England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR JUSTICE PATTEN
[2003] EWHC 1600 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		6th May 2004

Lord Justice Carnwath :

Introduction

1. This is an appeal by the Revenue against a decision of Patten J. He decided that the taxpayer, Camas Plc ("Camas"), was entitled, in computing liability to corporation tax, to deduct certain expenses incurred in the accounting period to 31^st December 1995, as "expenses of management" within the meaning of ICTA 1988 s.75(1). He reversed the decision of the Special Commissioners (Stephen Oliver QC and Adrian Shipwright).
2. Camas Plc ("Camas") is the parent of a group of companies concerned mainly with quarrying and construction. At the relevant time it was "an investment company" within the meaning of ICTA 1988 s.130. Its income consisted entirely of dividends and interest. As part of its policy of acquiring new investments in the same market sector, the Bardon Group Plc ("Bardon") was identified as a possible target for merger or acquisition. Between April and December 1995, various activities took place, including board meetings of Camas, professional reports, and meetings with Bardon representatives, for the purpose of considering the merits of such action, and preparing for it. This process culminated in a conditional offer communicated to the Bardon board on 19^th December. On 21^st December, following the rejection of that offer by the Bardon board, the Camas board decided to take the project no further.

Heads of expenditure

3. The expenses at issue are the professional fees incurred in that period for financial, legal and accountancy advice. They totalled £583,495 (excluding VAT), all of which was charged to the profit and loss account in accordance with ordinary accounting commercial practice. They were made up as follows:

i) Schroders (£185,000). These fees related to their work as the financial adviser to Camas in respect of the takeover, including advice on strategy and tactics, the formulation of alternative strategies in relation to a possible merger or a takeover, methods of financing any offer, and appraisal of the financial impact of successful offers for Bardon. They also attended board and other meetings and prepared papers for them.

ii) Warburgs (£25,531). They acted as brokers, gave advice on strategy, and carried out analysis of the register of Bardon shareholders.

iii) KPMG (£226,684). They carried out a comparison of the financial performance and accounting policies of the Camas and Bardon groups, a review of the benefits of integrating the two businesses, and a review of the profit forecast for the Bardon group. They also carried out an assessment of the borrowing requirements in the event that the takeover offer succeeded.

iv) Clifford Chance (£121,753). They gave legal advice on the impact on the proposed transaction of competition laws, on the information to be submitted to the Office of Fair Trading, and on the information that would require to be included in any circular. They also gave advice to the directors of Camas on their responsibilities under the City Takeover Code and the Stock Exchange Yellow Book. Together with Schroders and Warburgs they attended a number of board meetings.

v) Shearman & Sterling (£11,878). They advised on US anti-trust issues and provided an analysis of the impact of US securities laws.

vi) FPC Greenaway (£12,649). As printers, their services related to printing the offer documentation, listing particulars, circulars to shareholders and some press releases.

A proportion of the fees of Schroders (£40,000) and Clifford Chance (£33,800) was accepted by the Revenue as the incidental costs of loan finance (allowable under ICTA s 77). Otherwise, no distinction has been drawn by either side between the different heads of expenditure. The balance in dispute is therefore £509,695.

The sequence of activities

4. The Commissioners made detailed findings as to the sequence of work and meetings, which were summarised by Patten J. It is sufficient to quote his account of the conclusion of the process:

"On 19^th December Schroders faxed to Barclays De Zoete Wedd, the merchant bank which was acting for Bardon, a letter confirming an offer by Camas of 40p per Bardon share, with a partial cash alternative 'subject to joint analysis of potential synergies and due diligence'. The following day, the Offers Committee met on two occasions. At the first meeting a final draft of the facility agreement was produced, and it was resolved to proceed with the establishment of banking facilities on the basis of that agreement. At the second meeting, held later in the afternoon, the committee reported that the facility agreement had been finalised for execution, and it was resolved to approve it in its final form.

At 1.30pm on 20^th December the Bardon board met to discuss the Camas offer, which had been faxed by Schroders the previous day. The Chairman was authorised to respond by rejecting the offer on the basis that it was inadequate in value and that the board of Bardon did not believe that the record of Camas's management demonstrated that it would be able to achieve the purported synergies or lead a merged group to further growth. This decision was communicated to Camas later the same day. This led to a meeting of the Camas board the following day, 21^st December, at 10am. Following an update on events and discussion and advice from Warburgs and Schroders, it was decided that there was no possibility of a recommended bid at a price which Camas would be prepared to offer, and that 'the success of a unilateral bid was too uncertain to warrant proceeding'. Project Bardon therefore came to an end."

5. Before the Commissioners, Camas relied on an expert report by an investment banker, Mr Reed, which was accepted by the Commissioners, as to the complex process of preparation required in such cases:

"3.3 A strict timetable must be followed once a firm intention to make an offer is announced. Also, if the offeror and the target company are public companies, both are vulnerable to approaches from other offerors once an announcement of a firm intention to make an offer has been made. Speed in launching and completing an offer is, therefore, of utmost importance and this requires the prior contingent preparation of documentation.

3.4 The net effect is that considerable preparation is required before contemplating a public offer. This is to ensure that the largely irreversible offer process is not put in train until the offeror has completed its appraisal process and is certain that it wishes to make the offer and that the necessary documentation is sufficiently advanced so that, once implemented, the offer process can be executed as quickly as possible.

3.5 The offer process therefore essentially consists of three steps:

(a) the appraisal process;

(b) the decision whether or not to make an offer; and, if positive,

(c) the communication of this decision to the offeree.

Market circumstances can change very rapidly and very little time will usually elapse between decision and communication…."

6. In his report, Mr Wood also commented on the stage which the process had reached in this case. (Although not quoted by the Special Commissioners, I do not understand this part of his report to be contentious.) He described the "proposal" made to Bardon on 19^th December as "the key significant step" prior to abortion of the project:

"The Proposal certainly did not constitute an offer by Camas for Bardon because of the preconditions it contained. Schroders made it clear that prior to any offer being made, a meeting would need to be held subsequent to 2 January 1996 at which the Chief Executives of Camas and Bardon would need to conclude that putting the two companies together would lead to identified annual synergies of at least £10million…. Once this meeting had taken place, it was envisaged that Camas would undertake a due diligence exercise on Bardon which it was expected that Bardon would want to reciprocate."

7. He re-emphasised the "very sharp distinction" to be drawn "between a company communicating a firm intention to make an offer and the steps which lead up to this", and added:

"If the Proposal had contained a firm unconditional intention from Camas to make an offer, an announcement would have had to have been made by Bardon immediately following its board meeting, whether or not the Bardon Board decided to recommend the offer."

8. The Commissioners accepted that the object of the expenditure, viewed as a whole, was to take Camas, as potential offeror, through the three steps referred to in this report. They concluded:

"50. Relevant to the present issue we find that all the expenditure in issue here related to Project Bardon in the sense that it concerned the proposed merger with or acquisition of the whole of the issued share capital of Bardon, the means of achieving that result and whether or not to proceed with the bid. No other proposed mergers or acquisitions were under serious consideration in the period of Project Bardon.

51. We find also that the costs relating to Schroders, Warburgs, KPMG, Clifford Chance and the US lawyers were incurred, in part at least, to assist the board of the Company in making decisions and were to a large extent costs that would have to be incurred by a potential bidder in mounting a bid. This was because many of the same matters would be relevant in persuading shareholders to accept an offer as were relevant to the board of the Company. Much of this expenditure could be regarded as having a dual purpose i.e. to assist the board and as, at least, a starting point for a bid. And we find that the Board of the Company decided not to mount a bid for Bardon and in this sense can be said to have decided not to acquire Bardon."

9. Patten J commented that these findings, which were not challenged, accurately analysed the role of the professional advisers in the relevant period:

"The essential points seem to be: (a) that all the expenditure was relevant and necessary to Project Bardon; (b) that all the costs (apart from the printing costs) related to advice given to assist the board of Camas in making decisions about a possible bid; and (c) that most of the expenditure also had the dual function of providing the necessary starting-point for a bid and would have to be incurred by a potential bidder in mounting a bid." (para 17)

Statutory provisions

10. ICTA s.130 defines an "investment company" as:

"any company whose business consists wholly or mainly in the making of investments and the principal part of whose income is derived therefrom . . . "

As such a company, Camas was liable to corporation tax on its "profits", defined as including "income and chargeable gains" (see ICTA s 6(1), (4)). "Income" is computed in accordance with "income tax principles" (s 9); "chargeable gains" are defined by reference to the Taxation of Chargeable Gains Act 1992 (TCGA) (ICTA s 832(1)), and computed in accordance with the provisions of that Act (TCGA s 8(3)). Income and chargeable gains so computed are aggregated to arrive at the "total profits" for corporation tax (ICTA s 9(3)).

11. The issue in this case arises under ICTA section 75, headed "Expenses of management: investment companies". Sub-section (1) provides:

"(1) In computing for the purposes of corporation tax the total profits for any accounting period of an investment company resident in the United Kingdom there shall be deducted any sums disbursed as expenses of management (including commissions) for that period, except any such expenses as are deductible in computing profits apart from this section."

The principal issue in this case is whether the disputed expenditure consisted of "expenses of management" within the meaning of this section. The Commissioners held that it did not; Patten J reversed that decision. The Revenue raised a separate contention, rejected by both the Commissioners and the Judge, that this was expenditure of a capital nature and therefore could not in any event qualify as "expenses of management".

Expenses of management - authorities

12. The history of this term in the tax legislation began with section 14 of the Finance Act 1915, which gave relief to life assurance companies and investment companies for tax on "any sums disbursed as expenses of management (including commissions)". The leading case on the meaning of these words (in the equivalent Income Tax Act 1918, s 33) is the decision of the House of Lords in Sun Life Assurance Society v Davidson [1958] AC 184. It rejected a claim by the Society to deduct, as expenses of management, sums paid in respect of brokerage fees and stamp duty on the sale and purchase of investments. The Court of Appeal had decided a similar issue in favour of the Revenue in relation to an investment company, in Capital and National Trust v Golder (1949) 31 TC 265; and in Sun Life, it had regarded itself as bound by that decision, notwithstanding the different characteristics of a life assurance society ([1956] Ch 524).
13. In reading the speeches in the House of Lords, it is helpful to see how the case was argued by the Revenue:

"Management means administration, but the expression is not as narrow as the expenses of the board of directors or of the heads of departments. The natural meaning is that part of the expenses related to the sphere of administration or management. But it does not cover all the expenses of carrying on the whole business or trade of the company under the management. The decision of a commercial company to buy so many tons of fruit as a matter of policy would be management, but sending out the people to buy them would not be management. There is a distinction between the managerial decision and carrying it out in individual cases. Paying brokerage and stamp duty cannot be regarded as part of management…" (p 191 - emphasis added, here and in the following quotations)

Thus, there seems to have been no issue that the decision-making process, at least at board level, was part of "management"; the issue was over the treatment of the expenses of "carrying it out in individual cases".

14. The leading speech was given by Viscount Simonds. He described as "helpful" the following passage of the Special Commissioners' reasoning:

"… the brokerage and stamp duties payable on the purchase of an investment being not general expenses of conducting the society's business but expenses specifically referable to and only incurred by reason of the purchase, are expenses of the purchase and not expenses of management. If we draw a line between the moneys admittedly laid out by the society for expenses of management and the moneys laid out for the price of an investment, we hold that the brokerage and stamp duties fall on the same side of the line as the latter….

In our view the disputed items are so closely linked with the transaction of purchase (being necessarily incurred in the course thereof) as to be considered part of the expenses of the purchase and not expenses of management of the society's business." (p 197)

15. It is clear from the speeches in the House that there was no dispute that "the expenses of purchase" properly defined were excluded from expenses of management"; the issue was how to draw the line. Thus, Viscount Simonds noted the Society's concession that "the cost of purchase of the investments themselves" was not included, and commented:

"The concession is… of value, for, if the expense of purchasing an investment is not an expense of management, I can see no valid ground of distinction between the price of the stock which is purchased and the stamp duty paid upon contract or transfer and the brokerage paid to the broker. Each item is an integral part of the cost of acquisition or, as the commissioners put it, a part of the expenses of the particular purchase not of the expenses of management." (p 198)

Similarly, Lord Morton said:

"These expenses are… so closely linked with the transaction of purchase that they may naturally be considered as items in the total cost of a purchase which has already been resolved upon by the management of the company, and not as expenses of management. This is the short and simple ground upon which the Special Commissioners decided the case in favour of the Crown, and I have arrived at the conclusion, though with considerable doubt, that it is a sound ground." (p 202)

16. Unlike the majority, Lord Reid considered that the brokerage payments were deductible, on the grounds that they were indistinguishable in principle from expenses incurred by staff in arranging similar sales or purchases (p 206-7). Furthermore, he alone found assistance in the parenthetical reference to "commissions". Of this he said:

"That appears to me to be sufficient to negative one argument for the Crown – that expenses of management only include expenses involved in taking managerial decisions and exclude expenses involved in carrying them out in individual cases. Commissions arise from individual cases…" (p 205)

This passage confirms the point made above, that the Revenue accepted that the expenses of "taking managerial decisions" were deductible. The issue was how much wider the net of management expenses could be spread to cover the implementation of the decisions.

17. Lord Reid continued:

"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…. looking to the purpose and content of the section 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 a claim or in acquisition of an investment must be held to be expenses of management….

…It seems to me more reasonable to ask, with regard to a payment, whether it should be regarded as part of the cost of acquisition, on the one hand, or, on the other hand, something severable from the cost of acquisition which can properly be regarded as an expense of management." (p 205-6)

The last sentence is relied on by both parties before us as providing the most helpful formulation of the correct test.

18. Finally, Lord Somervell said that "unaided" he would have found for the Society, but that he was impressed by the arguments of the Revenue "restricted to these two particular items":

"The brokerage and stamp duty, though not… an integral part of the purchase price, are a direct and necessary part of the cost of a normal method of purchase." (p 209)

Lords Morton (p 203), Reid (p 205) and Somervell (p208) all expressed the view that the term "expenses of management" should be given a "wide" or "fairly wide" construction.

19. Sun Life was followed and applied by this court in Hoechst Finance Limited v Gumbrell (1983) 56 TC 594. It was held that the company was unable to recover as "expenses of management" a commission paid to its parent as the price of obtaining a guarantee for the issue of unsecured loan stock. The Court of Appeal upheld the decision of the Commissioners that the payment was not an expense of management because it "formed an integral part of the issue expenses" (p 611D, 614G). In analysing the speeches in Sun Life Dillon LJ found no distinction in principle between the approach of Viscount Simonds and Lord Reid (p 612G, 613H). May LJ helpfully summarised their effect:

"In my opinion, the result of that case is that in this type of situation one has to ask whether the relevant payment can be regarded as properly severable from the costs of acquisition of an investment or the issue of loan stock, on the one hand, or a direct and necessary part of the cost of a normal method of purchase or issue, on the other. If, posing that question, the answer is that it is the latter, then the payment is not an expense of management." (p 615A-B)

(The effect of Hoechst was reversed by statute. ICTA section 77 now contains express statutory provision for the deduction of "incidental costs of obtaining loan finance", which are to be "treated" as expenses of management.)

20. In the extracts cited above, I have emphasised the words which seem to me best to encapsulate the effect of the various judgments. All stress the closeness of the link between the expenditure in that case and the process of acquisition:-

"part of the expenses of purchase";

"an integral part of the cost of acquisition";

"items in the total cost of a purchase which has already been resolved upon";

"a direct and necessary part of the cost of a normal method of purchase".

21. Conversely, expenditure is not excluded merely because it relates to activities carried out in contemplation of acquisition. Lord Reid said that the expenses of "investigation and consideration" whether to pay out money in acquisition of an investment should be treated as expenses of management. Although these words were not in terms adopted by the other members of the House, they are consistent with the "wide" view advocated by Lords Morton and Somervell. In the context of the arguments before the House, the "width" there referred to concerned the extent to which the concept should be taken as including activities going beyond managerial decision-making. The same idea is implicit in Lord Morton's exclusion of items in the cost of "a purchase which has already been resolved upon". Nothing in Sun Life supports the exclusion of the cost of investigations and other activities which are part of the process leading to the decision to purchase. As Mr Prosser says, what is excluded by Sun Life is expenditure on "the mechanics of implementation".

The Hibernian case

22. At this point it is convenient to refer to the decision of the Irish Supreme Court, Hibernian Insurance Company Limited v Macuimis [2000] 2 IR 263, which though not binding provides persuasive support for the Revenue's contentions on both issues. It concerned the equivalent provisions in the Irish Corporation Tax Act 1976. In that case the disputed expenditure consisted of payments made to investment brokers, accountants and lawyers for advice given in connection with the evaluation of the projected acquisition of three insurance companies as investments. The transactions did not proceed. The Irish Supreme Court held that the expenditure had not been disbursed as part of the expenses of management.
23. In the leading judgment, Murphy J (with whom Hamilton CJ agreed) summarised the effect of the speeches in Sun Life as being to exclude expenses which formed an "integral part" of the acquisition of an asset. He illustrated the taxpayers' argument by reference to costs which were necessary to a purchase such as those of investigating title or "due diligence" in relation to a take-over. The taxpayers argued that such costs were deductible when incurred before the decision to purchase but not if incurred after it. Murphy J said:

"In my view such a decision cannot change the nature of the service provided. If a purchase were completed, I do not doubt that it would be universally accepted that all of the costs incurred in relation to the exploration, evaluation and investigation of the company to be acquired, would be "costs of the purchase". I believe that it would be impossible to justify any distinction as to the nature of those costs depending upon whether the work done on behalf of the purchaser was carried out before any agreement was reached, after an option had been obtained, or before or after a conditional or unconditional agreement signed." (p 290)

24. The difficulty of such a distinction, in his view, was exemplified by the facts of one of the cases before him, where a decision had been made in principle to purchase, subject to satisfactory trading results for 1989, and a contract had been drafted; but it did not proceed because the 1989 results fell short of expectations. He said:

"…the facts illustrate how difficult it would be to rely on such an imprecise event to differentiate between the nature of an expenditure incurred. In my view one cannot go further than saying that a close relationship between a proposed acquisition and expenditure incurred in respect thereof would necessarily deprive that expenditure of the characteristics of a management disbursement." (p 291)"

On this issue, the third member of the Court (Barron J) agreed with the majority:

"…It may be part of day to day management to appraise the possibility of acquisitions or disposals, but it ceases to be such when a specific situation is pursued.

The costs of management come to an end when a decision is taken to acquire or dispose of an investment as the case may be. This does not relate to the entering into of a binding commitment. Once steps are taken which may lead to a binding commitment and which are necessary for management to make a full and informed decision then management ceases and acquisition or disposal as the case may be commences." (p 296)

25. Murphy J also accepted the Inspector's submission that capital payments could not qualify as expenses of management, but in view of his conclusion on the first issue, he found it unnecessary to make positive findings as to the category into which the expenditure fell. Barron J disagreed. He said:

"An investment company maintains its capital in its investments. In the course of its management, its managers have to consider not only whether such capital is best employed but also whether it is providing the best return. I do not accept that only expenditure in relation to getting the best return from existing investments is what is intended by the expression 'expenses of management'. Expenditure relating to the appraisal of existing investments or the scope of new investment must equally be expenses of management. However, once an appraisal becomes specific in the sense of relating to a particular investment, this is not management, but possible acquisition or disposal as the case may be." (p 295)

26. I shall comment on these issues below in the context of the present case. As will become apparent, I am unable, with respect, fully to accept the Supreme Court's application of the principles in the Sun Life case. It has to be borne in mind that the costs of purchase came into the debate in Sun Life, not as part of a statutory test, but simply because, by common agreement, it was accepted that the act of purchase as such was not within the ordinary meaning of "management". It therefore became necessary to determine what expenses were an integral part of such a purchase. By contrast, it was common ground that the process of reaching a decision to purchase was management in the ordinary sense. There is nothing in the speeches which supports the view that an activity which is part of that decision-making process ceases to be management, merely because it may also assist in the purchase if that is decided upon - still less if it is not. Unlike the provisions relating to Schedule D expenses, there is no requirement that the expense should be "wholly and exclusively" related to management.

The present case

27. The Special Commissioners held that the expenditure in the present case could not be severed from the costs of the projected acquisition. They said:

"59… We have already found that all the expenditure in issue here related to Project Bardon and to nothing else. The board of the Company and, in due course, the board of Bardon Group plc had to be satisfied with every aspect of the project. The Company's board needed the advice as part of the necessary appraisal process and in order to enable it to decide whether to make the offer. It needed the services of Schroders and Warburgs both to advise on the project and enable it to communicate the decision to offer as soon as it had reached the decision to make one. We note in this connection Mr Reed's evidence that the act of working up a potential offer is part of the decision-making process and that any potential offeror has to carry out preparatory work before it can responsibly make an approach to the target. The evidence satisfies us that that was the position here. On that basis, it seems to us, the relevant expenditure cannot be properly severed from the costs of projected acquisition. Thus, given that the Sun Life test applies here, it disqualifies the expenditure from being expenses of management."

In their view, it made no difference that the proposed acquisition did not in fact take place:

"60… The character of the expenditure throughout the duration of Project Bardon was the same. It was wholly directed at the projected acquisition. All the expenditure was, on the evidence before us, a direct and necessary part of an acquisition of this scale. The board of the Company could not, as we have noted, have proceeded to make the offer without incurring the expenditure. The fact that the offer was rejected by Bardon's board on 20 December 1995 and so was not communicated to its shareholders in no way alters the character of the expenditure."

28. Patten J rejected the Revenue's contention that he should treat these conclusions as findings of fact:

"… the conclusions are no more than an extrapolation by the Commissioners from those findings in the context of their application to the facts of the Sun Life test. This is a question of law, which is reviewable on conventional Edwards v Bairstow principles." (para 42)

In his view, the Commissioners had asked the wrong question:

"… The speeches in Sun Life indicate that the correct approach is to draw a line distinguishing between management expenses and expenses or costs which are properly to be regarded as part of the costs of acquisition: i.e. the purchase price. An expense is, to use Lord Reid's words, 'severable' from the cost of acquisition if, objectively viewed, it is not 'part of' the purchase price. That is a matter of judgment in every case. But it does not follow, merely because expenditure which predates a possible or actual acquisition was prerequisite to, or, to use the Special Commissioners' words, 'directed at' the acquisition, that it falls automatically to be regarded as part of the costs of acquisition." (para 43)

29. The Revenue had accepted that if the expenses were not part of the purchase costs, as the Commissioners had found, they were expenses of management; there was "no third possibility" (para 39). On a correct application of Lord Reid's test, Patten J concluded that the expenses were not part of the costs of acquisition:

"44… On the Special Commissioners' own findings of fact, the services of Schroders and the other professionals were needed and were used in order to obtain advice on a possible investment in the form of the acquisition of the Bardon group, and to decide whether to go ahead. The work stopped when, on advice, the decision was taken to abort any possible acquisition. But even if the acquisition had gone ahead, the nature of the services would have been the same. Although one element of the professional services involved the working up of the bid, Mr Reed's evidence indicated that this was part of the decision-making process, and the Commissioners accepted that. I am unable to see how the cost of any of this can fairly be described as part of the cost of acquisition in the sense that brokerage fees, payments for financing and stamp duty obviously are, and the Special Commissioners have reached their conclusion, in my judgment, by asking themselves the wrong question."

30. Before us, Mr Henderson supports the Commissioners' reasoning. He accepts that expenditure in deciding on what sort of company to acquire is not excluded. However, expenditure ceases to be on "management" once a particular company has been identified:

"The starting point is when a particular target has been identified and where expenditure is directed to acquisition of that particular target."

(This formulation is similar to that of Barron J in the Hibernian case.)

31. On this issue I agree, respectfully, with Patten J. It is a short point. If my analysis of the speeches in Sun Life is correct, the activities in this case were all part of the process of managerial decision-making. I see nothing in Sun Life, or in the ordinary meaning of "management", which provides any support for Mr Henderson's suggested distinction between the process of deciding on the sort of company to acquire, and that of deciding on the acquisition of a particular company.
32. On the facts of this case, unlike Sun Life, no final decision to purchase was ever made. As Asquith LJ put it in another context, the project never –

"… moved out of the zone of contemplation - out of the sphere of the tentative, the provisional and the exploratory - into the valley of decision" (Cunliffe v Goodman [1950] 2 KB 237, 254).

The Revenue's argument might have been stronger if the stage had been reached of a "firm intention to make an offer", triggering the "strict timetable" described by Mr Reed. Even then, I would not necessarily conclude that any expenditure thereafter, even if the purchase proceeded, would have to be treated as costs of acquisition, rather than management. It must depend on the circumstances. Between such a triggering event and a final purchase there may be many chances and changes, requiring what can properly be regarded as "managerial" consideration. How one should categorise particular expenses in any such case must depend on the particular facts

33. Like the judge, I do not see this conclusion as involving any disagreement with the Commissioners on their findings of fact. They held that, on the evidence relating to acquisitions of this scale, "the act of working up a potential offer is part of the decision-making process", and that in this case the work was "wholly directed at the projected acquisition". They saw these findings as leading to the conclusion that it was "a direct and necessary part" of the proposed acquisition in this case. That formula reflects the words of Lord Somervell in Sun Life, adopted by May LJ in Hoechst. With respect to the Commissioners, however, I think they misapplied the formula. Lord Somervell made clear that he regarded that expression as a very narrow one, not intended to be wider than the particular items in issue in that case. The fact that the work was part of "the decision-making process" supports its categorisation as managerial. That is not affected by the fact that it was also a "necessary" prerequisite to acquisition, and directed to that possibility. It was preparatory to the making of a decision to purchase, not part of the implementation of a purchase already decided upon.
34. It is unnecessary to express a concluded view whether the fact that no acquisition occurred is in itself determinative. One can imagine cases where, following a firm commitment to purchase, expense is incurred in carrying it out, but some wholly unexpected event requires it to be aborted. If at the time it is incurred such expenditure is not an "expense of management", it may be difficult to see why it should change its character thereafter. However, in this case, the lack of an actual purchase merely confirms the fact that there never was a firm decision to buy.
35. Finally, I should note a separate point made by the Commissioners (para 61). They observed that the project, if implemented, would have nearly doubled Camas's capitalisation, and would have led to a major restructuring of the two groups. They observed:

"A separate but related feature of Project Bardon is that it strikes us as having little or nothing to do with the management of the Company's investment business…

… the steps in the project and the advice and services obtained in return for the disputed expenses were far removed from the Company's existing business of holding one block of shares and three loans."

They accepted, however, that this point had not been taken by the Revenue, which had treated the case as simply involving the acquisition of an investment. Similarly, this point has not formed part of the Revenue's argument before us, and I accordingly shall not comment on it.

Exclusion of capital expenditure?

36. The Revenue's alternative submission was that section 75 does not permit deductions of a capital nature, and that some or all of the expenditure in this case should be so characterised. Neither the Commissioners nor the judge thought that section 75 was so limited. This made it unnecessary to consider which if any of the payments should be regarded as capital in nature.
37. In support of his submission Mr Henderson relied on the history of the provision and its predecessors, which until 1965 had always been concerned solely with the tax on income. He was able to point to various dicta which assumed that the expenses in question would be of an income nature. The most recent were in the speech of Lord Hoffmann in Taylor v MEPC Holdings Ltd [2004] 1 WLR 82. With respect to those involved, I do not find it necessary to review those dicta in any detail, because for the most part they were not considering the present issue.
38. Mr Henderson also sought to rely on a general principle, as stated in his skeleton argument:

"The starting point is that income tax is a tax on income, and its corollary, that in the absence of express provision payments of a capital nature may not be deducted from income."

For this he relied on the judgment of Sir Wilfrid Greene MR in IRC v British Salmson Aero Engines Ltd [1938] 2KB 482, 498. Again, I do not, with respect, find that judgment of any assistance in the present case. It was concerned with the application of specific provisions of the Income Tax Acts to royalty payments, and the statements of principle were wholly understandable in that context, particularly having regard to the express prohibitions in the provisions relating to income tax of deductions of a capital nature. We are concerned with a wholly different statutory context, concerned with a tax on "profits" as defined for the purpose of corporation tax, which are not confined to income, and with a section which contains no reference to any distinction between capital and income.

39. Sir Wilfrid's judgment in that case is perhaps better known for his reference to the notorious difficulty of drawing a clear line between the two. As he said:

"There have been many cases which fall on the border-line. Indeed, in many cases it is almost true that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons. But that class of questions is a notorious one, and has been so for many years." (p 498)

Unless forced to do so, I would be reluctant to assume that the legislature intended such an uncertain distinction to be introduced into the present debate. (I note in passing that the current Finance Bill apparently seeks to introduce such a distinction into section 75. That may pose problems for the future, but it casts no light on the issues before us.)

40. Differing views on the point were expressed at first instance before the Sun Life case. In London County Freehold and Leasehold Properties Ltd v Sweet (1942) 24 TC 412, it was held that expenditure by a property company on the issue of new debenture stock was not "expenses of management" because raising capital was not part of the business of acquiring and managing property. The Commissioners had also rejected the claim on the grounds that the payments were "disbursements of capital". Macnaghten J said that whether they were disbursements of capital is "immaterial...The question is whether they were expenses of management…" (p 416). On the other hand, in Golder's case (above, at p 270), Croom-Johnson J said:

"… the notion behind this Section may be thought to be that the expenditure is something which if you were looking at the profits and gains under Schedule D would be deductible as a sum of money wholly and exclusive expended for the purpose of making profits and gains, within Rule 3 of Cases I and II of Schedule D, and accordingly that any expenditure partaking of a capital nature is not aimed at by the Section."

Although he found that point "rather attractive", he did not find it necessary to express an opinion on it because he did not in any event regard brokerage and stamp duty as expenses of management within the ordinary meaning of that term. Nor did he refer in terms to the contrary opinion of Macnaghten J. The Court of Appeal made no comment on this point.

41. In Sun Life, the issue did not arise directly because the investments were not fixed investments, but part of the stock-in-trade of the society. It is noteworthy, however, that Romer LJ saw no practical distinction between the two cases:

"It is just as much part of the day-to-day business of an investment company to purchase and change the investments which represent its capital; and it appears to me that the question whether that capital is fixed or circulating is as immaterial to the present issue as is the difference in the purpose which each company may have in mind when investing or reinvesting in stocks or shares." ([1956] Ch at p 550)

42. In the House of Lords, the Revenue in argument appears to have accepted the view of Macnaghten J. The submissions of the Attorney-General, as recorded, included the following:

"If it were possible to have a capital expense of management (which is doubtful), there would be nothing to exclude it…

If the expression 'expenses of management' is given its natural meaning, it is unnecessary to consider whether any particular expense is capital or not. The words must be given their ordinary meaning without a gloss." (p 190)

43. Of their Lordships, only Viscount Simonds mentioned this point. Referring to Golder's case he said:

"It was suggested that the decision could be justified on a ground not present in the instant case, viz.: that the payments there made had the quality of capital expenditure. It may be so, but that was not the ground of the decision…" (p 199)

Mr Henderson relies on that passage as showing, at least, that he regarded the issue as open to argument. However, later on the same page, he approved the comments of Romer LJ as to the lack of any practical distinction between the character of the disbursements in the two types of case.

44. Again it is a short point. In agreement with Patten J, I see no reason to read words into the statute which are not there. Indeed, I am content to adopt the way the matter was put by the Attorney-General in Sun Life. Although this involves differing from the majority in Hibernian, the arguments seem to have been put somewhat differently, and in any event the point was not part of the essential reasoning. On this point, I prefer respectfully the approach of Barron J.
45. I am unimpressed by Mr Henderson's protest that this may result in more favourable treatment in some respects for investment companies than trading companies, and that this goes beyond the original purpose of the provision. Mr Prosser urges us not to look behind the clear words of the 1988 Act, but I am not in any event persuaded that doing so assists Mr Henderson's argument. It may well have been thought (in line with what Romer LJ said in Sun Life) that, in a section dealing with both life assurance societies and investment companies, a distinction between different types of investment based on the capital/revenue test was unrealistic. However that may be, the legislature clearly decided not to adopt the language of the provisions governing trading companies. They adopted a different test. Whether that is more or less favourable to investment companies in particular cases is beside the point.

Conclusion

46. For these reasons, I agree, respectfully, with the judge's conclusion and would dismiss the appeal.

Lord Justice Chadwick

47. I agree.

The Vice-Chancellor

48. I also agree.
Order: Appeal dismissed; appellant do pay respondents costs of the appeal on the standard basis, such costs to be assessed if not agreed. (Order does not form part of the approved judgment)