BIM38240 - Wholly & exclusively: companies: flotation costs
What was the company's purpose in floating?
ICTA88/S77 allows a deduction for certain incidental costs
‘
wholly and exclusively incurred for the
purpose of obtaining the finance’.
This section describes a Special Commissioner’s
decision in a case involving the raising of loan finance. Special
Commissioners’ decisions do not create a binding precedent
but are indicative of the approach that they would take in similar
cases.
In the case of Focus Dynamics plc v Turner (SpC182/99) the
company carried on an engineering trade. In 1991 it raised finance
including £14m of debt. By 1992, owing to poor trading
results, the company had become financially unstable and
refinancing was necessary.
Samuel Montagu & Co Ltd began to exert pressure on the
company to change its debt structure. In March 1993 the
company’s chief executive considered either merging with or
acquiring other businesses as a way of raising money and repaying
the debt. In September 1993 the company’s board considered
for the first time the idea of a flotation of the company, which
had not come from the banks.
In June 1994 the company decided to proceed with a company
flotation and to appoint stockbrokers who were instructed to carry
out all the necessary preliminary work. In October 1994 an article
appeared in a national newspaper stating, amongst other things,
that the company was proposing to raise £14m through a share
issue designed to pay off debts and enable it to expand. Documents
were issued to existing shareholders and, for information only, to
holders of options under the executive share scheme, making it
plain that the proposed stock exchange listing would allow the
company access to fresh capital ‘to finance existing debt and
for development’. The company’s stockbrokers also
issued a prospectus, stating similar objectives.
In November 1994 the flotation took place and the proceeds
were used to repay all existing loans totalling £14,309,258,
including interest of £45,316. The professional fees and
charges incurred in the flotation amounted to £685,726. At the
time of the flotation the company considered the acquisition of
another company, which was made in April 1995 with the aid of a
short-term bank loan.
The company appealed against an assessment disallowing its
claim that the fees and charges were incidental costs wholly and
exclusively incurred for the purpose of repaying loan finance
within ICTA88/S77 and were therefore an allowable deduction from
its profits under ICTA88/S77 (1).
The Special Commissioner disallowed the expenditure. By
virtue of ICTA88/S77 (6) the incidental costs of obtaining loan
finance meant expenditure on fees, commissions, advertising,
printing and other incidental matters, being expenditure wholly and
exclusively incurred for the purpose of obtaining the loan finance
or of providing security for it or of repaying it.
In the instant case the clear conscious motive of the company
in arranging for the flotation in November 1994 was not limited
wholly and exclusively to raising funds in order to repay loan
finance. There was also the clear desire to enable the company to
expand and to make acquisitions. The whole of the funds raised by
means of the flotation was used to repay its existing borrowings.
But the clearance of those debts enabled the company to borrow
funds from its bankers, on short-term, to acquire another company
in 1995 and the motive of expansion had existed at least from early
1993. The company had therefore raised finance by means of a
flotation not only in order to repay debt but also in order to
provide finance for expansion and acquisitions. Accordingly, the
company clearly had more than one purpose when deciding to raise
funds by means of a flotation on the stock exchange.
The expenditure of £685,726 was not therefore deductible
by virtue of ICTA88/S77 (6) in computing the taxpayer
company’s taxable profits or allowable losses.
For those who do not have ready access to tax case volumes,
the part of the Special Commissioner’s decision on which the
above guidance is based is set out below:
Were the costs incurred in the flotation of
the company incurred wholly and exclusively for the purpose of
repaying loan finance? In my judgment it is plain from the facts of
this appeal that the company had more than one purpose when
deciding to raise funds by means of a flotation on the London Stock
Exchange. As early as 16 March 1993 the documentary evidence shows
that Mr Eastwood was ‘wanting to pursue acquisitions’.
In November 1993 the company attempted, albeit unsuccessfully, to
acquire Sisson Lehmann, even though initially its proposal was
opposed by Samuel Montagu. Just prior to the flotation in October
1994 the Financial Times asserted in an article that the company
wish to expand. And the flotation documents themselves are even
more revealing. The documents issued to shareholders refer to
refinancing existing debt and ‘for development’ or
‘for new development’. Finally there is the prospectus
itself which makes it very plain that the repayment of debt is only
one of the purposes or part of the purpose of the company in
arranging for the flotation. Within five months from the date of
the flotation the company arranged to acquire FBT (Shears) Ltd and
on the evidence of Mr Eastwood that acquisition was under
consideration (although no approach had been made) at the time of
the flotation.
Although Mr Eastwood was plainly an honest
witness he took pains to try to discount any motive of the company
other than debt repayment in arranging for the flotation. He
suggested that the Financial Times article was merely a
‘puff’ and that the documents sent to shareholders were
mainly addressed to existing employees and therefore designed to be
attractive to them. I do not accept those explanations. Looking at
the facts in the round I believe that the company raised finance by
means of a flotation in order to repay debt, which in fact it did,
and also in order to provide finance for expansion and
acquisitions.
