Case No: CH/2002/APP/0908
Neutral Citation Number: [2003] EWHC 1600 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 7th July 2003
Before :
THE HONOURABLE MR JUSTICE PATTEN
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Between :
 	CAMAS PLC	Appellant	
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 	J M ATKINSON
(HM INSPECTOR OF TAXES)	Respondent	
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Kevin Prosser QC and Julian Ghosh (instructed by Freshfields Bruckhaus Deringer) for the Appellant
Launcelot Henderson QC and Christopher Tidmarsh QC (instructed by the Solicitor of Inland Revenue) for the Respondent
Hearing dates : 20th - 21st May 2003
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Approved 

Mr Justice Patten :
Introduction 
 
1.	The issue for decision on this appeal is whether an investment company (as defined by ICTA 1988 s.130) is entitled to deduct the costs and expenses incurred in relation to the takeover of another company as "expenses of management" within the meaning of ICTA 1988 s.75(1), for the purpose of computing its liability to corporation tax. The expenses in question comprise some £583,495 of professional fees incurred in the company’s accounting period to 31st December 1995. Apart from certain sums which were attributable to the cost of obtaining loan finance and therefore deductible under ICTA 1988 s.77, the Inspector refused to allow the deduction of these expenses from the total profits of the company for the relevant period and his refusal was upheld by the Special Commissioners. 
2.	The taxpayer company, Camas Plc ("Camas"), was incorporated on 21st February 1994 and is a listed company. At all times material to this appeal it was the owner of the whole of the issued share capital of Camas Holdings Limited, which in turn held the issued share capital of a number of subsidiary trading companies. The principal activities of these subsidiaries included quarrying, the manufacture of asphalts and pre-cast concrete products used in the construction industry, road-surfacing and associated services. It is agreed that the principal business activity of Camas consisted of holding, directly or indirectly, investments to produce income and/or capital growth, and that it was therefore an investment company within the meaning of ICTA 1988 s.130 at the relevant time. As of 31st December 1995 its investments comprised the whole of the issued share capital of Camas Holdings Limited, loans of some £68m, £18m and £1m to Camas America Inc., Camas Holdings Limited and Camas Overseas Investments Limited respectively, and cash at bank and in hand amounting to £10,221,000. For the accounting period ended 31st December 1995 its income consisted entirely of dividends and interest. 
3.	It is again common ground that the board of Camas was looking to acquire new investments in the same market sector as that in which the group operated. By limiting acquisitions to the same market, the board believed it could save costs and at the same time utilise its own management experience. In pursuit of this policy Camas, in about March 1995, identified Bardon Group Plc ("Bardon") as a possible target for either merger or acquisition. Bardon was also a quoted company and fulfilled the investment criterion of operating in the same industry. It was approximately the same size as Camas and had a market capitalisation as at 1st April 1995 of £209m against that for Camas of £232m. It competed against the Camas Group in the Midlands and the North-west of England. 
4.	In their decision dated 30th September 2002 the Special Commissioners (Mr Stephen Oliver QC and Mr Adrian Shipwright) set out in some detail the various meetings and other events between April and December 1995 in connection with what became known as Project Bardon. In the light of their finding that all the expenditure in issue related to that project, it is unnecessary, I think, for me to do more than to summarise the various stages in the attempt to acquire control of Bardon. Ultimately no merger or acquisition took place, but as I shall explain later in this judgment, that fact in itself cannot alter the correct tax treatment of the relevant expenditure. It is also accepted by the Crown that, if completed, the acquisition of Bardon would have constituted an investment. 
5.	The first important meeting to discuss Project Bardon took place on 28th April 1995 between Mr Shearer, the Chief Executive of Camas, Mr Bailey, the then Director of Finance, and representatives of Schroders, who were the company’s principal City advisers. At this meeting "substantial synergies" were identified between the two businesses, and Schroders presented various merger schedules indicating different ways in which an acquisition or merger could be effected. Following these discussions, re-run schedules were sent to Mr Bailey on 12th May 1995, containing a further range of scenarios. On 23rd August 1995 Mr Shearer had his first meeting with the Chief Executive of Bardon, Mr Tom. It was agreed at that meeting that the Chairman and Chief Executive of Camas and their counterparts at Bardon should meet the following week, early in September. At this meeting there was agreement that the "industrial logic" for a merger existed and was sound, but Bardon wished to review the matter in mid-September, because it anticipated that there would be a substantial rise by then in the Bardon share-price. 
6.	The board of Camas met on 14th September 1995. Mr Shearer reported on the progress of Project Bardon and indicated that there would be further discussion on the matter at a planning meeting to be held the following day. At the same meeting a paper from Schroders was presented, which made a comparison between the merits of a recommended offer and merger, and between a recommended offer and a hostile bid. On 29th September Schroders wrote to Camas advising that, for tactical reasons, Mr Shearer should make it clear to Bardon that a merger was the strongly preferred option. As it happened, the Bardon share-price fell from 34p on 14th September 1995 to 27p on 26th October. This was thought to offer a window of opportunity to Camas, and at a board meeting held on 26th October it was decided that an acquisition by recommended offer was preferable to the possibility of merger. A further meeting was arranged with Schroders for the following week and at the same time the board decided to instruct external advisers to commence what was described as "background technical work". A paper on Project Bardon was to be prepared for consideration at the next board meeting, which was scheduled for 16th November. 
7.	The paper which was presented at this board meeting recommended that the acquisition of Bardon should be pursued, and the board of Camas supported this proposal. It was agreed that the Chairman and Chief Executive should meet their opposite numbers at Bardon on 20th November in order to discuss a recommended bid. It was thought that this could be at a price of about 40p per share. If agreement could be reached, then the proposal would be put to the Camas board for approval. If it was not possible to agree the terms of a recommended bid, then further advice would be taken about the possibility of making a unilateral bid for Bardon. Given that an offer by Camas for Bardon was now likely, each of the Camas directors received, at Schroders’ request, a copy of a "Memorandum on Responsibilities of Directors" prepared by Schroders, which set out the principal responsibilities of the directors in the event of a public offer being made to acquire the Bardon shares. The memorandum dealt with such matters as Stock Exchange restrictions on share-dealings during the period of a bid. 
8.	The Chairmen and Chief Executives of the two companies met on 20th November, when Camas’s representatives made it clear that they were no longer talking about a merger and hoped to be able to agree on a recommended offer. Price was discussed and the Chief Executive of Camas explained that a price in the range of 35/37p per share was appropriate. This is described in the minute of a later board meeting of 30th November 1995 as an "indicative offer". The Bardon representatives said that their next board meeting was fixed for 14th December 1995 and that it was unlikely that the offer would be discussed by that board before then. Following this, the Chairman and Chief Executive of Camas met Schroders on 29th November. There was to be a board meeting the following day, and it was decided to seek the board’s approval at that meeting for the making of what were described as "twin track" preparations, that would enable a bid to proceed on either a friendly or a hostile basis. These preparations would include approaching the banks on 1st December for finance for the acquisition and for subsequent working capital in relation to the combined groups. Bank financing of this kind was likely to take two weeks to put into place. These matters were reported to the Camas board the following day, when it was agreed that the Chairman and Chief Executive should meet with external advisers on the following day (1st December 1995) and that a further board meeting should be arranged for 7th December, to which the advisers would be invited. 
9.	The board meeting of 7th December was attended by Schroders, Warburgs (Camas’s brokers) and Clifford Chance. Schroders presented a paper and the board resolved to continue with the progression of Project Bardon. The Chairman undertook to arrange a further meeting with Bardon, with a view to securing an agreed bid. The purpose of Schroders’ paper, as set out on its opening page, was to brief the board prior to its deciding how to pursue the acquisition. This included a consideration of the circumstances in which Camas would be prepared to make a unilateral offer for Bardon and subsequent questions such as the management of the enlarged group. By this time KPMG had themselves prepared a draft report dated 28th November, comparing financial information on the two companies, and on 12th December they produced draft reports on working capital and on "synergies". 
10.	On 14th December the Camas board met again. The meeting was attended by Schroders, Warburgs and Clifford Chance. It was resolved to have further discussions with Bardon and an "Offers Committee" consisting of three directors, including the Chairman and Chief Executive, was established. The board also discussed the question of funding. It considered a draft bank facility dated 12th December 1995, having been reminded that, in connection with the proposed acquisition, Camas was required to have access to the necessary funding on a certain funds basis. The draft agreement was approved and a "Banking Committee" was established to deal with all matters relating to the facility agreement. At this meeting Warburgs also produced a report which listed and analysed each of Bardon’s shareholders, describing, in the case of the majority shareholders, Warburgs’ perception of their likely reaction to a hostile bid by Camas. 
11.	On 19th 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. 
12.	At 1.30pm on 20th 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, 21st 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. 
The Fees
13.	As I have already indicated, the professional fees (excluding VAT) disbursed by Camas totalled £583,495. Part of the sums disbursed to Schroders and Clifford Chance have been accepted as allowable as the incidental costs of loan finance. The balance of £509,695 remains in dispute. In Appendix I to the agreed statement of facts, the fees disbursed are set out as follows: 
Schroders 185,000
Warburgs 25,531
KPMG 226,684
Clifford Chance 121,753
Shearman & Sterling 11,878
FPC Greenaway 12,649
________ 
£583,495
Less: Proportion of fees which have been 
agreed as incidental costs of loan finance
Schroders (40,000)
Clifford Chance (33,800)
_________
£509,695
_________
14.	Schroders’ fees relate to their work as the financial adviser to Camas in respect of the takeover. This includes advice on strategy and tactics throughout the process. It includes the formulation of alternative strategies in relation to a possible merger or a takeover, advice on the methods of financing any offer, and an appraisal of the financial impact of successful offers for Bardon over a range of prices. I have already referred to their attendance at board and other meetings and to the papers which they prepared. Warburgs as brokers also gave advice on strategy, as well as carrying out an analysis of the register of Bardon shareholders. The fees of KPMG relate to 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. Clifford Chance advised on the impact on the proposed transaction of competition laws and on what information would need to be submitted to the Office of Fair Trading. They also advised on the information that would require to be included in any circular, and 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. Shearman & Sterling advised on US anti-trust issues and provided an analysis of the impact of US securities laws. FPC Greenaway are printers and their services related to printing the offer documentation, listing particulars, circulars to shareholders and some press releases. All of this expenditure was charged by Camas to the profit and loss account in accordance with commercial accounting practice. 
15.	At the hearing before the Special Commissioners, Camas also adduced the expert evidence of an investment banker, who produced a report explaining the steps which have to be taken in order to formulate and announce a public bid for a company and analysing the professional input necessary in relation to these various stages. His evidence was not challenged and the following paragraphs in his statement were referred to by the Special Commissioners in their decision: 
" "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. 
3.6 The initial consideration of a potential acquisition target will usually be conducted by the company itself and will be similar whether the target is a public or private company. However, for a public company target, once the potential attractiveness in business terms has been established, the nature and the complexity of the process means that it is necessary to involve the company's outside advisers to analyse all aspects of the situation and the feasibility of a public offer. These advisers both assist in the appraisal process aimed at establishing whether or not company wishes to make an offer and in the contingent preparation of the documentation that has to be issued in due course if an offer is made. Both these processes involve costs and expenditure on fees....
3.9 An offeror will initially try to seek a recommendation from the offeree's board. However, if the offeror is prepared to mount a hostile bid, then it will always keep this option in reserve, in case negotiations fail.
3.10 It is an unfortunate and costly consequence of undertaking a public offer that an extensive level of preparation is required while no decision has yet been taken to make an offer. Maintaining the option of mounting either a hostile or recommended offer is particularly onerous in terms of the preparations that are required, especially if part of the consideration is in shares. Different sets of arguments need to be marshalled and reflected in the drafting of the offer documentation. This drafting has to be done in advance to allow the offer to be pushed forward as quickly as possible once it has been announced.
3.11 I have reviewed various documents relating to CAMAS’s consideration of an offer for Bardon. From these documents, it would appear that CAMAS took all the steps I would have expected from a company responsibly contemplating a public offer. The steps were typical of such a process and incorporated the possibility of a hostile offer being made with the consideration being partly in shares...." "
As this evidence indicates, the timing of the steps required to mount a bid means that at the decision stage referred to in paragraph 3.5(b) of the statement, the work necessary to formulate the potential offer will already have been done. Indeed in paragraph 4.22 of his report Mr Reed says that, in his experience, many potential offers are aborted during this consideration phase and that the act of working up a potential offer is in itself part of the decision-making process. It is only possible for a company to decide that it wishes to proceed once it is in possession of all the relevant facts. The present case is a good example of this. It can be seen from the summary of facts earlier in this judgment that it was only once an indicative offer had been made to Bardon and rejected that a decision was made by the board of Camas not to proceed. The process was described by Mr Reed in his oral evidence to the Commissioners as a "continuum". As they recorded in their decision, the various steps ran into one another.
16.	The Special Commissioners’ findings of fact on this evidence are set out in paragraphs 47 to 51 of their decision in the following terms: 
"47. The object of the expenditure referred to in paragraphs 35-37 above, viewed as a whole, was to take the Company, as potential offeror, through the three steps outlined in Mr A J H Reed’s evidence (see paragraphs 40 and 41 above). To acquire a target company, particularly one which like Bardon was quoted and had a widely owned share capital, required a full appraisal process before the decision to offer was taken and communicated. Where as here the proposal was to merge with, or acquire the target company and to integrate its trades with the trades of the acquiring group in the interests of future "synergies", the exercise was inevitably long and expensive and involved the services of outside advisers. Those services were in part directed at providing the acquiring company with the information required to enable it to decide whether or not to make the offer. Then would come the process of formulating and communicating the offer, trying to achieve a recommendation from the target company’s board and, if that failed, mounting a hostile bid. All this time the board of the offeror company will have had its own shareholders’ interests to consider.
48. The means of achieving a merger or acquisition of the present nature involves a major restructuring of the holding company of the acquiring group. New share capital is created and finance to cover the cash element of the consideration is arranged in readiness for the acquisition of shares in the target company if the offer is accepted and goes unconditional.
49. The end result of the merger or acquisition, if successful, would have been for the Company’s capitalization to increase from £232 million (as it was at 1 April 1995) to £440 million (taking Bardon Group plc’s market capitalization of £209 million at the same date). The enlarged Camas plc would then be in a position to implement the internal reorganization of both sub-groups to achieve the sought-after "synergies".
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."
17.	These findings of fact are not open to challenge on this appeal. They do, in any event, accurately analyse the role of the professional advisers in relation to the events leading up to the board meeting of 21st December 1995. 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. 
Expenses of Management
18.	It is common ground on this appeal that Camas was at the material time an investment company as defined by ICTA s.130. This 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 . . . "
Camas is therefore liable to corporation tax on the income and chargeable gains from its investments. Corporation tax is a charge on profits (see ICTA s.6(1)) and this is defined to include both income and chargeable gains: see s.6(4)(a). The scheme of the tax is that profits in the form of income are computed in accordance with income tax principles and assessed to tax in accordance with income tax law and practice. Under s.8(3) corporation tax on profits arising in any financial year is computed and chargeable by reference to accounting periods which are treated as if they were years of assessment for purposes of applying the income tax provisions of the Act. Similarly in the case of profits in the form of capital gains, the charging provisions of TCGA 1992 apply, so as to include in the assessment to corporation tax the total amount of chargeable gains accruing to the company in the accounting period, after deducting: 
"(a) any allowable losses accruing to the company in the period, and 
(b) so far as they have not been allowed as a deduction from chargeable gains accruing in any previous accounting period, any allowable losses previously accruing to the company while it has been within the charge to corporation tax": see TCGA s.8(1).
Section 8(3) provides:
"(3) Except as otherwise provided by this Act or any other provision of the Corporation Tax Acts, the total amount of the chargeable gains to be included in respect of chargeable gains in a company’s total profits for any accounting period shall for purposes of corporation tax be computed in accordance with the principles applying for capital gains tax, all questions--
(a) as to the amounts which are or are not to be taken into account as chargeable gains or as allowable losses, or in computing gains or losses, or charged to tax as a person’s gain; or
(b) as to the time when any such amount is to be treated as accruing,
being determined in accordance with the provisions relating to capital gains tax as if accounting periods were years of assessment." 
19.	Once an investment company’s income and chargeable gains have been computed in accordance with these provisions (which include, of course, the deduction of any relevant allowable expenses under ICTA 1988 and TCGA 1992), then the taxable income and chargeable gains are aggregated in order to arrive at the "total profits": see ICTA s.9(3). It is at this stage in the process that s.75 comes into play. 
20.	ICTA s.75 provides as follows: 
"(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.
(2) For the purposes of subsection (1) above 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, foreign income dividends, group income and any regional development grant. In this subsection "regional development grant" means a payment by way of grant under Part II of the Industrial Development Act 1982.
(3) Where in any accounting period of an investment company the expenses of management deductible under subsection (1) above, together with any charges on income paid in the accounting period wholly and exclusively for purposes of the company's business, exceed the amount of the profits from which they are deductible–
(a) the excess shall be carried forward to the succeeding accounting period; and
(b) the amount so carried forward to the succeeding accounting period shall be treated for the purposes of this section, including any further application of this subsection, as if it had been disbursed as expenses of management for that accounting period."
On the face of it, therefore, the deduction of the expenses of management in the case of an investment company is a deduction against both income and capital gains. Some of the qualifying expenditure may well be deductible under the relevant Schedules and Cases of ICTA 1988 or under the provisions of TCGA. But the concluding words of s.75(1) make it clear that in the case of any such overlap, the deduction falls to be made under those provisions rather than under s.75. In the case of profits in the form of income, this causes no difficulties. Expenditure is deducted as part of the computation of income rather than as a deduction against total profits. But in the case of capital gains the position may be more complicated. Where a disposal leading to a chargeable gain occurs in the same accounting period, then under TCGA s.38(1)(a) the company will be entitled to deduct from the consideration on the disposal, for the purposes of computing the gain, not only the amounts spent by it in acquiring the asset, but also the incidental costs of the acquisition. What constitutes the incidental costs of the acquisition is dealt with in TCGA s.38(2) as follows:
"(2) For the purposes of this section and for the purposes of all other provisions of this Act, the incidental costs to the person making the disposal of the acquisition of the asset or of its disposal shall consist of expenditure wholly and exclusively incurred by him for the purposes of the acquisition or, as the case may be, the disposal, being fees, commission or remuneration paid for the professional services of any surveyor or valuer, or auctioneer, or accountant, or agent or legal adviser and costs of transfer or conveyance (including stamp duty) together--
(a) in the case of the acquisition of an asset, with costs of advertising to find a seller, and
(b) in the case of a disposal, with costs of advertising to find a buyer and costs reasonably incurred in making any valuation or apportionment required for the purposes of the computation of the gain, including in particular expenses reasonably incurred in ascertaining market value where required by this Act."
The requirement that the expenditure must be wholly and exclusively incurred for the purposes of the acquisition and is limited to the specified categories indicates that, although there will be some overlap with the "expenses of management" referred to in ICTA s.75, the tests are not the same and the provisions of s.38 are clearly more restrictive.
21.	That difficulty will not matter in practice because of TCGA s.39(1). Expenditure allowable as a deduction in computing profits for the purpose of corporation tax is not allowable as a deduction under s.38: see TCGA s.8(4). Expenses of management within the meaning of s.75 will not therefore be "deductible" in respect of any accounting period under the charging provisions of TCGA and will qualify for deduction against profits under s.75. If and so far as this does not embrace all the expenditure otherwise allowable under s.38, then the balance can be recovered under that section in the computation of the chargeable gain. The real difference in the treatment of these expenses between an investment company and an ordinary trading company occurs where the disposal and therefore the chargeable gain takes place (as it is likely to) in a subsequent accounting period to that in which the acquisition was made. The trading company will be entitled to deduct under TCGA s.38(1) only such incidental expenses as satisfy the criteria laid down in s.38(2). As already indicated, this is unlikely to be as comprehensive as the expenditure allowable under s.75. The investment company in the same scenario will have been able to deduct its allowable expenditure in the accounting period in which the acquisition took place, regardless of whether it also disposed of the investment in the same period, and will be able to carry forward as allowable expenditure any excess of expenses over profits: see ICTA s.75(3). It will be unable to deduct the same expenditure in calculating the chargeable gain on the subsequent disposal because of TCGA s.39, but this will not matter. It will already have obtained relief for such expenditure against its profits. 
22.	When, as in this case, no acquisition takes place, the position of an investment company is potentially even more advantageous than that of the trading company in relation to capital gains. Absent an acquisition (and therefore a subsequent disposal) none of the incidental expenditure, such as the cost of professional advice, will qualify for deduction under TCGA s.38(1)(a). But the investment company will, on the taxpayer’s case, remain entitled to deduct that expenditure as part of its expenses of management under ICTA s.75 against its general profits in the accounting period in which it is incurred. 
23.	For these reasons Mr Henderson QC, for the Inland Revenue, began his submissions by outlining what he contended would be the anomalous position of an investment company, were Camas to be correct in its contention that all the professional and other expenses incurred in connection with the abortive plan to acquire the Bardon group are recoverable under ICTA s.75 as expenses of management. Expenses of the kind in question are inevitably high and, in the event of a successful bid, will involve success fees. He pointed to the advantages that would exist of being able to deduct such expenses in the period in which they were incurred, rather than on a subsequent disposal of the asset, and of the ability of the investment company to deduct such expenses regardless of whether the acquisition proceeded. The differences between the position of an investment company and that of a trading company are not, however, confined to capital gains. Under ICTA s.74(1)(f) a trading company is not able to deduct (for the purpose of computing its profits under Case I or Case II of Schedule D) any capital expenditure. It is restricted to recovering the written-down value of the expenditure as capital allowances under CAA 1990. ICTA s.75 was, he submits, intended to remedy a disadvantage and not to confer an advantage on investment companies. Consistently with this hypothesis, the Crown advances two principal arguments against the professional and other fees being allowable as expenses of management. The first is that the phrase "expenses of management", whatever it may mean, does not include expenses which are wholly attributable to the acquisition of a particular investment and therefore are (or would have been) simply part of the costs of that acquisition. This is a question of construction already considered at appellate level and I shall come to the authorities later in this judgment. The second argument is, however, more fundamental. Mr Henderson submits that s.75 does not permit the deduction of expenditure of a capital nature. This was rejected by the Special Commissioners, who affirmed the refusal of the Inspector to allow the deduction only on the ground that the expenditure did not satisfy the test of what constitutes the "expenses of management" under ICTA s.75. 
24.	It is convenient to begin by saying something about the history of s.75. Relief for investment companies in respect of management expenses began with s.14 of the Finance Act 1915 ("FA 1915"), which also gave relief to life assurance companies when they were taxed (at the Crown’s option) on their investment income rather than on their profits under Case I of Schedule D. Since 1965 the relief for life assurance companies has been contained in a separate section, which is now ICTA s.76. The purpose of the legislative changes introduced by FA 1915 s.14 was explained by Lord Wright in his speech in Simpson v. The Grange Trust Limited (1935) 19 TC 231 at page 250 as follows: 
"An ordinary trading company assessed on the balance of its profits and gains for the year under Schedule D, Case I, is entitled, in order to arrive at the balance, to an allowance for outlays incurred for the purpose of earnings its profits: the companies or concerns enumerated in section 33(1) [of the Income Tax Act 1918], whose income is in the main taxed by deduction, would be placed at a disadvantage if no allowance was made to them for management expenses."
The relief granted originally operated by way of repayment of the tax charged by deduction.
25.	Mr Henderson submits that if capital expenditure is deductible under what is now ICTA s.75, then the legislative change introduced in 1915 went much further than was necessary to correct the perceived mischief identified by Lord Wright. Capital expenditure ought not, in principle, to be allowable against income, and much of the capital expenditure connected with the acquisition of an asset is likely to be recoverable as a deduction under TCGA s.38 against any chargeable gain arising on the subsequent disposal of the asset. The restriction of s.75 to revenue expenditure would also remove the disparity in treatment between investment and trading companies material to income. This argument is therefore based on two parallel lines of reasoning: (i) the potential inequality in fiscal treatment between the profits of an investment company and those of a trading company which the taxpayer’s argument would produce; and (ii) the more general question of principle as to whether Parliament ever intended to allow capital expenditure to be deductible as an expense against income. The second line of argument has a number of dicta to support it. I was referred to a judgment of Croom-Johnson J in Capital and National Trust Limited v. Golder (1949) 31 TC 266 (a case about what is now s.75), who at page 270 said that 
"the expenditure is something which if you were looking at profits and gains under Schedule D would be deductible as a sum of money wholly and exclusively expended for the purpose of making profits and gains."
His decision did not, however, turn on this point and, on appeal, the Court of Appeal did not mention it.
26.	In Sun Life Assurance Society v. Davidson [1958] AC 184, which is the leading authority on the meaning of "expenses of management" in ICTA s.75, Lord Somervell (at page 208) said that he would regard the phrase 
"as apt to cover the expenses which would normally be deductible in respect of its life assurance business if an assurance company carrying on life assurance business was assessed as a trade."
In the same case Viscount Simonds (at page 198) spoke of s.33(1) of the Income Tax Act 1918 (which re-enacted s.14 FA 1915) as using language
"which makes it clear that some only of the expenses which would be deductible under Case I and the relevant rules are deductible under this special method."
Both these dicta are readily understandable in the light of investment companies being chargeable at the time to income tax on their investments, and I accept that they assume an analogy or parallel between the type of expenditure which would be allowable as an expense of trading and the type of expenditure allowed to investment companies under the 1915 Act. But they also predate the introduction of both CGT and corporation tax and therefore offer no real guidance on whether the allowance of management expenses against "total profits", as defined, alters the scope of the exemption so as to accommodate capital expenditure. 
27.	Mr Henderson also referred me to the judgment of Robert Walker J in Johnson v. Prudential Assurance (1996) 70 TC 445, where it seems to have been common ground that the "expenses of management" within s.75 and 76 ICTA 1988 included some of the expenses on revenue account which would be deductible under Case I of Schedule D. But again no issue arose about capital expenditure and the focus was on the relationship between s.76 and the computation of profits under Case I of Schedule D. It seems that the only clear statement against capital expenditure being allowable as a deduction against total profits under s.75 is contained in the judgment of Murphy J in the decision of the Irish Supreme Court in Hibernian Insurance Company Limited v. Macuimis [2000] 2 IR 263, which concerned the equivalent provisions to s.75 in the Irish Corporation Tax Act 1976. At page 292 Murphy J said this in relation to the question whether capital expenditure was deductible as an expenses of management: 
"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."
28.	In 1915 there was no tax on capital gains, nor any corporation tax, and s.14 FA 1915 was obviously not intended to deal with anything but the ability of investment and life assurance companies to charge their management expenses against income, in much the same way as any other trading company. Following the introduction of CGT by the Finance Act 1965 ("FA 1965"), capital gains became taxable with the range of allowances now contained in TCGA s.38 and 39. The argument for the Crown is that these provisions established in effect a comprehensive code for making allowances in respect of capital expenditure, and that there was no reason to expand the scope of s.75 in order to accommodate capital expenditure as an expense of management. Mr Henderson also submits that, on examination, it is clear that FA 1965 did not effect any material alteration in respect of the type of expenditure that should be deductible against profits as an expense of management. For this he relied on FA 1965 s.57(1), which provided as follows: 
"57. (1) In computing for 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 income for the purpose of Case VIII of Schedule D:
Provided that--
(a) 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 and group income
(b) any enactment restricting the relief from income tax that might be given under section 425 of the Income Tax Act, 1952, shall apply to restrict in like manner the deductions that may be made under this subsection."
Section 425 of the Income Tax Act 1952 was the equivalent to what is now ICTA s.75. Section 57(1)(b) of FA 1965 is said to confirm that there was to be no expansion of the scope of s.425 following the introduction of CGT as a component of corporation tax.
29.	I have difficulties with both these submissions. Although s.14 of the 1915 Act was introduced to deal with the allowance of management expenses as a deduction against income, it is by no means certain that it was intended to be limited to revenue as opposed to capital expenditure. Abortive expenditure on the proposed acquisition of a capital asset is usually capital in nature: see Sargent v. Eayrs [1973] 1 WLR 236 at pages 239H - 240H. Similarly the brokerage and stamp duty at issue in the Sun Life case were almost certainly capital in nature, particularly when analysed (as they were) as part of the costs of acquisition. If s.33 TA 1918, like its statutory predecessor s.14 FA 1915, did not allow the deduction against income of capital expenditure, that would have been a short answer to the appeal. As it is, each member of the House decided the issue of the meaning of expenses of management in a way which took no account of this. I am also not convinced that any clear-cut understanding on the part of taxpaying companies that no capital expenditure could be set off against income was assumed to underpin the provisions for the assessment of income-based profits in the Taxes Acts. Section 74(1)(f), which prohibits the deduction of capital expenditure from the profits of a trading company, is at least a recognition that for fiscal purposes such expenditure might well otherwise be regarded as a legitimate component in the computation of profits under Case I or Case II of Schedule D. 
30.	But even if I am wrong about this, that still leaves the question of what impact (if any) the introduction of chargeable gains had as part of the total profits of an investment company. It seems to me dangerous to start any examination of this question with some predetermined view as to how the treatment of allowances for capital expenditure might reasonably be provided for. I prefer to start with the provisions of ICTA 1988 themselves. The definition of "profits" in s.6(4), as including both income and chargeable gains, confirms that the tax is payable on a combination of income and of capital profits, aggregated after being computed in accordance with the underlying income tax and CGT regimes: see s.9(3). The aggregate amount is described as the total profits and, as already explained, it is this figure and expression which is carried forward and subjected to s.75. In order to compute an investment company’s liability to corporation tax, "any sums" disbursed as expenses of management are deducted, subject to the exception in the case of expenses which are deductible under either some other provision of ICTA 1988 or under TGTA 1992. The concluding words of s.75 in their post-1965 form therefore contemplate in terms the possibility of overlap between the provisions of s.75 and those of TCGA s.38 and 39. Far from indicating that no "such expenses" are allowable under s.75, these words seem to me to confirm that capital expenditure is deductible, save insofar as it is not accounted for as part of the computation of chargeable gains. Mr Henderson accepts that where no disposal takes place in the same accounting period, that will not be a possibility. It must, I think, follow that those expenses (provided, of course, they qualify as expenses of management) will therefore fall into account under s.75 for the period in which they were incurred and will be excluded from any future calculation of chargeable gains on a subsequent disposal of the asset, by virtue of TCGA s.39(1). It would have been possible to exclude capital expenditure associated with the acquisition of an asset from the computation of corporation tax on total profits in the accounting period in which the acquisition took place, and left it to TCGA s.38 to provide relief at the time of disposal. But this would require clear words, when the combined provisions of ICTA s.75 and TCGA s.39(1) in fact point in the opposite direction by disallowing as expenses of a disposal expenditure which is allowable for the purpose of computing corporation tax. The primary relief is provided in s.75. 
31.	For these reasons I am unable to accept Mr Henderson’s submission that capital expenditure is not allowable as a deduction against profits under s.75. The provisions I have referred to indicate, in my judgment, the contrary, and I am unable to see how FA 1965 s.57(1)(b) can be construed so as to retain a restriction on the relief given to income expenditure, even if it is permissible to conduct this type of archaeology in the face of the enactment of two consolidating Taxes Acts since FA 1965. The Special Commissioners rejected any application of the capital-revenue test in determining whether the expenditure in issue is or is not an expense of management and they were, in my judgment, right to do so. 
32.	That brings me to the main issue on this appeal, which is whether the professional fees and other expenses were disbursed as expenses of management. Both parties to this appeal accept that the phrase "expenses of management" is an ordinary expression not made up of words which carry a recognised or technical meaning. However the words used in s.75 obviously indicate that the right to deduct the sums in question depends upon their having been disbursed as expenses of management and not as anything else. For this reason, when considering costs incurred in relation to the purchase of an investment, the approach of the Courts in the decided cases has been to separate expenses of management from what can properly be regarded as costs of the acquisition itself. The leading case is the decision of the House of Lords in Sun Life. At issue in that case was the ability of the Sun Life Assurance 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 House of Lords held that neither was allowable. The argument of the Crown (reported in [1958] AC at page 191) was that although not restricted to the expenses of the managers of the company, the expenditure must be related to administration or management and cannot encompass all the expenses of carrying out the business of the company under management. By the same token it cannot include expenditure which was so closely linked to the purchase or sale of the investments that it was in reality part of the cost of purchase and sale and not an expense of making the decision to buy or sell. 
33.	In Sun Life the Special Commissioners had decided the point in favour of the Crown, and their reasons are set out in the passage quoted by Viscount Simonds (at page 197) as follows: 
" "We have come to the conclusion," they said, "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 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. 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 also hold that the brokerage and stamp duties paid by the society on the sale of an investment are not expenses of management." "
At page 198 Viscount Simonds sets out his own reasons as follows:
"The Special Commissioners have recognized what I think is of first importance in interpreting the words in question, namely, that they are words of qualification or limitation. It is not all the expenses incurred by the society; it is not their trading or general expenses which are deductible. The society is not being assessed on its trading profits under Case I of Schedule D; on the contrary a special method of assessment is prescribed and language is used which makes it clear that some only of the expenses which would be deductible under Case I and the relevant rules are deductible under this special method. Counsel for the society, though they contended that the expenses of management were the same as the expenses of conducting, carrying on or running its business, yet conceded that some qualification must be introduced and, quite illogically as it appeared to me, admitted that there could not be included in such expenses the cost of purchase of the investments themselves. I do not know why not, for the acquisition of the necessary stock in trade would appear to be a first expense of carrying on a business. A further refinement was, indeed, introduced and it was said that such an expense could only be excluded if, and to the extent to which, it was represented by an asset of the business. I do not follow and cannot give effect to this argument. The concession is nevertheless 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."
This same distinction between costs of management and costs of acquisition is adopted in the other speeches. At page 201 Lord Morton of Henryton said this:
"It has been common ground between the parties throughout all courts that "expenses of management" do not include the price of investments bought by the society in the course of its business. Now it is clear that the sums now in question are not part of the price, for the price of an investment, purchased or sold, is the sum which is paid by the purchaser to the seller. These expenses are, however, so closely linked with the transaction of purchase that they may naturally 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."
But having decided the appeal in favour of the Crown on this ground, he added this (at page 203):
" . . . although I would decide this appeal in favour of the Crown, I do not accept the very narrow view of the words "expenses of management" which was put forward by the Attorney-General.
I think that these words should be given a wide construction, for the reasons about to be given by my noble and learned friend, Lord Somervell of Harrow."
34.	A similar approach can be detected in the speech of Lord Reid. Unlike Viscount Simonds, he thought that the reference in the section to commissions was important. At page 204 he said: 
"I do not get much assistance from these general considerations, and I turn to consider the words used in section 33. In the first place, not all expenses are included but only expenses of management. And secondly, it appears to me that the words in brackets "(including commissions)" are of considerable importance in determining what is meant by "expenses of management." I cannot believe that this form of drafting "expenses of management (including commissions)" could have been adopted unless it had been thought that commissions were at least so closely analogous to expenses of management that, without the words in brackets, it would have been doubtful whether commissions were or were not within the ambit of the leading words. 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."
Then later, at page 205, he went on:
"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. 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. It 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 expenses of management. And the collocation of the words "(including commissions)" shows that a sum can be an expense 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 between payments which enhance the value of an asset and payments which do not. For example, if a call is made in respect of shares not fully paid, paying the sum necessary would not be an expense of management, although there have been cases where shares remained of no value after becoming fully paid. 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."
35.	Finally Lord Somervell of Harrow (at pages 208 and 209) said this: 
"The formula "expenses of management (including commissions)" is clearly taken from the form of revenue account in the Schedule to the Life Assurance Companies Act. I would regard the words themselves as apt to cover the expenses which would normally be deductible in respect of its life assurance business if an assurance company carrying on life assurance business was assessed as a trade. There may be, as the Assurance Acts recognize, "other payments" which might or might not be deductible under Case I. The fact that these words are qualified by the words "accounts to be specified" is, I think, some indication that the words "expenses of management" and "commission" were regarded as covering all ordinary expenses. Proviso (a) contemplates that expenses of management (including commissions) may exceed in amount the expenses which would be deductible under Case I. This weighs heavily against the very restricted sense of management for which the Revenue contended. The section has to operate by providing for a repayment of tax already suffered. The purchase price of the investment cannot enter into the computation as an expense. It would only come in if one was in search of the "profit" made subsequently by its realization. 
Having regard to the intention of the section to be gathered from its terms and to the statutory background, the words should be given, in my opinion, a wide construction. I wholly reject the distinction sought to be drawn between the management and the carrying on of the business, restricting the former to the head management.
………..
The brokerage and stamp duty, though not, as the commissioners held in Golder's case, an integral part of the purchase price, are a direct and necessary part of the cost of a normal method of purchase. I therefore, with some hesitation, agree that they should not be treated as expenses of management, and that the appeals should be dismissed."
36.	I have quoted at some length from the speeches in Sun Life because both parties accept that they contain the law which I have to apply. Mr Prosser QC, for Camas, invites me to accept as the correct test the question posed by Lord Reid as to whether the costs under review should be regarded as part of the costs of acquisition or something severable from it, which can properly be regarded as an expense of management, and the Crown has accepted in its skeleton argument that this is the true test, or at least the most helpful formulation of the test in the present context. I agree with that, but the real difficulties of course arise in its application to the facts. In a sense Sun Life was the easy case to decide. Both stamp duty and brokerage fees only arise and become payable as part of the costs of sale and purchase of the investments. In the case of stamp duty the tax is payable by reference to, and as a charge on, the purchase price. Neither was any less consequential on the exercise of a management investment decision than the costs of purchase themselves, and it was therefore relatively easy to draw the line. 
37.	The same is, I think, also true of the subsequent decision of the Court of Appeal in Hoechst Finance Limited v. Gumbrell (1983) 56 TC 594. The issue in that case was whether the appellant company, which was a member of an international group of trading companies, could recover as expenses of management a commission of 0.25% per annum which it had to pay to its parent as the price of obtaining a guarantee for the issue of some guaranteed unsecured loan stock. The loan stock issue was made to raise finance for the other group companies operating within the United Kingdom. The Court of Appeal held that the commission was not an expense of management because it could not be severed from the cost of raising the finance. At page 614 Dillon LJ said this: 
"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. It 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 document 5 shows, the commission was charged by the parent company for giving the guarantee. It all relates back to the giving of the guarantee."
May LJ agreed with Dillon LJ and added this (at page 615):
"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."
As in the Sun Life case, everything points to the cost of the guarantee being part of the cost of obtaining the finance.
38.	In the present case, however, Camas submits that none of the costs of obtaining professional advice was an incidental cost of the purchase itself. Confirmation of this can be found in the very fact that the costs were incurred notwithstanding that the purchase of the Bardon group never proceeded beyond an indicative offer. The printing costs may be more debatable, in the sense that they included the cost of printing offer documentation, listing particulars and circulars to shareholders, all of which needed to be prepared in advance. This is the closest one gets to identifying a cost directly related to the actual process of purchase, but even this relates to steps which needed to be taken prior to any actual acquisition. 
39.	The Crown invites this Court to uphold the reasoning of the Special Commissioners as to whether the expenditure constitutes expenses of management. The relevant parts of the Special Commissioners’ reasoning are set out in paragraphs 59 to 60 of their decision. It is important to note that in paragraph 61 of the decision, the Special Commissioners go on to consider whether the expenses were in fact expenses of management, if they were not to be treated as incidental costs of the projected acquisition. This was not part of the Crown’s argument before the Special Commissioners, and Mr Henderson does not seek to support the Special Commissioners’ conclusion that the professional and other expenses were not, in any event, expenses of management. He accepts that if the expenses were not part of the purchase costs, then they were expenses of management, as defined. There is no third possibility to consider. This concession seems to me to be in line with the views expressed by Lord Morton and Lord Reid that the words "expenses of management" should be given a fairly wide meaning, and I have accepted the concession for the purposes of this appeal. It means that the only issue which I have to decide is whether or not the expenditure claimed falls to be treated as part of the costs of the projected acquisition of the Bardon group in the sense contemplated by Lord Reid’s test in Sun Life. 
40.	The Special Commissioners rejected the taxpayer’s contention that the expenses were severable from the costs of any acquisition. Their reasoning was as follows: 
"59. We now revert to the circumstances of this appeal. It is significant, as was emphasised for the Company, that unlike the situation in Sun Life where the brokerage and stamp duties were incurred in the course of acquiring investment holdings for the life assurance fund portfolios, the fees and expenses here were incurred in connection with a possible merger with or acquisition of Bardon. A merger with or takeover of a quoted company is fundamentally different from a simple purchase of shares through a stock exchange. The former is, as was pointed out for the Company, a process that had to be planned and implemented with great skill while the latter is a mere mechanical transaction. We agree, but this point of distinction does not necessarily have the effect of severing the fees of accountants, legal and financial advisers and printers from the costs of acquiring or seeking to acquire the entire share capital of Bardon. 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.
60. Does it affect the position that the acquisition never took place? This feature, it was argued for the Company, drove home the fact that the expenses were incurred in advance and independently of any possible acquisition. We do not accept this. 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."
41.	It is evident from paragraph 59 quoted above that the Special Commissioners accepted that all of the professional services were rendered so as to enable the board of Camas to decide upon and prepare for the bid. I am unable to see the materiality of any distinction between routine investment decisions and a proposed major acquisition of the kind involved in this case, for the purpose of determining whether or not the expenses involved were expenses of management. The only difference is in the amount of preparatory work and advice which is generated, but the latter is no less a management decision than the former, and the Special Commissioners appear to have accepted that. Mr Henderson also accepted as part of his argument that the acquisition of the Bardon group would, if completed, have constituted an investment. What seems, however, to have persuaded the Special Commissioners that none of the expenses of Project Bardon could be severed from the costs of the projected acquisition (i.e. the purchase price of Bardon) is that the expenditure was, to use their words, "directed at" the proposed acquisition and a "direct and necessary part of an acquisition of this scale". 
42.	Mr Henderson submits that I am bound by these findings of fact. I do not accept that. I am undoubtedly bound by the findings of primary fact which I set out earlier in this judgment and which are summarised in the first part of paragraph 59 of the decision. But 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. 
43.	In my judgment the Special Commissioners have misapplied the Sun Life test to the facts of this case and appear to have asked themselves a different 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. The logic of that view would mean that any expenditure relating to a management decision to invest would be disallowed on the basis that it was an essential part of the process leading up to the acquisition itself. This is in direct contradiction to Lord Reid’s own speech, which at page 205 (see above) refers in terms to the expenses of investigating and considering whether to acquire an investment being an expense of management. I accept Mr Prosser’s submission that the Special Commissioners have constructed a causative test of their own, rather than simply asking themselves whether the expenses are or are not part of the incidental costs of acquisition. But neither do I in fact accept the causative argument which they advance. Although the advice, and therefore its cost, was a prerequisite to any acquisition, it was in fact rendered to enable Camas to reach a decision as to whether or not to make an acquisition, and was therefore necessary and payable regardless of whether the purchase took place. This is confirmed by the fact that no transaction proceeded in this case. One can contrast this with a success fee which can only become payable in the event that the acquisition proceeds to completion. Although not a matter for decision on this appeal, I accept Mr Prosser’s submission that success fees would not be expenses of management, but would fall into the category of expenses (like brokerage fees) which cannot be severed from the costs of the acquisition itself. 
44.	It seems to me that the correct answer to Lord Reid’s question is that the expenses under consideration are not part of the costs of acquisition. 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. 
45.	The only other matter which I need to refer to is the decision of the Irish Supreme Court in the Hibernian Insurance Company case. This is not binding on me, but is a decision of a senior Appellate Court on the same question under the Irish Corporation Tax Act. 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 transaction did not proceed. The Irish Supreme Court held that the expenditure had not been disbursed as part of the expenses of management. In his judgment, after considering the speeches in Sun Life, Murphy J (at page 290) said this: 
"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."
I think that I need say no more than that, with great respect to the learned Judge, I do not accept that it would be universally accepted in the context of Lord Reid’s test that the expenses he refers to would be costs of the purchase, and there is nothing in the reasoning of the Irish Supreme Court which has caused me to take a different view of this matter. For these reasons the taxpayer’s appeal will be allowed.