Executive Network (Consultants) Ltd v O'connor
| Jurisdiction | England & Wales |
| Judgment Date | 22 November 1995 |
| Date | 22 November 1995 |
| Court | Special Commissioners (UK) |
special commissioners decision
Mr Stephen Oliver QC and Mr THK Everett.
David Ewart, counsel instructed by Higginsons, chartered accountants, for the taxpayer.
Mr Andrew George, inspector of taxes.
Corporation tax - Deduction in computing profits - Sponsorship payments - Recruitment consultant sponsored competition horses owned and ridden by majority shareholder's wife and children - Company obtained publicity at horse shows and show-jumping events - Dual purpose of expenditure - Expenditure was not incurred wholly and exclusively laid out for the purposes of trade - Appeal dismissed - Income and Corporation Taxes Act 1988 section 74 subsec-or-para (a)Income and Corporation Taxes Act 1988, s. 74(a).
Executive Network (Consultants) Ltd ("EN") appeals against five assessments to Corporation Tax. The assessments are for each of the twelve month accounting periods to 30 April from 1988 until 1992.
The assessments relate to certain payments made by EN to Mrs C H Toms, until the end of 1991, and thereafter to the British Equestrian Foundation for "forward payment" to Mrs Toms.
We heard evidence from Mr T W Toms (husband of Mrs C H Toms) and from Mr R B Kemp. Both were shareholders in EN throughout the years to which the appeals relate. We were provided with a document with the title "Sponsorship Agreement", with financial statements for EN for each of those years and with income and expenditure accounts relating to Mrs Toms' business for each of the twelve month accounting periods (to 30 April) from 1988 until 1992.
EN started trading on 1 March 1986 as a specialist recruitment and personnel consultant for the Information and Technology (IT) Industry. Until 6 April 1988 Mr T W Toms had 15,002 shares and Mr R B Kemp had 5000; the remaining 2000 issued ordinary shares were held by two other shareholders. On 6 April 1988 Mr T W Toms transferred 1000 shares to Mr R B Kemp.
Mr T W Toms had been a director of EN since it started trading. Before then he had been a recruitment consultant and in the course of that work he had met Mr Kemp. When EN started business Mr Kemp had a period of notice to work out; he worked part-time for EN at the start and became a director in early 1987. Mr Toms and Mr Kemp shared the running of EN. Mr Toms took responsibility for business development and marketing. Mr Kemp took responsibility for the administration and finance. Both regarded EN as a jointly run business. Both brought contacts with them and these generated revenue from the start. The nature of EN's trade is to handle a relatively small number of clients (not more than 40 in all) in the IT business, recruitment executive managers, sales and marketing personnel and technical specialists for them. For some clients EN has provided a "recruitment manager" service and become practically part of the client's organisation in place of an in-house department. To provide them with potential candidates for placings, EN keeps a data-base and advertises in the press, on railway stations and over the radio. The management of EN see it as an essential part of their business to maintain contacts with clients at a high level, aiming to establish a close working relationship with the chief executive of the client company.
Mrs Toms started a riding school in Scotland in 1963. This developed into a business of purchasing young horses, breaking them in, training them at the riding school and then selling them. By 1978 Mr and Mrs Toms had purchased 15 stables and 10 acres. Mrs Toms ran an equestrian business with three main activities. She bought young horses, trained them for competition and sold them. She trained horses for other owners. She entered her own horses and the ones she was training for horse shows and events so as to enhance their values from competition. Riders of these horses included the two children of Mr and Mrs Toms, Christopher who was born in 1971 and Louise who was born in 1974. By 1986 Christopher was 15 and was competing at "senior" level.
£19,315 was spent by EN on sponsorship. (No assessments have been raised to disallow this amount.) The £19,315 was paid to Mrs Toms. Mr Toms explained the reason. He was aware that a number of IT companies were involved in sponsorship of horse trials and show jumping. He decided that EN should be involved in these as sponsors so as to give it opportunities to make contact with those IT companies and their senior executives. Mr Toms suggested the idea of sponsorship to Mrs Toms. The aim was for her to have about six horses available for competitions. The £19,315 was paid, to use Mr Toms' words, "to get it off the ground" and to invest in horses "at a higher level". The horses were, said Mr Toms, to be ridden by Mrs Toms, Christopher and Louise. The sponsorship would enable Louise Toms "to buy a good competitive horse".
The original decision to sponsor was Mr Toms' alone. He discussed the matter with Mr Kemp who was not at that time a director. The arrangement for sponsorship was, to use Mr Toms' words, "totally informal". There was no agreement and there was no correspondence setting out the specifications and expectations of the sponsor. Mr Toms explained that, so far as Mrs Toms was concerned, it was her objective to build up a successful equestrian business. Payment to Mrs Toms started within two months of EN's commencement of business. Twelve monthly payments were made varying from £1000 to £2,400.
Within six months of the first sponsorship payment EN had secured an IT company, "Multisoft", as a client. Multisoft was already sponsoring equestrian events and its chairman, who had been a client of Mr Toms' previous company, had a special interest in these because his daughter was a rider. Mrs Toms gave the chairman's daughter a considerable amount of help in pursuing her interest. Multisoft were to become EN's biggest client and some 22 of Multisoft's dealers and agents became smaller clients of EN.
This was the first year under appeal. In the course of the year EN made 12 monthly payments of £12,000 to Mrs Toms. Mrs Toms built up the value of her stock of horses from £13,250 to £16,135; she made sales of horses fetching £19,350. Selling horses had become the sole source of her business income. Her expenses of £17,319 (of which £2,533 related to "Entry fees and sundries") were met, as to £12,000, from EN's sponsorship. Without sponsorship Mrs Toms would have traded at a loss of £8,424. During that year EN's turnover increased by around £32,000 to £418,235.
We had no details of who rode what horse and where. Most of the horses owned by Mrs Toms were given the prefix "Executive" to their names. Louise became 14 during the year and from then on she and Christopher her brother were riding as "seniors". They rode novice horses in events in which top riders were performing.
In the course of the year EN made 11 payments of £1000 to Mrs Toms. Mrs Toms increased the value of her horses in stock by £3000 to £19,450. Her sales of horses produced £19,850. The expenses worked out at £18,524 of which £2,122 related to entry fees. Allowing for the £11,000 sponsorship she made a net profit of £4,291. Without the sponsorship Mrs Toms would have traded at a loss of £6,709. Christopher and Louise did most of the riding.
Mr Kemp observed that this form of sponsorship was good for EN's business. He supported the decision to continue it because, to...
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