A special commissioner decided that expenditure on motor rallying carried on by the sole proprietor of a business was wholly and exclusively laid out for the purposes of the trade and so could be deducted in computing the taxpayer's profits.

Facts

The taxpayer appealed against discovery assessments under TMA 1970, s. 29 disallowing rally car marketing expenditure of £11,733, £11,747 and £25,018 respectively for those years. He also appealed against the disallowance of capital allowances for those years in respect of the rally cars. The taxpayer argued that the advertising costs in respect of a rally car were wholly and exclusively laid out or expended for the purposes of the trade as prescribed by ICTA 1988, s. 74. Similarly the claim for capital allowances in respect of the rally car was allowable. The taxpayer contended that the expenditure on motor rallying was for the purposes of the trade and resulted from a rational and, in retrospect, successful commercial decision. So far as any benefit accrued to the taxpayer personally by way of the motor rallying expenditure, that benefit was purely incidental and could not rightly be said to have been the purpose of the expenditure. The Revenue contended that the evidence showed that the non-business advantage to the taxpayer of promoting his own motor rallying interest and career was the, or at least an, object of the expenditure. On that basis s. 74(1)(a) applied to prohibit the deduction of the expense and the assessments should be upheld accordingly.

The taxpayer further argued that reliance could not be placed on TMA 1970, s. 29 in raising an assessment outside the prescribed time-limit. As this was a case of alleged innocent mistake, the 12-month limitation in TMA 1970, s. 9A applied. The question was whether the Inland Revenue officer ‘could not reasonably have been expected on the basis of information available to him to be aware of such excessive claims for relief’ (within s. 29(5)).

Issues

Whether the discovery assessments were in time and whether the expenditure on motor rallying was expenditure wholly and exclusively laid out for the purposes of the trade.

Decision

The special commissioner (Stephen Oliver QC) allowed the appeals in principle.

Discovery assessments

The Computation Report annexed to the 1999 return referred to ‘Rally car (marketing of business)’ under the heading ‘Capital Allowances’. Later Overflow Reports referred only to ‘Rally Car’ under the capital allowances headings. That was the limit of the Inland Revenue officer's awareness and those points were insufficient to alert the officer to the possibility of an excessive claim. As 1998–99 was the first year in which the taxpayer's business had been claiming motor rallying expenses, there should have been something in the return information for that year to record that the trading expenses included motor rallying expenditure. There should also have been something to explain how that had come about. For the years 2000 and 2001 the reference to the rally car was even less explicit and made no mention of ‘marketing of business’. The reference to ‘rally car’ in the capital allowances computations served as a clue to the reasonably alert Revenue officer, but it came nowhere near to clearly alerting him to the possibility of an excessive claim. The reference to ‘rally car’ in the capital allowances was not enough to draw attention to the fact that the computation of trading income included expenditure on motor rallying; nor did it indicate how a rally car was seen to be a means of marketing the minibus business. Accordingly, the discovery assessments were all made in time.

Purpose of expenditure

On the evidence, the taxpayer's motor rallying activities from 1999 onwards were for the purposes of promoting a business. There was no reliable way of determining whether the motor rallying activities caused the improvements in sales but the motor rallying complemented the business and vice versa. It followed that the whole of the disputed expenditure served the purpose of the trade and that the taxpayer's intention (in his capacity as the proprietor of the business) was to benefit the trade by promotion of the name and facilities that it offered. The taxpayer took part in motor rallying because he enjoyed it and it gave him satisfaction. If he had not been good behind the wheel it would have been pointless to have incurred the expenditure. The taxpayer was using his skill and enthusiasm for motor rallying as the best means available to him for promoting the business. He enjoyed it and it had given him satisfaction in just the same way as running an evidently successful business had done. Nonetheless the securing of the private satisfaction of success on the rally circuit could properly be described as an incidental effect of the payment. Standing back and looking at all the circumstances the tribunal was satisfied that the particular object that the taxpayer sought to achieve from the disputed expenditure on motor rallying was the promotion of the business. On that basis the disputed expenditure was laid out wholly and exclusively for the purposes of the trade. It was not therefore excluded from deduction in computing the profits of the trade by ICTA 1988, s. 74(1)(a). The appeals would be allowed in principle.

(2007) SpC 601.
Decision released 19 March 2007.