent company. The argument would then be that
the defence expenses were expenses of managing the company’s
investments.
As the above conclusion demonstrates, the crux of the matter
for investment companies is not very different from that for
trading companies even though the legal route is different. It
follows that the practical guidance given above about the analysis
of expenditure, the nature of evidence to be sought, and the
interpretation of that evidence holds good for examining management
expenses computations as well.
