Upper Tribunal (Tax and Chancery Chamber)
Mr Justice Birss
Decision released 16 July 2013
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, s 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, s. 54(1)(a)). The First-tier Tribunal found in favour of HMRC (Interfish Ltd  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 benefitting the club, improving its finances and allowing it to recruit new players, they were made in order to achieve the ultimate objective of benefitting 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.