Interfish Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 16 July 2013 |
| Neutral Citation | [2013] UKUT 336 (TCC) |
| Date | 16 July 2013 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2013] UKUT 336 (TCC).
Mr Justice Birss.
Jonathan Peacock QC (instructed by Deloitte LLP) appeared for the Appellant
Patrick Way QC (instructed by HMRC) appeared for the Respondents
Corporation tax - deductibility of expenditure - sponsorship payments intended to improve fortunes of sports club - expectation of trade benefits principally as a result of recognition by others involved with the club of taxpayer's benefaction - dual purpose of benefiting sports club and taxpayer's trade - payments not deductible - Income and Corporation Taxes Act 1988 ("ICTA 1988"), Income and Corporation Taxes Act 1988 section 74s. 74 - appeal dismissed.
The Upper Tribunal has upheld the decision of the First-tier Tribunal that sponsorship payments made by a company were not made wholly and exclusively for the purposes of that company's trade.
Interfish Ltd (the appellant) had made a number of sponsorship payments to a local rugby club over a number of years. The appellant had claimed relief for these amounts against its trading profits. HMRC sought to add the payments back on the basis that they were not incurred wholly and exclusively for the purposes of the appellant's trade under what was then ICTA 1988, s. 74(1)(a) (since rewritten as CTA 2009, Corporation Tax Act 2009 section 54 subsec-or-para 1s. 54(1)(a)). The First-tier Tribunal found in favour of HMRC (Interfish LtdTAX[2012] TC 02275) and it fell to the Upper Tribunal to determine if the First-tier Tribunal had made an error in law.
It was common ground that some benefits were enjoyed by the appellant as a result of the arrangement; for example, it advertised its brand on the players' shirts, on a hoarding at the club's ground and on the club's website. The appellant and the club had a common director: Mr Colam. The arrangement established Mr Colam in the local business community to the benefit of the appellant. Counsel for the appellant argued that although the payments had the immediate purpose of benefiting the club, improving its finances and allowing it to recruit new players, they were made in order to achieve the ultimate objective of benefiting the appellant. The benefit to the club should be seen as merely consequential and incidental to the benefits enjoyed by the appellant.
The Upper Tribunal rejected the argument put forward by the appellant and upheld the decision of the First-tier Tribunal. The distinction between an immediate and ultimate objective does not arise from the statute and nor is it made in the cases. The question is only: what were the actual objectives of the taxpayer? Mr Colam's conscious purpose was to improve the club's financial position so that the appellant's commercial interests would be furthered in consequence. The improvement in the club's financial position was an intended consequence of the arrangements and it can not be relegated to something consequential and incidental. The payments were not made wholly and exclusively for the purposes of the appellant's trade.
This is an important decision which will disappoint those involved in corporate sponsorship activities. It is often assumed that sponsorship payments are always deductible against trading profits. This is not always the case, as this decision demonstrates. Each situation must be considered on its own merits. In this instance, there was a close relationship between the company and the club, the arrangements were not always documented and the timing of the payments was driven by the financial needs of the club. With this in mind, it is difficult to see how payments could have been made wholly and exclusively for the purposes of the company's trade.
For commentary on the wholly and exclusively rule, see the CCH Tax Reporter at 707-370.
[1]This is an appeal from two inter-related decisions of Mr Nicholas Paines QC sitting as the First-tier Tribunal (FTT) by which the Appellant, Interfish, appealed against assessments to corporation tax insofar as they related to payments made by Interfish to Plymouth Albion Rugby Football Club (Plymouth Albion). The appeal is concerned with the deductibility of such payments in the computation of Interfish's profits for the purposes of corporation tax for its accounting periods ended 31 January 2003, 2005 and 2006. The payments come to about £1.2 Million and the extra tax due if the payments are not deductible is about £300,000. Before the FTT, Interfish contended that the payments are deductible but the FTT held that they were not. Interfish appeals and contends that in reaching the conclusion it did, the FTT made an error of law. Before me Interfish is represented by Mr Jonathan Peacock QC instructed by Deloitte LLP. The respondents on the appeal, the HMRC, contend that there has been no error of law. They support the reasoning of Mr Paines QC. The HMRC are represented by Mr Patrick Way QC instructed by the HMRC.
[2]Mr Colam is a director of Interfish. The judge set out Mr Colam's involvement with the rugby club in considerable detail in paragraphs 6-30 of the first decision given on 13 May 2010. There is no point in trying to summarise the whole of the history of the dealings between Mr Colam and the rugby club which span a period of approximately ten years. Highlights include the following.
[3]Interfish is a fishing, fish processing, fish wholesaling (in the U.K. and internationally) and fish retailing business based in Plymouth. Interfish is both a major employer in Plymouth and a significant business in the south west of England. Its retail business (within the stores of one of the major supermarkets retailers) trades as "South West Seafoods". Interfish is wholly owned by Jan Colam and a family trust, and is controlled by Mr Colam. It was common ground before the judge below and before me that Mr Colam's state of mind amounted to the state of mind of the company.
[4]Plymouth Albion is a rugby club based in Plymouth. It is a member of the Rugby Football Union. In the relevant years the club was one of the largest clubs in the south west. It played in the RFU's National Division 1 and was eligible for, and played in, the RFU's national cup competition drawing considerable crowds to home matches. In the relevant years Interfish made payments to Plymouth Albion which it treated as deductible amounts in its accounts under the heading Advertising and Marketing. The sums paid represent about 1%-3% of Interfish's turnover.
[5]Mr Colam became heavily involved in the club in about 1999. At that stage the club was in severe financial difficulties. The management hoped that Mr Colam might help out. The club was going to incorporate and he was invited to join the board. £10,000 to £12,000 was needed urgently and only £6,000 to £8,000 had been raised though subscriptions for £10 shares in the newly formed company. Mr Colam was asked to buy 300 shares and did so in order to help the chairman out and keep the club going. He also became a director of the new company. From a statement that Mr Colam made to the board in December 2003 it appears that in 1998/1999 the club had debts in the region of £200,000. At that stage other sponsors would not increase their contributions over what one of the witnesses, Mr Harris, a partner of a local firm of chartered accountants described as "a magic threshold". Interfish was prepared to be more generous. Mr Colam wanted to be established in the business community in Plymouth and to have the value of the business connections that the club afforded. There seems to be no dispute that Mr Colam did obtain significant influence in the community through being the club's major sponsor in a way which could not be achieved by simply participating as a director.
[6]The debts which the club owed included a substantial overdraft which was an embarrassment to the local Regional Corporate Director of the NatWest Bank, Mr Spencer, who was also closely involved in the running of Plymouth Albion. Mr Colam said in evidence that he wanted to show the bankers who were involved with the club that he could make the club run sensibly.
[7]In 2003 Mr Colam acquired more shares and he told the FTT that he did this because he did not want to see his ideas for the club outvoted; he wanted the club to go in the direction in which he thought it ought to go in the interests of Interfish. After the relevant sponsorship payments with which this case is concerned were made, Interfish has made some further payments to Plymouth Albion but by about 2006 Mr Colam had achieved what he wanted to for Interfish and had told the club that he was reducing his sponsorship payments.
[8]In the relevant period Interfish had advertised its South West Seafoods brand on a perimeter hoarding and on players' shirts as did other local companies. It is in addition an agreed fact that Interfish's South West Seafoods logo has been on each page of the club's website. Interfish also used the club for business hospitality. It may, although the evidence was not clear on the point, have paid fees for some of the above. What the judge thought was most significant was that Interfish has both lent money to the club and made substantial payments to cover what would otherwise be a deficit in the club's player budget. One of the club's needs was to improve its squad of players. Interfish's first sponsorship payment was to enable the club to recruit the Plymouth born Graham Dawe, a former Bath, England and British and Irish Lions player as its director of Rugby. Mr Colam attended committee meetings with a view to giving Mr Dawe support 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. Mr Dawe was asked if he could survive and obtain promotion with this budget...
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