The appeal case, Howden Joinery Group PLC & Anor v R & C Commissioners [2014] TC 03396 UKFTT 257, related to expenses of management under corporation tax rules.

The FTT part-allowed the Howden Joinery's appeal against HMRC’s refusal to allow, as deductible ‘expenses of management’, certain expenses and provisions arising in connection with rental guarantees given by the taxpayer to landlords of its former subsidiary company.

The appellant taxpayer (HJ) included £10m of current year expense and £86m of provisions in respect of future years’ expense as deductible ‘expenses of management’ within Income and Corporation Taxes Act 1988 (ICTA), s75 for the year 2008.

HJ’s appeal against HMRC was joined with a related appeal over HJ’s surrender of some £87m (of such management expenses) by way of group relief to a subsidiary of HJ. These expenses related to payments made or to be made by HJ in respect of parent company guarantees it had given over a considerable number of leases of properties entered into by MFI Properties Limited (‘properties’). The guarantees had been given over an extended period of time, the earliest dating back to 1981.

Until September 2006, HJ was parent company of the MFI group of companies, which included properties. HJ sold the MFI group, including properties, to a third party, Mayflower, in September 2006. Properties, and Mayflower, went into administration in October 2008, and November 2008, respectively. As a result, HJ was called upon by various landlords of properties to make payments under the parent guarantees. Those guarantees by HJ had remained in force after the sale to Mayflower (although Mayflower had given an indemnity – now largely worthless - to HJ in respect of its guarantee obligations).

HJ sought to manage and limit or terminate its exposure to these liabilities, in negotiation with the various landlords. There was no single approach to HJ exiting from its guarantee obligations. That depended on negotiation with each landlord.

In some cases HJ paid a lump sum, in others it subsidised rental of replacement tenants. Where a lump sum settlement was negotiated, the form of Deed of Release was expressed to release HJ from all of its obligations and liabilities under the lease in question or any supplemental deed, in return for a lump sum described (at least in the earlier releases) as a ‘capital payment’.

The obligations and liabilities from which HJ was released included the obligation to pay lease rents and the obligation to take on a new lease if the tenant (Properties) went into liquidation and the landlord required it.

2008 tax computation

HJ’s tax computation for 2008 included as deductible amounts:

• payments of guaranteed rent (‘Guarantee Payments’) made on 36 properties for the fourth quarter of 2008 (some (£3.5m);
• lump sum settlement payments made under ‘Release Agreements’ on seven properties in late 2008 (some £7.5m);
• payment of costs related to the above matters (some £1.8m); and
• a provision of some £86m (‘the Provision’) in respect of future obligations under its ongoing rental guarantees. This provision was broadly calculated by extrapolating the rental due to the end of the relevant lease tem and applying a 3% discount to that amount.

It was not in dispute that HJ was an investment company or that the provision was made in accordance with UK GAAP and FRS 12, Provisions, Contingent Liabilities and Contingent Assets, in particular. For the 2008 year, in which the various payments were made, and the provision recognised, Properties was no longer a subsidiary of HJ.

This case covers some important ground on deductibility of “expenses of management”, and contains a “roll call” of famous, historic cases in this area – Sun Life, Tucker v Granada, Johnson Matthey

Mark Cawthron, tax writer, CCH

The Tribunal judges, Rachel Short and Andrew Perrin, said that this case threw up a number of difficult issues – of how payments that replace legal payment obligations of a third party should be treated; of how to look at the purpose of the taxpayer where circumstances at time of giving the guarantee will be very different to those at the time payment is actually made; and because the position of a group holding company as the person incurring expense throws into harsh light arguments about ‘purpose’ and possible ‘duality of purpose’.

Before making the ruling, the Tribunal set out some findings of fact, including:

• HJ’s purpose when entering into the guarantees was to sustain the value of its investments and the returns obtained in the form of shares and dividends;
• The Release Agreements were new agreements in 2008, to get out of the original guarantee obligations;
• The £86m provision was for future payments under existing guarantee obligations, plus related costs, including expenditure on maintaining the leased buildings themselves.

In conclusion, the Tribunal held that HJ’s appeal should be allowed with respect to the payments under the Release Agreements, and related costs, but dismissed with respect to the Guarantee Payments and the Provision.

Comment

Mark Cawthron, tax writer at CCH said: ‘This case covers some important ground on deductibility of “expenses of management”, and contains a “roll call” of many of the famous, historic cases in this area – Sun Life, Tucker v Granada, Johnson Matthey, Vodafone v Shaw and Camas; in addition, reference is made to the well-known case on the “character” of payments made under guarantee (Westminster Bank v National Bank of Greece).