Supreme Court of Ireland Decisions

1. This appeal raises the issue whether certain disbursements by Hibernian Group Plc (the Group) and surrendered by it to Hibernian Insurance Company Ltd (Hibernian) constitute management expenses within the meaning of s. 15 of the Corporation Tax Act, 1976, and as such deductible in computing liability to Corporation Tax.

2. The issue arises in this way. The Group was incorporated on the 7th April, 1986, with the object of facilitating the expansion of life and general insurance business carried on through subsidiary companies both by organic growth and through investments when suitable opportunities arose. By its memorandum the Group was authorised to carry on the business of an investment company and in fact its business consisted wholly or mainly in the making

3. In May 1986 the Group acquired the entire share holding in Hibernian. On the 21st August 1987 the Group acquired 50% of the shares in Hibernian Life Association. On the 20th of December 1988 the Group incorporated Hibernian Reinsurance and on the 29th of June 1989 Hibernian Investment Managers was incorporated. In the period between 1986 and 1990 three significant investment opportunities arose, two in Ireland, namely, PMPA and ICI and one in Spain, namely, Vimar. These were insurance companies the purchase of shares in which was explored and evaluated by or on behalf of the Group. In so doing the Group incurred expenditure of £404,720 largely in respect of advice from investment bankers and leading accountants as well as legal advice. In the event none of the three companies was ultimately acquired by the Group.

4. The Group contended that the expenditure constituted management expenses within the meaning of s. 15. It was not disputed that the Group was entitled and did surrender to Hibernian those expenses pursuant to s. 107 of the Corporation Tax Act, 1976. Furthermore, it was claimed by the Group, and conceded by the Inspector, that the Group was at all material times an investment company within the meaning and for the purposes of s. 15 aforesaid. Accordingly, the expenditure totalling £404,720 would have been available to Hibernian as a deduction in computing its total profits for the purposes of corporation tax if and to the extent that such disbursements constituted “expenses of management” within the meaning of that section. The claim by the Group to such a deduction having been refused by

5. The learned Judge then, at the request of Hibernian, stated a case for the opinion of the High Court under s.428 of the Income Tax Act, 1967, as applied by s. 146 of the Corporation Tax Act, 1976. The question on which the opinion of the Court was sought was whether the Judge was correct in holding that the expenditures aforesaid were not expenses of management within the meaning of s. 15 (1) of the Corporation Tax Act, 1976. In the body of the Case Stated the Judge of the Circuit Court set out with commendable clarity the facts which he had found or were admitted in relation to the manner in which the business of the Group was managed and in the schedule to the Case Stated he set out details of the services rendered in respect of the payments claimed to be expenses of management.

6. The findings and admissions in relation to the business of the company are set out in lettered paragraphs of which the most important were as follows:-

7. Particulars set out in the Schedule in the Case Stated in numbered paragraphs relating to the fees or costs paid for expert advice in relation to potential investments included the following:-

8. IBI were retained to assist management in providing critical appraisals and advice to the board of the Group on the proposed investments in ICI and PMPA. Detailed consultation took place between the Group’s management and IBI and detailed reports were prepared by IBI for the Group board. Both of these companies were very sizeable operators in the Irish market and all of the enquiries referred to in the opening paragraphs above had to be carried out. This involved a very substantial amount of collaboration with the Group’s management. In the case of PMPA, circumstances were ‘such that a bid did not emerge. In the case of ICI, an offer was made and this was not accepted. The Group was invited to make a second offer which was also ultimately not accepted. In both cases, the sale involved purchase of shares in a new company which would have become a subsidiary of the Group.

9. These fees were incurred for detailed audit and evaluation work carried out by Coopers & Lybrand’s Madrid office on this potential Spanish general insurance acquisition. This work was carried out at an early stage to enable a view to be formed on the state of work and administration in the company, its net asset value and its potential value and generally appraise its suitability and value in an investment context. In addition, taxation and legal structure aspects of such an investment were considered.

10. These fees were incurred in investigating and evaluating the proposal to acquire the Spanish company Vimar Sequros y Reaseguros S.A., drafting the purchase agreement which could be used if the transaction proceeded and all other work and correspondence.

11. Ms Justice Carroll answered the question raised in the Case Stated in the affirmative for the reasons set out in a comprehensive judgment delivered by her on the 25th day of July 1997. It is from that judgment and the order made thereon that Hibernian appeals to this Court.

12. Section 33 aforesaid remained part of the system under which the liability of the companies to which it applied was determined for the purposes of Income Tax from 1918 and Corporation Profits Tax from 1920 until the assessment of companies to Income Tax was terminated and Corporation Profits Tax abolished by the Corporation Tax Act, 1976.

13. However, in computing the corporation tax chargeable under that Act on the “profits” of a company a similar, though not identical, relief was granted by s. 15 of the 1976 Act in respect of management expenses. That Act made separate provision for life assurance companies (s.33) and investment companies (s. 15).

14. The Corporation Tax Act, 1976, s. 15 (6) defines an investment company as meaning:-

15. The material provisions of s. 15 are contained in subsection 1 thereof which is as follows:-

16. Profits in general are required to be determined in accordance with the provisions of s. 11(1) of the Act of 1976 on the basis provided therein, namely:-

17. Section 14(1) dealt with deductions (and additions) in the computation of profits in respect of capital allowances in the following terms:-

18. Section 14 then goes on to deal with the manner in which such allowances are applied for the purposes of corporation tax.

19. Having regard to the fact that “expenses of management” may be deductible in computing the liability to tax of one type or another of a variety of companies it is surprising how few decisions have been reported in relation to the meaning of that expression. Helpful observations offered by leading authors do not appear to be supported by authority. In Wheatcroft’s Law of Income Tax, Sur Tax and Profits Tax 1952 Edition at paragraph 1/688 the author says:-

20. Again, Messrs Brennan, Moore & Carr in their book on Corporation Tax published by the Institute of Taxation in Ireland provide examples of management expenses which include rent, stationery, electricity, secretarial expenses and directors salaries. That analysis, apparently based on the function of management as opposed to other aspects of commercial enterprise, does not appear to have been pursued in the authorities to which this Court was referred.

21. Perhaps the most important single decision was one relied on in this Court by both the Appellant and the Respondent, namely, the Sun Life Assurance Society .v. Davidson (H.M Inspector of Taxes) 37 TC 330 (the Sun Life Case). The plaintiff in that case was, as its name indicates, a life assurance company. It claimed relief from tax in respect of two categories of disbursements: first, brokerage charges and secondly stamp duties, arguing that those disbursements constituted expenses of management within the meaning of s.33 of the Income Tax Act, 1918. Harman J in the High Court and all of the Judges of the Court of Appeal decided that neither category of disbursement constituted expenses of management. They did so because they felt bound by the decision of the Court of Appeal in Capital & National Trust Ltd .v. Golder 31 TC 265 (Golder’s case). The Judges of the Court of Appeal believed that “expenses of management” should be given a wide meaning - perhaps a very wide meaning - and for that reason were reluctant to disallow the two items in issue. Singleton U explained his views (at page 346) in the following terms:-

22. The House of Lords upheld the unanimous conclusion of that Court of Appeal and sought to lay to rest the misgiving which the members of the Court had felt in arriving at their decisions. In particular, Viscount Simons in the House of Lords, having quoted the passage already cited from the judgment of Singleton U, went on to say (at page 357):-

23. On the other hand, Lord Reid made it clear that expenses of management were not confined to expenses involved in taking managerial decisions nor do they exclude expenses involved in carrying out such decisions in individual cases (page 359). The passage cited from the judgment of Lord Reid and relied on in most subsequent cases was expressed (at page 360) in the following terms:-

24. On those criteria a particular disbursement would fail to qualify for deduction either because it could not be severed from the cost of acquisition of an asset or, if it could be so severed, it could not properly be regarded as an expense of management.

25. Whilst it is easy to accept, as Lord Reid pointed out, that expenses of management cannot be defined with precision, one might have thought the general concept of management and the expenses thereof could be identified with some measure of clarity. I would have hoped that Viscount Simons was correct when he said at page 354:-

26. Unfortunately very little guidance is available as to where these areas of sunshine and darkness may be found. Certainly it would appear that the area of twilight is extensive.

27. The decision of the House of Lords in that case affirming the hesitant decision of the Court of Appeal therein effectively subsumed the judgment in Golder’s Case. There are, however, two points of note remaining from the earlier case. First, to note that that judgment was expressly directed to an investment company rather than an assurance company and, secondly, the simple but helpful reminder provided by Tucker U (at page 273 of the report) in the following terms:-

28. The decision in Hoechst Finance Ltd . v. Gumbrell (Inspector of Taxes) [1981] STC 127 is helpful in that it examines the phrase “expenses of management” in the context of s.304 (1) of the Income and Corporation Tax Act, 1970, which is similar in its concept and its terms to s. 15 of our 1976 Act. In that case the taxpayer company was incorporated to raise and provide finance for its fellow subsidiary companies. It raised a substantial loan on the Stock Exchange but only on terms that the parent company guaranteed repayment thereof. For so doing the parent company charged a commission of .25% per annum on the amount of the loan outstanding for the time being. The tax payer contended that the commission so payable was deductible “as an expense of management” . Mr Justice Nourse allowed that claim but his decision was unanimously overruled by the Court of Appeal [1983] STC 150.

29. A passage from the judgment of Dillon LJ (at page 155) is material for the analysis which it provides both in relation to expenses of management and expenditure of a capital nature. He said:-

30. Whilst McWilliam J. did analyse and derive some assistance from the judgments in the Sun Life Case, Golder’s Case and Hoechst Finance it is clear that the word “management” was used in s.8 1 of the 1967 Act in a very different context from that in which it appears in s. 15 of the Corporation Tax Act. First, it appears in the context with the words “maintenance repairs and insurance” and, secondly, it is expressly concerned with “management of the premises” . In the circumstances I think there is little assistance to be derived from that judgment in determining the issues which arise in the present case. I would, however, note that Mc William J approved, in my view correctly, the observation of Lord Reid that if expenses incurred for work performed by a member of the staff of a business would be classed as management expenses, such expenses would not cease to be management expenses because independent qualified persons were employed for the same work.

31. In Golder’s Case it was conceded that the cost of purchasing an investment which formed part of the current or circulating capital of the tax payer company was not and could not be an expense of management. If that concession was correctly made - and I believe that it was - a fortiori expenditure incurred in purchasing a capital asset would not qualify as expenses of management. In the present case the Appellant did not in the High Court, nor does he in this Court, contend otherwise. The essence of his argument is, and has been, that no costs or

32. Unquestionably the Respondent is correct is saying that different judges, and in particular Lord Reid in the Sun Life Assurance Case, had referred to the severability of certain items from the cost of purchase. Other judges spoke of “divorcing” particular sums from the price paid or the amount received when changes took place in the investments of a tax payer company. There is no doubt that such distinctions can be made. In fact it must be possible to identify a variety of phases between the stage when one company considers the desirability acquiring all of or a substantial share holding in another company and the ultimate completion of such an acquisition. The question arises, however, as to why one should classify differently work of the same character but carried on in different phases or stages of such an acquisition. Undoubtedly, the Group is entitled to pray in aid the observations of Lord Reid both as to the severability and deductibility of the costs incurred in relation to such

33. Vimar, the lawyers actually drafted the purchase agreement. The findings made by the Circuit Court Judge contained the following statement:-

34. It would seem that even on the test proposed by the Group that at least some of the costs would have been incurred after a decision was made to acquire the shares in question but, more particularly, 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. The relationship between the disputed expenses in the present case and the potential purchases was such as to deprive that expenditure of the character of expenses of management.

35. The Respondent had also disputed the right of the Group to deduct the expenditure incurred in evaluating the putative investments on the ground that such expenditure constituted capital payments and that payments of that character were not deductible in computing profits for corporation tax. The Group denied that the payments were capital in their nature but argued

36. Even allowing for the technical and artificial nature of fiscal legislation it would require the clearest words to justify the inference that the legislature intended to arrive at taxable profits or income for an accounting period by deducting a capital payment from a revenue receipt. It can be done, and is done, in various ways for different capital allowances but I would not infer from the general terms of s. 15 of the 1976 Act that the legislature intended for such a radical change in the concept of profits. If expenses of management constitute capital disbursements they are not, in my view, deductible in computing profits and it may be that the converse is likewise the case: if disbursements constitute capital payments they would not constitute expenses of management. The decided cases tend to support this view.

37. Whether an expenditure incurred in relation to the proposed acquisition of a capital asset would lose the character of a capital payment acquired by association with the purpose for which it was expended has been considered in a number of cases.

38. In my view the very substantial costs incurred by the Group in procuring the expert and specific evaluation of the three investment opportunities referred to in the Case Stated did not constitute management expenses. It is not necessary to make a positive finding as to the category into which the expenditure does fall. I am satisfied, however, that, from the date on which the Group focused its attention on the acquisition of the prospective investments, the expenditure incurred in respect of them would properly have been considered to be costs of acquisition of an investment in the event of the purchase being completed and that it would not have a different characterisation simply because the plans to purchase were frustrated or aborted. In my view Judge Devally was entitled to conclude that the disbursements in question did not constitute management expenses and the learned High Court Judge was correct in deciding that there was ample evidence to justify that conclusion. Accordingly I would dismiss the appeal and affirm the order of the High Court.

39. The appellant is an investment company within the meaning of s. 15 of Corporation Tax Act, 1976. S. 15(1) is as follows:

40. This provision recognises that in the case of investment companies there are expenses which should be allowable against the income from its investments for tax purposes. To this extent the section is a successor of s. 33 of the Income Tax Act, 1918.

41. The issue which arises on this appeal is as to the meaning of the expression “expenses of management” as it occurs in the statutory provision. It is accepted by both parties that these words have no special meaning for the purposes of the Act. Some assistance in their meaning might have been obtained from a consideration of the words “including commissions”, these words clearly indicating that commissions were to be regarded as part of expenses of management. However, no arguments have been addressed to the Court as to the assistance, if any, which might be derived in the interpretation of the words “expenses of management” from the reference to commissions. For the same reasons there is no need to consider what expenses would have been deductible if income was being computed for the purposes of Case V of Schedule D.

42. Counsel for the respondent has submitted that in considering expenses of management one must have regard to the distinction between

43. Counsel for the appellant on the other hand rejects the notion of a division between capital and revenue expenses. He submits that this is a principle relating to the taxation of traders, which is not what is involved in the instant case. He also maintains that management goes beyond the management of existing investments and must include the cost of appraising potential investments. He submits that a line should be drawn when a decision is made either to acquire or to dispose of an investment and that all expenses up to the time of making such a decision are expenses of management.

44. S.33 of the Income Tax Act, 1918 was considered in Sun Life Assurance Society v. Davidson 37 TC 330. The facts in that case were whether or not brokerage and stamp duty incurred on the purchase of shares should be allowed as expenses of management. Two passages from the judgment of Viscount Simonds indicate the differing views as to what expenses should or should not be allowed under the heading “Expenses of Management”.

45. The first is at p. 354 where he quotes a passage from the judgment of the special commissioners in the same case. This passage was as follows:

46. At p. 356 he quoted the views of Singleton L.J. to the contrary where the latter said:

47. In my view, these positions could equally have been taken in relation to the proper construction of the expression “expenses of management” in s. 15 of the 1976 Act.

48. Since an investment company is not being taxed on the basis of being a trading company it seems to me to be inappropriate to consider the distinction between the costs of trading and the costs of obtaining a capital asset. Having regard to what is the purpose of the section it seems to me to be appropriate to consider those expenses which it would be unfair to disallow as against investment income.

49. 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

50. In a sense the issue in the present case is where to draw the line between management on the one hand and investment in the sense of acquisition or disposal on the other. There must be a distinction between the general expenses of management and expenses incurred specifically in relation to a particular investment. The former involves general day to day activity of the company. The latter relax such day to day involvement. This is exemplified by the passage from Wheatcroft’s Law of Income Tax, Surtax and Proper Tax referred to by Murphy J.:

51. What we are dealing with is a privilege granted to an investment company not available to other taxpayers. Tax is paid on the income generated regardless of the cost of administration whether of the fund or of

52. 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.

53. I would dismiss the appeal.