Can a company deduct the costs of buying a business

Mostly not. Legal, due diligence and adviser fees for buying a company or a trade are normally capital, so they cannot be deducted from trading profits, and that stays true if the deal falls through. Instead, qualifying fees on a share purchase are added to the base cost of the shares, fees on buying a trade follow the assets they are capitalised into, and the costs of arranging acquisition finance are usually deductible under the loan relationship rules.

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Why are acquisition costs usually not deductible?

Section 53 of the Corporation Tax Act 2009 (CTA 2009) prohibits a deduction for items of a capital nature in calculating trading profits. HMRC’s Business Income Manual at BIM46415 says fees are capital when incurred on the acquisition of an identifiable capital asset, and gives shares in another company as an example of an asset of a capital nature. The general tests for the capital and revenue divide are explained on the page about capital or revenue expenditure.

For takeovers, BIM38260 is direct: in the majority of cases the bidding company’s expenditure is disallowable because it is capital, being the cost of acquiring a capital asset. That covers lawyers drafting the sale agreement, accountants carrying out financial due diligence, corporate finance advisers running the deal and any success fee.

Does it make a difference if the deal falls through?

No. BIM38260 states that abortive takeover expenditure is still capital, following ECC Quarries Ltd v Watkis (1975) 51 TC 153. HMRC’s Company Taxation Manual at CTM08260 quotes Lothian Chemical Co Ltd v Rogers (1926) 11 TC 508: expenditure “does not change its nature according to whether it be successful or unsuccessful”. The test is what the company would have obtained had the deal completed.

The practical difference is that abortive costs on a share deal never become part of any base cost, because no shares are acquired. They are usually lost for tax entirely.

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Where is the line between looking at targets and buying one?

For a holding company with an investment business, relief comes through management expenses under section 1219 CTA 2009, and section 1219(3)(a) excludes capital expenditure. CTM08260 sets out HMRC’s approach:

Expenditure on appraising and investigating possible investments is generally revenue, up to the point the company decides to acquire a particular investment. Preliminary reports and profit forecasts on several options are given as an example.
Once that decision is made, later expenditure is capital and disallowed by section 1219(3)(a).
Making any offer to the target, including an indicative or conditional offer, suggests the decision has been made.
A success fee is likely to be capital.

CTM08190 explains that this follows Camas plc v Atkinson [2004] EWCA Civ 541, where the Court of Appeal held that expenditure does not form part of the acquisition cost until, at the earliest, the decision to acquire. Even so, it adds that the direct costs of changing investments, such as brokerage and stamp duty, are never management expenses. A trading company buying a competitor faces BIM38260’s starting point that the acquirer’s costs are normally capital.

Which costs are added to the base cost of shares?

Section 38(1)(a) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) allows the price paid plus the incidental costs of acquisition when computing a later gain. Section 38(2) defines incidental costs as expenditure wholly and exclusively for the acquisition, being fees, commission or remuneration for the professional services of a surveyor, valuer, auctioneer, accountant, agent or legal adviser, costs of transfer or conveyance including stamp duty, and costs of advertising to find a seller.

HMRC’s Capital Gains Manual at CG15250 says that list is exhaustive and that adviser fees count only to the extent they are directly referable to acquiring the particular investment. General strategic advice, market research or financing advice is not part of the base cost. Base cost only helps if the eventual sale produces a chargeable gain or allowable loss. If the disposal is exempt under the substantial shareholding exemption, the capitalised fees give no relief.

What happens on a trade and asset purchase?

In the accounts, FRS 102 paragraph 19.11 measures the cost of a business combination as the fair value of what is given plus any costs directly attributable to the combination, so deal fees increase the cost allocated to goodwill and the other assets acquired. The differences between buying shares and buying a trade in the accounts are covered on the page about trade and assets versus share purchases.

For tax, the treatment depends on where the costs end up:

Goodwill and other intangibles: under Part 8 CTA 2009, CIRD12720 says the tax cost starts from the capitalised expenditure shown in GAAP accounts. Relief for goodwill bought on or after 1 April 2019 is only available where the business is bought with qualifying intellectual property, at a fixed 6.5% a year on the lower of the cost and six times the cost of the qualifying IP. The regime is explained on the page about intangible fixed assets.
Plant and machinery: CA20070 says professional fees qualify for plant and machinery allowances only if they relate directly to the acquisition, transport and installation of the plant. Fees for buying the business as a whole will rarely meet that test.
Property: fees within section 38(2) TCGA 1992 form part of the base cost of the building.

Can the cost of arranging the acquisition loan be deducted?

Usually, yes. For a company, section 306A(2) CTA 2009 treats expenses incurred directly in bringing a loan relationship into existence as loan relationship debits, and section 329 extends this to abortive finance costs. BIM45815 lists typical allowable costs, such as legal fees for negotiating the loan, arrangement and commitment fees and fees for valuations needed for security. It also warns that where a loan funds an acquisition, the costs of the borrowing must be separated from the costs of the acquisition. Unless the borrowing is for the trade, the debits are non trading.

How might the fees on a typical deal be treated?

Illustration only. Holdco Ltd, a holding company with an investment business, looks at three possible targets and pays £8,000 for initial market reports. It then makes an indicative offer for Target Ltd, pays £45,000 for due diligence and legal work on the share purchase, a £30,000 success fee to its corporate finance adviser and £12,000 to its lender’s solicitors and for an arrangement fee on the acquisition loan.

£8,000 market reports: appraisal before the decision to acquire, so likely to be a management expense under CTM08260.
£45,000 due diligence and legal fees after the offer: capital. The part that is for a listed professional’s services wholly and exclusively for the acquisition is added to the base cost of the Target Ltd shares under section 38.
£30,000 success fee: capital under CTM08260. It is added to base cost only if it is remuneration for an agent’s or other listed professional’s services for the acquisition.
£12,000 finance costs: non trading loan relationship debits under section 306A.

If the deal had collapsed after the offer, the £45,000 and £30,000 would have been disallowed with no base cost to carry them, while the £8,000 and the finance costs under section 329 would still be relieved.

What mistakes come up most often?

Writing off abortive deal costs in the accounts and deducting them in the tax computation.
Treating every fee after the offer as base cost without checking it falls within the section 38(2) list.
Not asking advisers to split invoices between appraisal work, the acquisition itself and the financing, so the different treatments cannot be supported.
Assuming capitalised goodwill on a trade purchase will be amortised for tax without qualifying IP.
Forgetting that a later sale qualifying for the substantial shareholding exemption makes capitalised fees worthless for tax.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.