Chapter 2: Management expenses
Section 1219: Expenses of management of a company’s investment business
3086.This section sets out what are “expenses of management”. It is based on section 75 of ICTA.
3087.There is no explicit definition of “expenses of management” either in the source legislation or in this Act. Instead, the limits of the expression are set by:
case law, in which the expression (retained in this Act) has been considered;
general exclusions set out in this section;
specific reliefs set out in Chapter 3 of this Part; and
specific restrictions set out in Chapter 4 of this Part.
3088.Subsection (1) ties the expenses to the management of the company’s investment business (defined in section 1218), and to the accounting period to which the expenses are “referable” (see section 1224).
3089.The section provides that the expenses are allowed as a deduction, echoing the words of Part 3 (trading income). HMRC guidance (see paragraph 8580 of the Company Taxation Manual) suggests that the deduction of management expenses is mandatory. But this amounts to the same thing.
3090.Both restrictions in subsection (2) apply for the purposes of this Part (see section 1218).
3091.Subsection (3) excludes capital expenditure, in terms that follow closely the trading income rule. It also prevents a deduction as management expenses for anything that is otherwise allowable for tax purposes.
Section 1220: Meaning of “unallowable purpose”
3092.This section explains “unallowable purpose”, an expression used in section 1219(2)(b). It is based on section 75 of ICTA.
3093.Subsection (1) is the basic rule that explains the ordinary meaning of “unallowable purpose”.
3094.Subsection (2) extends “unallowable purpose” to include investments held in connection with arrangements to secure a tax advantage.
Section 1221: Amounts treated as expenses of management
3095.This section makes clear the relationship between two of the rules in section 1219 and rules elsewhere in this Part. It is based on section 75 of ICTA.
3096.The rule in section 1219(3)(a) which excludes capital expenditure is not applied to a rule that treats an amount as an expense of management.
3097.Similarly, the rule in section 1219(2) that expenses must be “in respect of” the company’s investment business is not applied to a rule that makes an amount deductible as an expense of management. See Change 81 in Annex 1.
Section 1222: Income from a source not charged to tax
3098.This section requires non-taxable income to be set off against management expenses. It is based on section 75 of ICTA.
Section 1223: Carrying forward expenses of management and other amounts
3099.This section allows excess management expenses to be carried forward. It is based on section 75 of ICTA.
Section 1224: Accounting period to which expenses are referable
3100.This section introduces the timing rules for management expenses. It is based on section 75A of ICTA.
3101.Subsection (2) makes clear that the general rules in this Chapter may be overridden by a specific timing rule elsewhere.
Section 1225: Accounts conforming with GAAP
3102.This section gives the timing rule in the two most common cases. It is based on section 75A of ICTA.
3103.Subsection (1) deals with the first most common case. The management expenses are “referable to” the accounting period for which accounts are drawn up in accordance with generally accepted accounting practice (“GAAP”). GAAP is defined in section 50(1) of FA 2004.
3104.UK generally accepted accounting practice is defined in section 50(4) of FA 2004.
3105.Subsection (2) deals with the second most common case. GAAP accounts are drawn up. But the period of the accounts does not coincide with the company’s accounting period. The expenses are apportioned.
3106.Subsection (3) sets out the basis of apportionment. It retains the words “it appears that” because they may make the test easier to meet than an apparently objective test (“if the method would work unreasonably …”). But the second “appears” in section 75A(5) of ICTA (“such other method … as appears just and reasonable”) is dropped as it adds nothing. So the wording here is consistent with other “just and reasonable” apportionments in the Act. The same point arises in connection with section 1229(6).
Section 1226: Accounts not conforming with GAAP
3107.This section gives the timing rule if accounts are not GAAP compliant. It is based on section 75A of ICTA.
Section 1227: Accounts not drawn up
3108.This section gives the timing rule if there are no accounts. It is based on section 75A(7) and (8) of ICTA.
3109.The rule is that the management expenses are “referable to” the accounting period into which they would have fallen if GAAP accounts had been drawn up.
3110.There are alternative definitions of GAAP in section 50 of FA 2004. International standards apply if the company “prepares accounts in accordance with international accounting standards”. In any other case (including the case where no accounts are prepared), the United Kingdom standard (UK GAAP) applies.
3111.The combined effect of section 50(1) and (4) of FA 2004 is that in section 75A(8) GAAP means UK GAAP. A similar point arises in section 1231. In each case the section specifies UK GAAP.
Section 1228: Credits that reverse debits
3112.This section explains that the credits in accounts with which sections 1229 and 1230 are concerned include repayments and amounts never paid. It is based on section 75B of ICTA.
Section 1229: Claw back of relief
3113.This section applies the corporation tax charge to credits in accounts that reverse management expenses. It is based on section 75B of ICTA.
3114.Subsection (5) provides for any necessary apportionment of the company’s accounts to accounting periods.
3115.Subsection (6) sets out the basis of apportionment. It retains the words “it appears that” because they may make the test easier to meet than an apparently objective test (“if the method would work unreasonably …”). But the second “appears” in section 75B(6) of ICTA (“such other method … as appears just and reasonable”) is dropped as it adds nothing. So the wording here is consistent with other “just and reasonable” apportionments in the Act. The same point arises in connection with section 1225(3).
Section 1230: Meaning of “reversal amount”
3116.This section calculates the reversal amount. It is based on section 75B of ICTA.
3117.The calculation is set out in a method statement that excludes from the credit in the accounts:
anything that does not relate to management expenses previously allowed; and
anything that has already been taxed.
Section 1231: Absence of accounts
3118.This section sets out what happens if there are no accounts. It is based on sections 75B and 578A of ICTA.
3119.The reversal amount is the amount that would have been credited to GAAP accounts for the company’s accounting period.
3120.There are alternative definitions of GAAP in section 50 of FA 2004. International standards apply if the company “prepares accounts in accordance with international accounting standards”. In any other case (including the case where no accounts are prepared), UK GAAP applies.
3121.The combined effect of section 50(1) and (4) of FA 2004 is that in section 75B(10) GAAP means UK GAAP. A similar point arises in section 1227. In each case the section specifies UK GAAP.
