[2009] UKFTT 137 (TC)
					TC00105

Appeal number SC/3178/2007

CORPORATION TAX — de-listing of quoted company — whether costs of delisting allowable expense in corporation tax computation — whether company an “investment company” — ICTA s 130 — no — whether costs “expenses of management” — ICTA s 75 — no — appeal dismissed

FIRST-TIER TRIBUNAL
TAX 
DAWSONGROUP LIMITED
	Appellant
- and -

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS
Respondents

TRIBUNAL: 	Judge Colin Bishopp

Sitting in public in London on 23 to 25 March 2009

Felicity Cullen QC, instructed by Richard Yates, chartered accountant, for the Appellant
Daniel Margolin, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION
Introduction
1.	The appellant, Dawsongroup plc, can trace its origins to a haulage business begun in 1935. By 1988 it had become the parent of a group of companies carrying on the business of renting trucks, trailers, buses, coaches and some specialist equipment. Most of that business was and is carried on in the United Kingdom and Ireland, but a small part of the group turnover is generated in continental Europe. In 1988 Dawsongroup, hitherto a private company, became public and 25% of its shares were floated on the London Stock Exchange. 
2.	Unfortunately, the flotation was not a success. Although the price of the shares increased significantly for a time, it later subsided and remained at or about the flotation price. The directors’ belief was that the poor share value performance was the consequence of two principal causes: the fact that the majority shareholder, Peter Dawson, and his family owned almost three quarters of the shares, making the market in them illiquid; and the fact that outside investors were more concerned about short-term profits than the long-term growth which was the goal of the “family” shareholders, a factor which made the strategic management of the group difficult. Another material consideration was the additional financial burden imposed on the company by reason of its being listed, including the costs of more stringent compliance requirements, one of which was the obligation that its board should include initially one and later two independent directors. 
3.	In May and June 2000 the board considered the possibility of the appellant’s ceasing to be a listed company, and becoming private again. Advice was obtained from solicitors; in the light of that advice Mr Dawson and his family formed a company, Dawsoninvest Ltd, which made an offer for those of the shares in Dawsongroup which were not held by them. The board was required, by Stock Exchange rules, to take separate advice and it appointed a committee, consisting of the independent directors (since the others had, or might have had, conflicts of interest), for this purpose. Various other professional advisers were appointed to deal with different aspects of the offer. I do not need to deal with the detail of events, save to record that the offer was eventually successful. Dawsongroup ceased to be listed, and reverted to private company status.
4.	The issue in this appeal is whether the expenditure incurred by the appellant in the delisting of its shares from the Stock Exchange, during its accounting year to 31 December 2000, is deductible in computing its profits for the purposes of corporation tax. Initially it put its case that the expenditure is deductible on two alternative, if not mutually exclusive, bases: that it was revenue expenditure incurred wholly and exclusively for the purposes of its trade; and that, the taxpayer being an investment company, the expenditure is deductible as an expense of management. The respondents’ response to the first argument was that the expenditure was of a capital nature and consequently not deductible; its case in relation to the second is that Dawsongroup is not an investment company and, if that proposition is wrong, that the expenditure cannot be considered an expense of management. After the evidence had been concluded Felicity Cullen QC, who appeared for the appellant, abandoned its first argument and I am accordingly required to decide only the second issue.
5.	The costs which Dawsongroup seeks to deduct amount to £433,574, consisting mainly of professional fees, the greater part of that sum being accounted for by the fees paid to the advisers to the independent directors. Save for some modest items on which I am not asked to adjudicate, at least at this stage, the respondents take no issue with the individual amounts claimed. Dawsoninvest incurred costs of its own, which are not the subject of the present dispute.
Whether Dawsongroup is an investment company
6.	The statutory definition of an investment company was to be found, at the material time, in s 130 of the Income and Corporation Taxes Act 1988:
“In this Part of this Act ‘investment company’ means any company whose business consists wholly or mainly in the making of investments and the principal part of whose income is derived therefrom …”
7.	I accept the respondents’ argument (which was in any event not disputed) that the definition imports two distinct tests: whether the company’s business consists wholly or mainly in the making of investments; and whether the principal part of its income is derived from the making of investments. That is, it is not sufficient that the majority of its income is derived from investments; something more is required. The respondents concede that the second limb of the test is satisfied: Dawsongroup’s annual accounts show that while the dividend income received by it from its subsidiaries fluctuated, sometimes by a great deal, its value at the relevant time, taking one year with another, comfortably exceeded the aggregate charges made for the services the appellant provided to them. The respondents make the point that Dawsongroup is able to dictate the charges it levies, but it is nevertheless not part of their case that the accounts do not properly reflect the balance between the two types of income. They argue instead that, notwithstanding that balance, Dawsongroup does not satisfy the other part of the statutory test. 
8.	The 1988 Act makes no attempt to define an investment company, or even to identify any relevant criteria, and in accordance with conventional rules of construction it is therefore necessary to interpret the phrase, as it is used in s 130, according to its ordinary English meaning. Neither party was able to identify any judicial authority which is directly in point, in that it essays a definition. It is common ground that the question whether a company is an investment company is one of fact: see MacNiven v Westmoreland Investments Ltd [1997] STC 1103 at 1126, per Carnwath J. 
9.	I was provided with a statement of agreed facts, which was supplemented by the oral evidence of Clive Gear, now retired but at the material time Dawsongroup’s finance director. Much of Mr Gear’s evidence was directed to the abandoned argument, but he dealt also with the nature of Dawsongroup’s activities, which may be outlined quite briefly. 
10.	Formerly, it carried on trade itself but in the period leading up to its flotation in 1988 it devolved its trading activities to its subsidiaries. Mr Gear described the group structure: the subsidiaries and, in some cases, their own subsidiaries (all ultimately wholly owned by Dawsongroup) variously own the properties from which the group carries on business, and undertake the core activities of leasing vehicles and equipment. In addition to holding the shares in the subsidiaries, Dawsongroup provides various facilities for them, essentially what are conveniently termed head office functions—financial, banking and treasury (group policy was that no subsidiary might borrow externally but was required to seek its working capital from Dawsongroup); information technology; legal and company secretarial services; and various other services more conveniently or economically dealt with centrally. Mr Gear told me—and, again, it was not challenged despite the respondents’ observation to which I have referred—that Dawsongroup charged its subsidiaries, on an arm’s length basis, for the services it provided. It did not charge any of the cost of the delisting to its subsidiaries. Part of its head office premises was let to a separate company (a subsidiary of Volvo) which had purchased part of its business and Dawsongroup also provided some services, which could not readily have been secured elsewhere, to that company.
11.	Against that background the parties agree that Dawsongroup is a trading company. Its own case is that it is, nevertheless and in addition, an investment company since its principal activity is the holding of assets, that is the shares of its subsidiaries. The respondents do not deny that it is possible for a company to be both engaged in trade and an investment company; their position is that the appellant’s principal activity, determinative of its status, is the control of and provision of services to its subsidiaries, which is to be regarded as a trading activity rather than a function of investment.
12.	Daniel Margolin, counsel for the respondents, placed some emphasis on discussions which took place in 2003 between Dawsongroup’s directors, including Mr Gear, and officers of the respondents. The nature of the company’s activities was one of the topics. The directors then put forward the view that Dawsongroup was a trading company, stressing its provision of services for its subsidiaries, and making the point that its employees spent little time on managing its investments. Mr Gear agreed, when he gave evidence, that investment decisions were all made at main board level and that employees were involved only in ad hoc tasks, such as due diligence enquiries into possible acquisitions; if such work was required of them, they would normally work longer hours in order to undertake those tasks in addition to their normal duties. None was employed solely or principally for what might reasonably be regarded as investment activities.
13.	The notes of the discussions, prepared by the respondents but accepted by Mr Gear as an accurate record, show that the directors also told the officers that the company made few new investments, most suggested acquisitions being rejected quickly, and even at board level relatively little time was spent on what might properly be called investment decisions; the executive directors were more heavily involved in overseeing the subsidiaries’ trading activities. Dawsongroup’s corporation tax returns had been prepared and submitted on the basis that it was a trading company. Mr Gear added that, although he is a chartered accountant he is not a tax specialist, and he was not familiar with the statutory definition of an investment company. He understood at that time, he said, that Dawsongroup could be either a trading company or an investment company but not both; its corporation tax returns were prepared in accordance with what he then believed to be the correct practice. 
14.	 “Making” investments does not import a requirement that they be turned over (see Commissioners of Inland Revenue v Tyre Investment Trust Ltd (1924) 12 TC 646 at 656, per Rowlatt J); as Lightman J said in Cook v Medway Housing Society Ltd [1997] STC 90 at 98, “the word ‘making’ [as used in s 130] includes ‘holding’”. So much was common ground. Both parties relied, too, on a further observation by Lightman J in Cook v Medway Housing Society. At p 100 he said:
“In determining what is the business of a company for the purposes of s 130, it is necessary to have regard to the quality, purpose and nature of the company and its activities, and this includes the full circumstances in which the relevant assets are acquired and retained, including the objects clause in the memorandum of association of the taxpayer … It is relevant to have regard to the actual activities carried on by the taxpayer at the relevant date, but if these are viewed without regard to the taxpayer’s past history or future plans they may give only a partial and incomplete picture. The critical question is whether the holding of assets to produce a profitable return is merely incidental to the carrying on of some other business, or is the very business carried on by the taxpayer.”
15.	I interpose that Dawsongroup’s memorandum of association does not add anything to the remaining evidence.
16.	Mr Margolin also referred me to the Irish case (which Lightman J mentioned in Cook v Medway Housing Society) of Casey v The Monteagle Estate Co Ltd [1962] IR 106, in which a similar statutory provision was in issue. At p 138 Teevan J said:
“What has to be looked to is the nature of the operations or functions of the company. The search is not for a company making investments but for a company whose main business is the making of investments.”
17.	Mrs Cullen pointed out that Dawsongroup had held shares in its subsidiaries since at least 1998—and therefore some 12 years or so before the relevant expenditure was incurred, and a period now exceeding 20 years—and that in that period new subsidiaries had come into the group, some by acquisition, others being created for the purpose of carrying on new trading activities, or existing activities in other countries. She argued that it was undoubtedly “in business” and that any of its activities beyond the provision to its subsidiaries of the various “head office” services must, by process of elimination—no other description being tenable—be investment activities. As Atkin LJ said in Commissioners of Inland Revenue v Korean Syndicate Ltd [1921] 3 KB 258 at 276, 
“ …I see nothing to prevent a holding company—holding being a well-known method of carrying on business in these days—from carrying on a business.”
18.	That Dawsongroup is “in business” is a proposition which I do not think can be seriously doubted. But that conclusion does not, however, answer the more difficult question, whether its “business consists wholly or mainly in the making of investments”. Mrs Cullen did not argue that there was any readily definable test of an investment company; it was, as she put it, something more easily recognised than described, like an elephant.
19.	In support of her contention that “investment” was the correct identity Mrs Cullen referred me to American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue [1978] STC 561, in which the Privy Council held that the receipt of rents could, in some circumstances, amount to the carrying on of a business, a case to be contrasted with Jowett v O’Neill and Brennan Construction Ltd [1998] STC 482, in which Park J, upholding the decision of a Special Commissioner, concluded that merely receiving the interest on moneys on deposit did not amount to the carrying on of a business. Both of those cases deal with the meaning of “business”, without directly casting light on the particular meaning of “investment company”, but I accept Mrs Cullen’s point that once it is established that a company is in business, it is necessary to identify the nature of that business, if necessary by the process of elimination she suggested, and that a company may not need to be a very active investor in order to be considered an investment company. She offered three examples to illustrate her point.
20.	The taxpayer company in MacNiven v Westmoreland Investments was itself a subsidiary of a company owned by pension scheme trustees. Its principal activity was to act as the holding company of subsidiaries which invested in commercial properties. There was no suggestion that it undertook head office functions for its subsidiaries; the issue in that case which is relevant for present purposes is whether the Special Commissioners were justified in finding that what the Crown conceded had formerly been an investment company remained such notwithstanding it had divested itself of almost all its assets. Carnwath J decided that they were, and that they were entitled to take into account, in reaching that conclusion, the company’s history over the 20 years or so before the divestment. It could be deduced from the decision that a company may be an investment company even though its level of investment activity is modest or, as in that case, very modest. 
21.	In Land Management Ltd v Fox [2002] STC (SCD) 152, a decision of a Special Commissioner, Dr Brice, it was accepted by both parties, and was therefore not in issue, that a company which, as the headnote to the published report puts it, had “income derived from a tenanted residential freehold property … held shares in [an associated company], acquired shares in a listed company, received dividends, made a loan to [the associated company] and received interest” was an investment company. Though it provides some indication of what criteria identify such a company, the absence of argument on the point necessarily means that the case must be treated with caution.
22.	A subsidiary of the taxpayer in Revenue and Customs Commissioners v Salaried Persons Postal Loans Ltd [2006] STC 1315, a decision of Lawrence Collins J (as he then was), had ceased to trade but had assets which consisted of a tenanted property and cash. The value of the property represented about 7.5% of the total. The subsidiary lent the cash, interest-free, to its parent and its only income was the rent received from the tenant of the property. The Special Commissioner (from whose decision this was an unsuccessful appeal) found that the subsidiary was not carrying on a business, of investment or any other type. Significantly, it had not acquired the property as an investment (it had previously occupied it for its own trading purposes), and it had been a passive owner, doing little more than receive the rent. Lawrence Collins J thought it a material consideration that the property represented only a small part of the subsidiary’s assets.
23.	Mr Margolin argued that the directors’ perceptions, as they had been revealed at the discussions to which I have referred, were important, based as they were on the difference, in time spent, between the investment activities and the management of the group’s trading activities. In that context it is worth recording, if only to make the point that perceptions are not necessarily the best guide, that the officers taking part in the discussions then advanced the view, as the notes reveal, that Dawsongroup was an investment company. The reality, Mr Margolin argued, was that Dawsongroup’s principal business was the provision to its subsidiaries of head office functions and strategic management. He questioned whether the holding of shares in its subsidiaries could truly be regarded, in itself, as a business activity. Although, as the Korean Syndicate case showed, a holding company could be regarded as carrying on a business, here the holding of the subsidiaries’ shares was no more than an adjunct to Dawsongroup’s principal activity of controlling a trading group. He relied on a further Irish case, Howth Estate Company v Davis (1934) 40 Saorstát Éireann Tax Cases 1, but I agree with Mrs Cullen that the facts of that case are so different from these that it is of little assistance.
24.	In my opinion, however, the authorities relied on by Mrs Cullen, illustrative though they are, are also of limited help. In MacNiven v Westmoreland Investments there was no choice to be made between investment and some other type of activity, rather the question was whether the taxpayer could be regarded as carrying on any activity at all. It is also apparent to my mind, although he does not say so in so many words, that Carnwath J harboured some doubts about the Special Commissioners’ conclusion, which he could not disturb unless it was unsupportable in the sense developed in Edwards v Bairstow [1956] AC 14. The Land Management case, as I have said, must be treated with caution, but it seems to me that the nature of the investment activity there differed in one important respect from that here, in that the taxpayer in that case invested outside its own group, while Dawsongroup does not. I do accept, however, that its investment activities are greater than those described in Salaried Persons Postal Loans.
25.	I agree with Mr Margolin that the critical tests are those adumbrated by Lightman J in the final sentence of the extract from his judgment in Cook v Medway Housing Society which I have set out above, and by Teevan J in the Monteagle Estate case. Though I accept that it is possible to be simultaneously a trading company and an investment company, I have reached the clear conclusion that Dawsongroup is a trading company which carries out its business by means of the subsidiaries which it controls, that it holds the shares in its subsidiaries as a necessary incidental to its chosen means of carrying on that activity, and that the holding of the shares is not an end in itself, a business activity in its own right. I reach the same answer by applying Mrs Cullen’s “elephant test”: an investment company, in my judgment, is one which deals in, or merely holds, assets, such as shares, land or bonds, in order to profit, by dividends, rents or interest, from its investments, but not, as here, as the means by which it is able to control the assets. Standing back from the matter, it seems to me that Dawsongroup is in reality engaged in trade. I conclude, therefore, that it is not an investment company within the meaning of s 130, and on that ground alone the appeal must accordingly fail.
Expenses of management
26.	It is not necessary to decide whether the expenditure in issue is an expense of management in view of my first conclusion, but as I heard submissions on the point I shall deal with it in case I am found elsewhere to have fallen into error on the first question.
27.	The relevant statutory provision is s 75(1) of the 1988 Act which, as it was in force for the relevant accounting period, provided that
“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.”
28.	The provision changed in 2004, when capital expenditure ceased to be deductible, but that limitation did not apply at the time Dawsongroup incurred the delisting costs and it is not necessary to consider for the purposes of this appeal whether the expenditure was of a revenue or capital nature. Here, too, there is no statutory definition or explanation of the relevant term, “management expenses”, which seems to me also to be a question of fact. What follows assumes (contrary to my finding) that Dawsongroup is to be regarded as an investment company.
29.	Mrs Cullen accepted that “management expenses” are those incurred in managing the business, rather than the investments themselves. Thus in Sun Life Assurance Society v Davidson (1956) 37 TC 330 (a decision of the House of Lords) brokerage charges and stamp duties were found not to be management charges but expenses of purchase of the investments. In Camas plc v Atkinson [2004] STC 860 the Court of Appeal, upholding Patten J and the Special Commissioners, distinguished Sun Life v Davidson (though following what Lord Reid had said in that case) and held that the costs incurred by what was indisputably an investment company in considering whether or not to make an acquisition—that is, costs which would be incurred whether or not the acquisition was made (in the event it was not)—were management expenses. What those cases showed, she said, was that the expression “management expenses” had a wide meaning (a point made by the Presiding Special Commissioner, Stephen Oliver QC, in Holdings Ltd v IRC [1997] STC (SCD) 144 at [37], again following comments to the same effect of Lord Reid in Sun Life v Davidson), limited only by the exclusion of the costs actually incurred in the making of an investment acquisition, a limitation which did not apply in this case. She argued that the expenditure was incurred in this case in order to free the business of the regulatory burden, and the financial costs that burden implied, which its listed status had imposed, and that it was correspondingly a management expense of that business.
30.	Mr Margolin, too, relied on what Lord Reid said in Sun Life, particularly his comment, at p 359, that “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”. The flaw in the taxpayer’s argument, he said, was that the expenditure in respect of which relief was sought was not incurred, to adopt a phrase used in Holdings v IRC at [40], in “the course of the investment business” (assuming Dawsongroup had any such business), or in the management of anything, even Dawsongroup’s trading business.
31.	 In my judgment Mr Margolin is right. There must, I think, be a connection, or identifiable relationship, between the expenditure and the investment business of which it is, supposedly, an expense. Here, the expenditure had nothing to do with investment (or trading, for that matter). I do not doubt that the regulatory burden was significant, that it impeded the board’s freedom to make strategic decisions and that it adversely affected the group’s growth and profitability. The question, however, is not whether the expenditure was reasonably incurred, or whether the company (ultimately the shareholders) derived a benefit from what was done in return for the expenditure, but whether it is an expense of management, that is the conduct of the (investment) business. The business undertaken by Dawsongroup, whether correctly viewed as trade or investment, was wholly unaffected by what was done—it was, and always would have been, carried on in exactly the same way; no investment decisions (such as the acquisition of a new subsidiary) depended on it; and Dawsongroup’s relationship with its subsidiaries, which represented its only investments, was, and was intended to be, unchanged. Indeed, as Mr Gear’s evidence made clear, it was the board’s perception of the effect of its listed status on the group’s trading activities (that is, the need to earn short-term profits at the expense of growth) and on the value, or perhaps more accurately the price, of its shares which led to the incurring of the expenditure. At best, it could be said to have made it possible for Dawsongroup to exploit its subsidiaries better in the future, but it could not be said to be expenditure incurred in the course of managing investments.
32.	On that ground, too, the appeal must be dismissed.

COLIN BISHOPP
TRIBUNAL JUDGE
RELEASE DATE: 9 June 2009