Whether payments totalling £1.2 million by a group of companies to sponsor a struggling rugby football club were deductible for corporation tax purposes

Background

In three accounting periods between 2003 and 2006, the holding company of a group of companies involved in the fishing industry paid about £1.2 million to Plymouth Albion, one of the largest rugby clubs in the South West of England. The sums paid represented about 1%–3% of the company’s turnover.

The payments were made to the club by Interfish Ltd (“the taxpayer”). The business of the taxpayer includes fishing, fish processing and wholesale, and a fish retailing business based in Plymouth with the brand name South West Seafoods (“SWS”). The company is both a major employer in Plymouth and a significant business in its area. It is controlled by Mr Colam (“the director”).

The taxpayer argued that the payments made to the rugby club were of benefit to the business because they visibly promoted the brand and made it easier to obtain bank funding for its expansion.

During the period in question, the taxpayer (and other local companies) had advertised on players’ shirts. In addition the logo also appeared on each page of the club’s website and the club was used for business hospitality.

The taxpayer both lent money to the club and made substantial payments to cover a deficit in the club’s player budget. One of the club’s needs was to improve its squad of players. Hence the first sponsorship payment was to enable the club to recruit a well-known former rugby player and sporting personality as its director of rugby.

The director of Interfish Ltd also attended committee meetings with a view to providing support to the new director of rugby in getting finance for a group of players that would make the club more attractive to spectators. For example, on 22 April 2004, a budget for the year 2004/2005 was presented including a player budget of £658,000 and Interfish sponsorship of £250,000. This budget was subsequently approved on the basis that the new director of rugby felt that the club could survive and obtain promotion with this budget, despite it being a tenuous belief.

In addition, a particular benefit to the taxpayer of making the payments (as perceived by the director), apart from visible promotion of the brand, was that it made it easier to obtain bank funding for expansion.

The First Tier Tribunal (FTT) noted the role the director had taken on at the rugby club (which commenced in 1999), his promise of financial support and the loan made to the club which was perceived by that director as likely to earn the goodwill of a local banker. Another example given in evidence of the advantages the director’s position at the club brought was an occasion in which it was necessary for it to bring a large vessel into Plymouth unexpectedly at short notice. On that occasion arrangements were made quickly for the taxpayer to have the temporary use of a ferry berth. In addition, the director’s position at the club also enabled him to have club players, who enjoyed a degree of star status locally, promote the brand in local stores.

Thus the taxpayer claimed the sums as advertising and marketing deductions for corporation tax under section 74(1) ICTA 1988. HMRC disagreed and the taxpayer appealed that decision to the FTT.

The FTT agreed with HMRC finding two purposes in the making of the payments; being both in order to improve the financial position of the rugby club and to ensure that those involved in the club would look favourably upon the taxpayer in ways that would assist its trade. Thus the payments were not deductible because they were not “wholly and exclusively laid out or expended for the purposes of the trade”.

The taxpayer appealed that decision to the Upper Tribunal (“UT”) arguing that the FTT had made an error in law, saying its only purpose in sponsoring the rugby club was business. The rugby club’s improved financial position was a necessary and intermediate step to the only purpose of boosting the taxpayer’s finances. The UT also held that the payments were not deductible for the same aforementioned reasons.

Decision

The Court of Appeal held that the provisions in section 74(1)(a) as examined by the courts over the years have never wavered from the proposition that the business purpose must be the sole purpose. Therefore on that basis, it might have been thought that once the FTT found the payments by the taxpayer had two purposes, that would be the end of its appeal.

However, on behalf of the taxpayer a number of what were referred to by the Court as “beguiling” submissions, were made in support of the payments being deductible. In particular it was contended that the taxpayer did, in fact, have only one purpose in making its payments and that was a business purpose.

The purpose of improving the financial position of the rugby club was merely a necessary and intermediate purpose on the way to the sole and ultimate purpose of improving the financial position of the taxpayer’s business. It was also asserted that where there are two purposes, but one is merely an intermediate purpose on the road to a final purpose, then the requirements of section74(1)(a) are satisfied.

The purpose was to improve the financial position of the rugby club in order to achieve the taxpayer’s ultimate business purpose. It was contended that that satisfies the requirement that the payments were made exclusively for the purposes of it’s trade. The failure, either of the FTT or the UT, to recognise that one purpose may be intermediate or incidental to the ultimate purpose, namely, a trade advantage, amounted to an error of law.

The Court of Appeal did not agree with that contention. If authority was needed for such a proposition, a strong argument could be found against it in the judgment of Romer LJ in Bentley Stokes and Lowless v Beeson [1952] 33 TC 491. That proposition was repeated by Lord Brightman in Mallalieu v Drummond [1989]:-

“If it appears that the object of the taxpayer at the time of the expenditure was to serve two purposes, the purposes of his business and other purposes, it is immaterial…that the business purposes are the predominant purposes intended to be served.”

Despite this clear statement of principle, the taxpayer sought authority for its contention that an intermediate purpose on the way to achieving an ultimate purpose may be disregarded. The authority for this proposition, it argued, was to be found in the Bentley case itself. In that case, partners in the solicitors firm of Bentley Stokes and Lowless lunched their existing clients in a social club or in restaurants in the West End. The Special Commissioners found as a fact that there was a social element in the lunches, forming part of the “motive” in providing hospitality. It was this element on which the Revenue relied on in precluding the deductibility of the expense for tax purposes.

In particular the Court of Appeal cited this passage from the Bentley case:-

“Was the entertaining,…undertaken solely for the purposes of business, that is, solely with the object of promoting the business or its profit earning capacity? It is, as we have said, a question of fact. And it is quite clear that the purpose must be the sole purpose. The paragraph says so in clear terms. If the activity be undertaken with the object both of promoting business and also with some other purpose, for example, with the object of indulging an independent wish of entertaining a friend or stranger or of supporting a charitable or benevolent object, then the paragraph is not satisfied, though in the mind of the actor, the business motive may predominate. For the statute so prescribes. Per contra, if, in truth, the sole object is business promotion, the expenditure is not disqualified because the nature of the activity necessarily involves some other result, or the attainment or furtherance of some other objective, since the latter result or objective is necessarily inherent in the act.”

In citing the above dictum, the taxpayer sought to underline the word ‘independent’. The purpose in benefiting the rugby club’s financial position was not independent of its purpose of furthering the trade. The promotion of the taxpayer’s business by payments to the rugby club necessarily involved the attainment or furtherance of financial support for the rugby club. Financial support of the rugby club was “necessarily inherent in the promotion of it’s business”.

The Court of Appeal held that whilst this argument was an ingenious deployment of particular words and phrases in a paragraph of Romer LJ’s judgment in the Bentley case, it was contrary to the principles expressed and the decisions themselves in a number of unquestioned cases dealing with the requirement of exclusivity.

The Court of Appeal in the Bentley case had upheld the reversal of the Commissioners’ view because the nature of business entertainment necessarily involved an element of hospitality. That case decided no more than that and it did not decide that if there are two purposes, one may be regarded as subordinate or intermediate to the other.

In the current appeal there were two purposes found, and one of those purposes was not the purpose of the taxpayer’s trade; there is no warrant for distinguishing between the two purposes by assessing one as being intermediate or subordinate to the other.

In Mallalieu v Drummond [1989] the expenditure on the clothes Mrs Mallalieu was required to wear was expenditure predominantly for the purposes of her profession. The fact that the expenditure also provided her clothing was (as contended by the taxpayer in that case) a subordinate or intermediate purpose. The expenditure served professional and personal purposes and it is contrary to authority and principle to regard one as of more importance than the other, or one purpose as a means by which the other was to be achieved.

The Court did agree that there will be cases where it is necessary to consider the incidental effect of expenditure where its sole purpose is to serve the taxpayer’s trade. That was the view in Mallalieu: the benefits derived from the expenditure on warmth and decency were regarded as purely incidental. But it was not possible in this case to describe the purposes of meeting the financial needs of the rugby club as incidental.

On the basis of all of the foregoing, the Court of Appeal held that there were two purposes in making the payments; the taxpayer’s appeal was thus dismissed.

The full judgement is available at: http://www.bailii.org/ew/cases/EWCA/Civ/201 4/876.html