Hibernian Insurance Ltd v Inspector of Taxes

• Jurisdiction: Ireland
• Judge: BARRON J.,Mr Justice Francis D Murphy
• Judgment Date: 20 January 2000
• Neutral Citation: [2000] IESC 41
• Date: 20 January 2000
• Court: Supreme Court
• Docket Number: [1996 No. 110R, S.C. No. 307 of 1998]

[2000] IESC 41

THE SUPREME COURT

Hamilton CJ

Murphy J

Barron J

307/98

HIBERNIAN INSURANCE CO LTD v. MACUIMIS (INSPECTOR OF TAXES)

BETWEEN:

HIBERNIAN INSURANCE COMPANY LIMITED

APPELLANT

AND

MAC UIMIS (INSPECTOR OF TAXES)

RESPONDENT

Citations:

CORPORATION TAX ACT 1976 S15

CORPORATION TAX ACT 1976 S15(1)

INCOME TAX ACT 1918 S33

CORPORATION TAX ACT 1976 SCHED D CASE V

SUN LIFE ASSURANCE SOCIETY V DAVIDSON 37 TC 330

WHEATCROFT LAW OF INCOME TAX SURTAX & PROPER TAX (1952) PARA 1/688

CORPORATION TAX ACT 1976 S107

INCOME TAX ACT 1967 S428

CORPORATION TAX ACT 1976 S146

FINANCE ACT 1915 S41(1)

FINANCE ACT 1915 S21(2)

CORPORATION TAX ACT 1976 S15(6)

CORPORATION TAX ACT 1976 S11(1)

CORPORATION TAX ACT 1976 S14(1)

BRENNAN MOORE & CARR CORPORATION TAX

CAPITAL & NATIONAL TRUST LTD V GOLDER 31 TC 265

HOECHST FINANCE LTD V GUMBRELL (INSPECTOR OF TAXES) 1981 STC 127

INCOME & CORPORATION TAX ACT 1970 S304(1) (UK)

HOECHST FINANCE LTD V GUMBRELL (INSPECTOR OF TAXES) 1983 STC 150

STEPHEN COURT LTD V BROWNE 1984 ILRM 231

INCOME TAX ACT 1967 S81(5)(d)

INCOME TAX ACT 1967 S81

SOUTHWELL V SAVILL BROTHERS LTD 1901 2 KB 349

SARGEANT (INSPECTOR OF TAXES) V EAYRS 48 TC 573

LOTHIAN CHEMICAL CO LTD V ROGERS 1926 11 TC 508

Synopsis

Taxation

Taxation; corporation tax; management expenses; whether certain expenses incurred by the appellant in evaluating potential investment opportunities were expenses of management; whether it is significant that such costs were incurred before the decision to purchase; whether the relationship between the expenses incurred and the potential purchases was such as to deprive that expenditure of the character of expenses of management; whether the legislation directed the deduction of sums dispersed as "expenses of management" without reference to any other quality or characteristic of the disbursement; meaning of "management" in legislation; s.15(1), Corporation Tax Act, 1976; s.33, Income Tax Act, 1918.

Held: Appeal dismissed.

Hibernian Insurance Company Limited v. MacUimis - Supreme Court: Hamilton C.J., Murphy J., Barron J. - 20/01/2000 - [2000] 2 IR 279 - [2000] 2 ILRM 196

The plaintiff had incurred various expenses in investigating the possible purchase of a number of companies. The companies themselves were not ultimately purchased. The plaintiff claimed that it was entitled to treat the expenses incurred as management expenses and as a consequence was deductible for the purposes of corporation tax liability. The claim was rejected in the Circuit Court and in a reference to the High Court the decision was affirmed. The plaintiff appealed. The Supreme Court rejected the appeal holding that the costs in question were correctly characterised as not falling within the category of management expenses.

1 Judgment of Mr Justice Francis D Murphydelivered the 20th day of January 2000

2 This appeal raises the issue whether certain disbursements by Hibernian Group Pic (the Group) and surrendered by it to Hibernian Insurance Company Ltd (Hibernian) constitute management expenses within the meaning of s. 15 of the Corporation Tax Act, 1976, and as such deductible in computing liability to Corporation Tax.

3 The issue arises in this way. The Group was incorporated on the 7th April, 1986, with the object of facilitating the expansion of life and general insurance business carried on through subsidiary companies both by organic growth and through investments when suitable opportunities arose. By its memorandum the Group was authorised to carry on the business of an investment company and in fact its business consisted wholly or mainly in the makingof investments and the principal part of its income was derived from the making of such investments. That business required the maintenance and evaluation of the existing investments of the Group and the evaluation of potential investment opportunities.

4 In May 1986 the Group acquired the entire share holding in Hibernian. On the 21st August 1987 the Group acquired 50% of the shares in Hibernian Life Association. On the 20th of December 1988 the Group incorporated Hibernian Reinsurance and on the 29th of June 1989 Hibernian Investment Managers was incorporated. In the period between 1986 and 1990 three significant investment opportunities arose, two in Ireland, namely, PMPA and ICI and one in Spain, namely, Vimar. These were insurance companies the purchase of shares in which was explored and evaluated by or on behalf of the Group. In so doing the Group incurred expenditure of£404,720 largely in respect of advice from investment bankers and leading accountants as well as legal advice. In the event none of the three companies was ultimately acquired by the Group.

5 The Group contended that the expenditure constituted management expenses within the meaning of s. 15. It was not disputed that the Group was entitled and did surrender to Hibernian those expenses pursuant to 5.107 of the Corporation Tax Act, 1976.Furthermore, it was claimed by the Group, and conceded by the Inspector, that the Group was at all material times an investment company within the meaning and for the purposes of s. 15 aforesaid. Accordingly, the expenditure totalling £404,720 would have been available to Hibernian as a deduction in computing its total profits for the purposes of corporation tax if and to the extent that such disbursements constituted "expenses of management" within the meaning of that section. The claim by the Group to such a deduction having been refused bythe Inspector of Taxes it was appealed to the Circuit Court in Dublin where Judge Devally found against Hibernian and in favour of the Inspector expressing his views in the following terms:-

"A four year period of intense and sustained research and consultation took place between 1986 and 1990 which I am unable to classify or describe as management, either in the generally accepted sense of the term or within the thrust or context of the reference to which I have been directed and the evidence which I have heard. I believe that the £404,720, the subject of the claim, was expended in looking at projects which I would regard as being in the category of mergers/takeovers and would be in the category of capitalexpenditure."

6 The learned Judge then, at the request of Hibernian, stated a case for the opinion of the High Court under s.428 of the Income Tax Act, 1967, as applied by s.146 of the Corporation Tax Act, 1976.The question on which the opinion of the Court was sought was whether the Judge was correct in holding that the expenditures aforesaid were not expenses of management within the meaning of s. 15 (1) of the Corporation Tax Act, 1976.In the body of the Case Stated the Judge of the Circuit Court set out with commendable clarity the facts which he had found or were admitted in relation to the manner in which the business of the Group was managed and in the schedule to the Case Stated he set out details of the services rendered in respect of the payments claimed to be expenses ofmanagement.

7 The findings and admissions in relation to the business of the company are set out in lettered paragraphs of which the most important were asfollows:-

8 a "(B) The business of the Group consisted wholly or mainly in the making of investments and the principal part of its income has been derived from the making of investments. The Group's business of making investments required:-

9 (I) the maintaining and evaluating of its existing investments;and

10 (II) evaluating potential investment opportunities.

11 b (F) The business of the Group as managed by the Board of Directors which in the year ended the 31 December 1990 comprised Mr Eamon Walsh, Group Chief Executive and other executive and non executive directors. In practice, the function of management was delegated to a subcommittee of the Board which then procured the necessary appraisal skills and advice from professional experts, both internally and within the Group structure and also externally.

12 c (H).... The process [of evaluating potential investment opportunities] required an active role for the management beginning with the identification of possible acquisitions, setting the evaluation process in train, co-ordinating the efforts of the management team and the professional advisors involved in considering the acquisition, investigating the possible sources of finance and deciding how the investment would fit in with the Group's current portfolio of investments. At any stage the process could be discontinued whether due to the investment turning out to be unsuitable, the breakdown in negotiations or otherwise."

13 Particulars set out in the Schedule in the Case Stated in numbered paragraphs relating to the fees or costs paid for expert advice in relation to potential investments included the following: -

"1 Investment Bank of Ireland ("IBI")

14 IBI were retained to assist management in providing critical appraisals and advice to the board of the Group on the proposed investments in ICI and PMPA. Detailed consultation took place between the Group's management and IBI and detailed reports were prepared by IBI for the Group board. Both of these companies were very sizeable operators in the Irish market and all of the enquiries referred to in the opening paragraphs above had to be carried out. This involved a very substantial amount of collaboration with the Group's management. In the case of PMPA, circumstances were such that a bid did not emerge. In the case of ICI, an offer was made and this was not accepted. The Group was invited to make a second offer which was also ultimately not accepted. In both cases, the sale involved purchase of shares in a new company which would have become a subsidiary of the Group.

5 Coopers & Lybrand - Vimar

15 These fees were incurred for detailed audit and evaluation work carried out by Coopers & Lybrand's Madrid office on this potential Spanish general...