Hibernian Insurance Company Ltd. v. MacUimis [2000] IESC 41 (20th January, 2000)

Judgment of Mr Justice Francis D Murphy delivered the 20th day of January 2000 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 _____________________ page break _____________________ of investments and the principal part of its income was derived from the making of such investments. That business required the maintenance and evaluation of the existing investments of the Group and the evaluation of potential investment opportunities. 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 -2- _____________________ page break _____________________ the Inspector of Taxes it was appealed to the Circuit Court in Dublin where Judge Devally found against Hibernian and in favour of the Inspector expressing his views in the following terms:- ‘A four year period of intense and sustained research and consultation took place between 1986 and 1990 which lam unable to classify or describe as management, either in the generally accepted sense of the term or within the thrust or context of the reference to which I have been directed and the evidence which I have heard. I believe that the £404,720, the subject of the claim, was expended in looking at projects which I would regard as being in the category of mergers/takeovers and would be in the category of capital expenditure.” 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. 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. (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:- -3- _____________________ page break _____________________ “(B) The business of the Group consisted wholly or mainly in the making of investments and the principal part of its income has been derived from the making of investments. The Group’s business of making investments required:- (I) the maintaining and evaluating of its existing investments; and (II) evaluating potential investment opportunities. (F) The business of the Group as managed by the Board of Directors which in the year ended the 31 December 1990 comprised Mr Eamon Walsh, Group Chief Executive and other executive and non executive directors. In practice, the function of management was delegated to a subcommittee of the Board which then procured the necessary appraisal skills and advice from professional experts, both internally and within the Group structure and also externally. (H).... The process [of evaluating potential investment opportunities] required an active role for the management beginning with the identification of possible acquisitions, setting the evaluation process in train, co-ordinating the efforts of the management team and the professional advisors involved in considering the acquisition, investigating the possible sources of finance and deciding how the investment would fit in with the Group’s current portfolio of investments. At any stage the process could be discontinued whether due to the investment turning out to be unsuitable, the breakdown in negotiations or otherwise.” -4- _____________________ page break _____________________ 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:- “ Investment Bank of Ireland (“IBI”) 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. Coopers & Lybrand - Vimar 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. -5- _____________________ page break _____________________ William Fry - Vimar 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. Other Costs ... In January of 1990, it was agreed in principle to proceed with an offer for an 80% holding in Viamar subject to satisfactory finalisation of their 1989 trading results. It subsequently emerged that their 1989 trading was significantly worse than had been anticipated and a decision was taken not to proceed.” 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. The phrase “expenses of management” was introduced into the income tax code by the Finance Act, 1915, sections 41(1) and 21(2). Those sections were subsequently repealed by the Income Tax Act, 1918, but re-enacted by s.33 thereof. As some of the authorities cited to this Court concerned the interpretation and application of that section it is appropriate to quote the material parts thereof as follows:- -6- _____________________ page break _____________________ “33 (1) Where an assurance company carrying on life assurance business, or any company whose business consists mainly in the making of investments, and the principal part of whose income is derived therefrom, or any savings bank or other bank for savings, claims and proves to the satisfaction of the special commissioners that, for any year of assessment, it has been charged to tax by deduction or otherwise, and has not been charged in respect of its profits in accordance with the rules applicable to Case figure 1 of Schedule D, the company or bank shall be entitled to repayment of so much of the tax paid by it as is equal to the amount of the tax on any sums disbursed as expenses of management (including commissions) for that year: Provided that - (a) relief shall not be given under this section so as to make the tax paid by the company or bank less than the tax which would have been paid if the profits had been charged in accordance with the said rules; and (b) ... (c) ... (2) ... (3) A company or bank shall not be entitled to any relief under this section in respect of any expenses as to which relief may be claimed or allowed under rules 7 and 8 of No. V of Schedule A.” -7- _____________________ page break _____________________ 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. 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. (6) defines an investment company as meaning:- any company whose business consists wholly or mainly in the making of investments, and the principal part of whose income is derived therefrom, but includes any savings bank or other bank for savings.” 15. The material provisions of s. 15 are contained in subsection 1 thereof which is as follows:- “15(1) In computing for purposes of corporation tax the total profits for any accounting period of an investment company resident in the State there shall be deducted any sums disbursed on or after the 6th day of April, 1976, as expenses of management (including commissions) for that period, except any such expenses as are deductible in computing income for the purposes of Case V of Schedule D: -8- _____________________ page break _____________________ Provided that there shall be deducted from the amount treated as expenses of management the amount of any income derived from sources not charged to tax, other than franked investment income.” 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:- “11(1) Except as otherwise provided by this Act or any other enactment relating to income tax or corporation tax, the amount of any income shall for purposes of corporation tax be computed in accordance with income tax principles, all questions as to the amounts which are or are not to be taken into account as income, or in computing income, or charged to tax as a person ‘s income, or as to the time when any such amount is to be treated as arising, being determined in accordance with income tax law and practice as if accounting periods were years of assessment.” 17. Section 14(1) dealt with deductions (and additions) in the computation of profits in respect of capital allowances in the following terms:- “In computing for purposes of corporation tax a company ‘s profits for any accounting period there shall be made in accordance with this section all such deductions and additions as are required to give effect to the provisions of the Income Tax Acts which relate to allowances (including investment allowances) and charges in respect of capital expenditure, as those provisions are applied by this Act.” -9- _____________________ page break _____________________ 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:- “An investment holding company can recover tax on it management expenses including office expenses, salaries and directors fees where an individual or trustee holding investments has no similar rights.” 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. -10- _____________________ page break _____________________ 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:- “If the purchase is part of the ordinary day to day business of the Society it is difficult at first sight to see why something which the Society has to pay in order to carry out the purchase is not an expense of the ordinary running of the Society ‘s business. ft is argued that the expenses of management end when a decision is made to buy, and thus that the cost of stamp or brokerage which takes place later is not an expense of management. That cannot be right, for someone on behalf of the Society has to receive and to check the securities and the broker is under the duty of seeing to the transfers and forwarding the securities. That is a part of his work in return for the remuneration he receives by way of brokerage or commission. ft seems to me to be -11- _____________________ page break _____________________ impossible to split the transaction in this way; to do so is to depart from common sense.” 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):- “The case is thus put by the learned Lord Justice as cogently as it can be put. But it is, I think, vitiated by the initial mistake that he regards ‘management’ as equivalent to running the company ‘s business in a wide and almost colloquial sense. If it had this meaning, it would cover the price of the investment equally with the brokerage and the stamp duties. But ex concessis it does not, and I would say with the greatest respect that it would be to depart from common sense to treat the three constituents of the cost of purchase differently.” 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:- -12- _____________________ page break _____________________ “I do not think that it is possible to define precisely what is meant by ‘expenses of management’. ft 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. I cannot accept the argument for the Appellants that every sum spent by the company is an expense of management unless it can be brought within certain limited classes of expenditure which are admittedly not expenses of management, such as payments to policy holders and the purchase price of investments acquired by the company. ft is not enough to show negatively that a particular sum does not fall into any other class; it must be shown positively that it ought to be regarded as an expense of management. But 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 expense of management. The collocation of the words ‘(including commissions) ‘shows that a sum can be an expenses of management whether the work in question is done by the company ‘s staff or done by someone else on a commission basis, and it must follow that if work of an appropriate kind is done for a fixed fee that fee may also be an expense of management. Admittedly the price paid for an investment is not an expense of management, and Counsel for the Appellants did not and could not reasonably withhold the admission that a sum spent on enhancing the value of a trading asset is not an expense of management. I do not think that it is practicable or reasonable to draw a rigid line -13- _____________________ page break _____________________ between payments which enhance the value of an asset and payments which do not ft 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.” 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:- “It is in fact very clear that an expression like ‘expenses of management’ is insusceptible of precise definition and that there must be a borderline or twilight area in which a conclusion one way or the other could easily be reached. That does not mean that there is not on either side of it an area of sunshine and of darkness.” 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. -14- _____________________ page break _____________________ 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:- “He [counsel for the appellant] says these expenses were ‘expenses of management’ because they were expenses incurred by the management in carrying out the business of the Company. That seems to me a totally different thing. What we are concerned with here is the expenses of management, not expenses incurred by the management in carrying out the proper business of the Company.” 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. -15- _____________________ page break _____________________ 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:- “In the present case it seems to me that the guarantee had to be obtained by the company from its parent in order to raise the money to invest by advances to the other United Kingdom subsidiaries and the company had to agree to pay the parent the continuing commission in order to obtain the guarantee and therefore realistically as part of the price of raising the money. The commission cannot be severed from the cost of acquisition and so equally the annual payments of the commission cannot be severed from the cost of acquisition. ft is unreal to regard each annual payment as merely a payment for the current year or the current six months to keep the guarantee on foot as part of the continuing management of the company ‘s business, because the whole obligation in respect of the loan stock and the obligation of the guarantee was undertaken once and for all when the stock was raised and the guarantee was entered into, and, as shown by the letter from the parent company, the commission was charged by the parent company for giving the guarantee. ft all relates back to the giving of the guarantee.” Stephen Court Ltd . v. JA Browne [1984] IRLM 231 did involve the consideration of the concept of “management” but only in the context of the Income Tax Act, 1967 , s.8 (5)(d), which provided for the deduction from rents of certain payments including:- -16- _____________________ page break _____________________ “(d) the cost of maintenance, repairs, insurance and management of the premises borne by the person chargeable and relating to and constituting an expense of the transaction or transactions under which the rents or receipts were received, not being an expense of a capital nature.” 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 of the 1967 Act in a very different context from that in which it appears in s. 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 -17- _____________________ page break _____________________ expenses which the Group might have incurred in respect of any of the potential investments subsequent to the date upon which the Board of Directors decided to purchase the particular investment would qualify as expenses of management but all expenditure prior to that date would so qualify. The Respondent on the other hand contended that all of the expenses of investigating and evaluating the potential investments were so closely linked with the proposed purchase that they would fall to be considered as the cost of purchase if the transactions had proceeded. The Respondent contended that the character of the expenditure could not alter depending upon whether the purchase was successful or not. Moreover, the Respondent argued, the relationship between the expenditure which was incurred and the nature of the asset which would have been acquired if the transaction had proceeded brought the expenditure into the category of capital and as such was not deductible in calculating profits whatever other characteristics it might have possessed. 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 -18- _____________________ page break _____________________ activities. The other judges in the Sun Life Assurance Case placed a different emphasis on the relationship between expenditure and acquisition. Their views might be summarised by saying that a particular expenditure could not constitute an expense of management if it formed an “integral part” of the acquisition of an asset. Whilst taxes and duties imposed on transactions are inescapably associated with such transactions and professional advice in relation thereto are, in theory at any rate, optional, it would be impossible in practice to suggest that the legal costs of, say, investigating the title to land the subject matter of a contract for sale or professional advice in relation to a “due diligence” investigation for a take over could be dispensed with. Indeed the Appellants would not suggest otherwise. The argument on their behalf is that such costs and expenses are deductible when incurred before the decision to purchase but not if incurred after it. 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. The problems to which these variations and refinements could give rise is exemplified by the present case. In the findings made by Judge Devally and quoted above in relation to the fees paid to the Investment Bank of Ireland, it is explained that the Group made not one but two offers for ICI, neither of which was ultimately accepted. Those offers would appear to indicate that the time had been reached “when a decision was made by the Group to proceed with the acquisition” . In relation to -19- _____________________ page break _____________________ 33. Vimar, the lawyers actually drafted the purchase agreement. The findings made by the Circuit Court Judge contained the following statement:- “In January of 1990, it was agreed in principle to proceed with an offer for and 80% holding in Vimar subject to satisfactory finalisation of their 1989 trading results. ft subsequently emerged that their 1989 trading was significantly worse than had been anticipated and a decision was taken not to proceed.” 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 -20- _____________________ page break _____________________ more particularly that s. of the 1976 Act authorised the deduction of management expenses, whatever their nature, in computing profits. The Group accepted that “income” for the purposes of corporation tax must, in general, be determined in accordance with the principles of income tax law and practice. The Group pointed out that the requirement is to be applied “except as otherwise provided by this Act” . Whilst the application of income tax principles would exclude capital payments from deduction in computing income the Group argues that s. expressly and unequivocally directed the deduction of sums dispersed “as expenses of management” without reference to any other quality or characteristic of the disbursement. It was contended that this amounted to a statutory exception from s. of the 1976 Act. That is a proposition which I do not accept. 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. 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. -21- _____________________ page break _____________________ In Southwell . v. Savill Brothers Ltd [1901] 2 KB 349 a brewing company was in the habit of making applications to licensing justices for new licenses in respect of premises owned by it. As the licensing justices sometimes required the applicant to surrender an existing licence the brewers made a practice of paying annual sums to the holders of certain existing licenses in return for the right to call for a surrender of such licenses in case they were required by the Justices. The brewery accepted that where an application for a new licence was successful no part of the annual payments were deductible. In that event the payments were treated as capital. They contended, however, that where the licence was refused they should be allowed to deduct from their profits the annual expenditure. Kennedy J. in delivering his judgment disallowing the deduction said (at page 353):- “The fact that the expenditure does not turn out to be a profitable investment cannot alter the nature of the expenditure, or make it any less an investment of capital.” Similarly in Sargeant (H. M Inspector of Taxes) .v. Eayrs 48 TC 573 Goff J. held that a tax payer who carried on a farming business in England and incurred costs in travelling to Australia with a view to buying a farm was not entitled to deduct the costs in computing his taxable income. The costs constituted capital expenses even though no farm was ever bought. The judgment of Goff J. was summarised (at page 578) in the following terms:- “In the result the business was not extended, because he found prices in Australia prohibitive, and therefore the expenditure was abortive. But Lothian Chemical Company Ltd . v. Rogers (1926) 11 T. C. 508 shows, as one would expect, that that is -22- _____________________ page break _____________________ an irrelevant consideration. The expenditure does not change its nature according to whether it be successful or unsuccessful.” 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. -23- _____________________ page break _____________________ Hamilton C. J. Murphy J. Barron J. 307/98 THE SUPREME COURT HIBERNIAN INSURANCE COMPANY LIMITED Appellant v MAC UIMIS (INSPECTOR OF TAXES) Respondent JUDGMENT delivered on the 20th day of January 2000 by BARRON J. 39. The appellant is an investment company within the meaning of s. 15 of Corporation Tax Act, 1976 . S. 15 (1) is as follows: _____________________ page break _____________________ (2) “In computing for purposes of corporation tax the total profits for any accounting period of an investment company resident in the State there shall be deducted any sums disbursed on or after the 6th day of April, 1976, as expenses of management (including commissions) for that period, except any such expenses as are deductible in computing income for the purposes of Case V of Schedule D: Provided that there shall be deducted from the amount treated as expenses of management the amount of any income derived from sources not charged to tax, other than franked investment income.” 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. _____________________ page break _____________________ (3) 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 _____________________ page break _____________________ (4) capital and revenue and that only revenue expenses should be regarded as expenses of management. The respondent further submits that management in this sense only involves management of its existing investments and taking such steps as may be necessary to obtain the best return from such investments. 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. _____________________ page break _____________________ (5) 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: “.. and we so hold, that 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 _____________________ page break _____________________ (6) moneys admittedly laid out by the Society or 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. The fact that the purchase is necessarily made in the ordinary course of carrying on the Society’s business does not of itself determine whether the sums in question are expenses of management of that business. 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. We hold also that the brokerage and stamp duties paid by the Society on the sale of an investment are not expenses of management.” 46. At p. 356 he quoted the views of Singleton L. J. to the contrary where the latter said: _____________________ page break _____________________ (7) “If the purchase is part of the ordinary day-to-day business of the Society it is difficult at first sight to see why something which the Society has to pay in order to carry out the purchase is not an expense of the ordinary running of the Society’s business. It is argued that the expenses of management end when a decision is made to buy, and thus that the cost of stamp or brokerage which takes place later is not an expense of management. That cannot be right, for someone on behalf of the Society has to receive and to check the securities and the broker is under the duty of seeing to the transfers and forwarding the securities. That is part of his work in return for the remuneration he receives by way of brokerage or commission. It seems to me to be impossible to split up the transaction in this way; to do so is to depart from common sense.” _____________________ page break _____________________ (8) 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 _____________________ page break _____________________ (9) 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. In the Sun Life case Lord Somervell of Harrow referred to the brokerage and stamp duty in that case as being a direct and necessary part of the cost of a normal method of purchase. In regard to the two views cited by Viscount Simonds, I prefer the test formulated by the Revenue that such expenses were not only specifically referable to, but only incurred by reason of the purchase and so could not have been expenses of management. It seems to me that the fact that the duties of management still existed in relation to a purchase is insufficient as a test of whether expenditure comes within the expression “expenses of management” . _____________________ page break _____________________ (10) 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.: “An investment holding company can recover tax on its management expenses including office expenses, salaries and directors ‘fees where an individual or trustee holding investments has no similar rights”. 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 _____________________ page break _____________________ (11) the income generated by the fund. Such costs are the real costs of management. In the instant case, the proposed investments were never made, but that did not change the nature of what was being done. The decision which it is submitted creates the dividing line between costs of management and costs of acquisition was in fact taken before any other disputed expenditure was incurred. 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. 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. _____________________ page break _____________________ (12) 53. I would dismiss the appeal. © 2000 Irish Supreme Court BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII