Centrica, the FTSE 100 owner of British Gas, has lost an appeal against HMRC.
The Supreme Court has dismissed an appeal by Centrica’s investment arm over the treatment of professional services fees.
Centrica Overseas Holdings, the energy supplier’s investment entity, acquired a Dutch company, Oxxio and its four subsidiaries in July 2005. However, the deal didn’t go to plan. Around mid-2009, Centrica decided to sell Oxxio and went on to instruct professional advisers.
By March 2011, following a lengthy process, the investment business sold the assets of two Oxxio subsidiaries and the shares in a third subsidiary.
Centrica’s advisors on the deal, Deutsche Bank AG London, Pricewaterhousecoopers (PwC) and De Brauw, racked up fees of £2,529,697 between the time of instruction in 2009 and the final sale in 2011.
The investment business went on to claim relief for the £2.5m expenditure in its tax return for the accounting period ending 31 December 2011, but was denied by HMRC.
The tax authority denied the claim because this expenditure was not deductible. It argued that it was not an expense of management and that, even if it was, it was capital in nature.
The parties went on to fight it out in the courts, with the case going to the Supreme Court.
Centrica Overseas Holdings first appealed the HMRC decision to the First-tier Tribunal, which found that most (but not all) of the expenditure was expenses of management, but dismissed the appeal on the basis that the expenditure was not incurred by the company.
The investment business then appealed to the Upper Tribunal. The Tribunal allowed the appeal and found that all the expenditures in question were both business management expenses and revenue expenditures and, therefore, deductible.
Then HMRC appealed that ruling to the Court of Appeal, which found that the expenditure was a management expense, but allowed HMRC’s appeal on the basis that the money was capital in nature and therefore not deductible.
It has been established from these cases that the £2.5m expenditure was a management expense.
However, Centrica appealed to the Supreme Court only on the question of whether the expenditure was capital in nature.
The Supreme Court unanimously dismissed its appeal today, as the Lord Justices held that the expenditure was capital in nature and, therefore, not deductible under the Corporation Tax Act.
Both Centrica and HMRC have been approached for comment.