Specific Professional Fees not deductible for Corporation Tax

The Court of Appeal (CoA) in the case of HMRC v Centrica Overseas Holdings Ltd [2022] EWCA Civ 1520 made an important decision regarding the deductibility of expenses incurred in the process of disposing of a subsidiary. The case involved Centrica Overseas Holdings Ltd (COHL), a holding company that incurred professional fees while disposing of one of its subsidiaries.

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What is meant by Corporation Tax?

You are required to pay Corporation Tax on the profits earned from business activities as a limited company, any foreign company with a UK branch or office, or a club, co-operative or other unincorporated association (such as a community group or sports club). You are responsible for calculating, paying, and reporting your tax, and will not receive a bill for it.

 

How can I pay Corporation Tax?

You must register for Corporation Tax when you start or restart a dormant business in the UK. You need to prepare your records and Company Tax Return to determine the amount of tax to pay, pay the tax or report if none is due by the deadline, which is typically 9 months and 1 day after the end of your accounting period, and file the Company Tax Return by the deadline, which is usually 12 months after the end of your accounting period. If you are an unincorporated association, you must write to HMRC for registration.

 

What are Deductibles for Corporate Tax?

There is no definitive list of corporate tax deductibles that qualify for tax relief through capital allowances, and it is important to consider tax legislation, case law, and HMRC guidance when identifying qualifying expenditure.

UK corporations are subject to corporation tax on their taxable profits by HMRC, the tax authority. To calculate the taxable profit, businesses can deduct certain expenses that they incur in the course of their operations. These include the cost of goods sold, wages and salaries, rent, interest, depreciation, insurance, repairs and maintenance, professional fees, pension contributions, donations to charity, and research and development (R&D) expenditure.

What are Professional fees?

Professional fees are the fees paid to accountants, lawyers, and other professionals for services rendered to the company. Legal and other professional fees can be disallowed by HM Revenue and Customs if they are of a capital nature, or not wholly and exclusively incurred for the purpose of the trade. Even where an item of expenditure is found to be revenue rather than capital in nature, it still needs to be shown that it also meets the wholly exclusive test. This simply means that the HM Revenue and Customs needs to be satisfied that the sole purpose for incurring the expense is for the purposes of trade, profession or vocation.

 

Can I deduct Professional fees/ management expenses for Corporate Tax purposes?

Certain professional fees as a result of management expenses may not qualify for corporate tax deduction if found to be capital in nature as opposed to income that is considered to be of a revenue nature.

The recent Court of Appeal decision in a tax dispute between Centrica Oversees Holding Ltd (COHL) and HM Revenue & Customs has clarified that not all professional fees may qualify for corporate tax deduction. In July 2005, COHL acquired a Dutch company named Oxxio BV, which had four subsidiaries. During the process of disposing the subsidiary, COHL incurred expenses for professional services from Deutsche Bank AG London, PwC and De Brauw Blackstone Westbroek, which totalled £2,529,697.

COHL claimed relief for these expenses on its company tax return for the accounting period ending December 31, 2011. However, HM Revenue and Customs (HMRC) denied the claim and issued a closure notice amending the company’s tax return, stating that the expenses were not deductible under the Corporation Tax Act 2009. COHL appealed the decision, but it was dismissed by the First-tier Tribunal (FTT). COHL then appealed to the Upper Tribunal (UT), which allowed the appeal. HMRC then took the case to the CoA.

What is the outcome of HMRC v Centrica Overseas Holdings Ltd [2022]?

The CoA allowed the appeal, agreeing with HMRC that the expenses being professional fees which were incurred as a result of management expenses were not deductible under the Corporation Tax Act, 2009. The CoA held that although they were expenses of management, they were also capital in nature, which means that they are not deductible for tax purposes. This case shows how complex it can be to determine the deductibility of expenses incurred in the process of disposing of a subsidiary and how important it is to have professional advice when dealing with such matters to avoid any legal and tax issues.

Download the Judgement here

What is the Corporation Tax rate for 2022 and 2023?

The normal rate of corporation tax currently stands at 19% for the financial year beginning 1 April 2022, however, this is set to increase to 25% for the financial year 2023. From 1 April 2023, there will no longer be a single Corporation Tax rate for non-ring fence profits.

From 1 April 2023 the Corporation Tax rate changes to:

• 19% for taxable profits below £50,000 (small profit rate)
• 25% for taxable profits above £250,000 (main rate)

 

What is Marginal Relief for Corporation Tax rate?

If your company has a profit that falls between the main rate and small profit rate, you may be eligible for Marginal Relief. This means that the rate of Corporation Tax you have to pay will be reduced instead of being at the standard 25%. However, if your company’s accounting period is shorter than a year or if your company is associated with other companies, the profit range will be adjusted accordingly. It’s also important to note that if your company is non-UK resident, a close investment holding company, or has profits over £250,000, you will not be able to claim Marginal Relief.

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