Can abortive deal costs ever be allowable?

The issue

Whenever a transaction completes there are usually sellers who need to calculate their capital gains and pay tax in respect of them. At a very high level a capital gain is computed as follows:

Proceeds – costs of disposal – cost of asset = taxable gain.

Most costs of sale will clearly be tax-deductible but for some the position is not so clear. For example, on a disposal is it possible to claim a deduction for a previous transaction which has been aborted?

Example

Between July and October 2019,  UK Holding Company Ltd is involved in a transaction whereby it seeks to sell its subsidiary investment company for £15M. This deal is ultimately aborted but another buyer comes to the table in February 2020 and the company is sold for £14.5M in April 2020. £90,000 of deal costs were incurred for the aborted transaction and then a further £60,000 of costs were incurred in relation to the second transaction. Everybody is agreed that £60,000 is deductible as a cost of sale but what about the £90,000 incurred in respect of the aborted transaction?

HMRC view

HMRC take the position that the £90,000 will not be deductible in respect of the disposal, although there is not to my knowledge any specific HMRC guidance on abortive costs. Anecdotally they take the view that abortive costs do not fall within section 38 TCGA 1992 which dictates what disposal costs are allowable.

The legislation (section 38 TCGA 1992)

The tax position is dictated by section 38(2) TCGA 1992 which is as follows:

38(2) For the purposes of this section and for the purposes of all other provisions of this Act, the incidental costs to the person making the disposal of the acquisition of the asset or of its disposal shall consist of expenditure wholly and exclusively incurred by him for the purposes of the acquisition or, as the case may be, the disposal, being fees, commission or remuneration paid for the professional services of any surveyor or valuer, or auctioneer, or accountant, or agent or legal adviser and costs of transfer or conveyance………

Therefore we need to answer the question of whether abortive costs are ‘wholly and exclusively’ incurred for the purposes of ‘the disposal’.

Forbes Dawson view

This is something of a philosophical question but there certainly seems to be latitude to argue that abortive costs in respect of an asset should be allowable in respect of a subsequent successful disposal. Although abortive costs do not relate to the final transaction, arguably they do relate to ‘the disposal’, being costs relating to the disposal of the asset. In the example above it is also likely that some of the ‘abortive costs’ were of direct use for the final disposal if, for example, a similar sales and purchase agreement ended up being used (with similar completion mechanisms etc). However, I do not think that this argument is necessarily required.

HMRC may resist this interpretation by taking a narrower view of the legislation. They may say that the costs can only ‘relate to the disposal’ if they relate to the specific deal with the buyer. Ultimately this is something which may end up being settled by a case. I am surprised that there do not seem to have been any such cases to date (the first person to prove me wrong gets a bottle of something – and the case must relate to abortive disposal costs).

 

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