HMRC has launched a ‘One to Many’ campaign about the corporation tax treatment of expenses incurred by holding companies of corporate groups. Whilst the campaign may be targeted at larger businesses, there are potentially lessons for all corporate groups, particularly those with overseas operations.

The key to ensuring the correct treatment is applied to expenses of holding companies is understanding the exact nature of the expenditure – what it was incurred on and for whose benefit it was incurred. Failure to consider ‘corporate plumbing’ may result in a challenge from HMRC and additional tax liabilities.

What types of companies are affected?

Corporate groups will have an ultimate parent company and will often have multiple intermediate holding companies. Typically, if such a company is subject to UK corporation tax, it is considered to have an investment business in relation to its subsidiaries, even in cases where it also carries on a trade.

What are management expenses?

Expenses that relate to the management of a company’s investment business are treated as management expenses for UK corporation tax purposes. Generally, such expenses are tax deductible, if they are not capital in nature and are not otherwise specifically disallowed.

For a holding company, deductible management expenses may include:

• Staff costs relating to management of the company’s subsidiaries.
• Administrative expenses related to compliance obligations such as audit, accounts filing and tax.
• General advice in relation to strategic options for future acquisitions and disposals (costs that relate directly to a specific transaction are likely to be capital in nature and therefore would be disallowable).

However, not all expenditure that is incurred by a holding company will necessarily fall within the definition of management expenses.

What other types of expenses do holding companies typically have?

It is not uncommon for a holding company to bear costs centrally for its subsidiaries. Such costs are not management expenses for corporation tax purposes as they are incurred for the benefit of the businesses carried on by the subsidiaries, not the investment management business carried on by the holding company. Such costs might include the costs of centralised finance, IT and human resources functions, to the extent the relevant services are consumed by companies other than the holding company.

Depending on the exact nature of the activities undertaken by the holding company in respect of these functions, it may be appropriate for these costs to be recharged to each relevant subsidiary, such that they are not treated as expenses of the holding company for the purposes of accounting and, by extension, tax.

However, it is also possible that the holding company’s activities in this regard will amount to a trade of providing management or other related services to its subsidiaries. In this case, the relevant expenditure should normally be treated as trading expenses, with transfer pricing principles applied to determine the amount of trading income to be recognised.

HMRC’s ‘One to Many’ campaign explained

A One to Many campaign is where HMRC sends one standard message to many customers. Whilst it is not a compliance check, the aim is to influence customers’ behaviour, so they are more likely to comply with their tax obligations.

As part of the campaign that has recently begun, HMRC is issuing letters to certain holding companies with overseas subsidiaries that have claimed relief for significant management expenses. It believes that many such businesses may have miscategorised expenditure as management expenses.

Where a business receives such a letter, it should consider whether relevant expenditure has been treated appropriately. In particular, consideration should be given to:

• The nature of the expenditure.
• For whose benefit the expenditure was incurred.
• The capacity in which the company incurred this expenditure.

Where expenditure was incurred as part of services provided to UK subsidiaries and a trade consisting of the provision of similar services has been recognised, any corrections for miscategorised expenditure may ultimately be tax neutral in consequence of transfer pricing ‘compensating adjustment’ rules. However, where a UK holding company has overseas subsidiaries, there is a substantial risk of HMRC challenge, as the miscategorisation may have resulted in a failure to recognise profits and consequential loss of tax in the UK.

Next steps for holding companies reviewing corporation tax treatment

We would recommend that corporate groups review the expenditure incurred by ultimate and intermediate holding companies, to ensure recharges are made where appropriate and the correct treatment is applied in tax returns. This will be a particularly pressing issue for those that receive a One-to-Many letter, as failure to take action now is likely to result in increased penalties should an issue be identified in a subsequent HMRC enquiry.

However, all groups should pro-actively ensure that they have appropriate transfer pricing policies and effective procedures to ensure they are properly implemented. Failure to adequately address such ‘corporate plumbing’ could result in significant tax leakage if HMRC comes calling.

For further information, please get in touch with James Morris, Paul Minness or your usual RSM contact.

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