Neutral Citation Number: [2014] EWCA Civ 876

Case No: A3/2013/2566
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (Tax and Chancery Chamber) 
THE HONOURABLE MR JUSTICE BIRSS 
[2013] UKUT 0336 (TCC)
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: Friday 27th June 2014
Before:

LORD DYSON, MASTER OF THE ROLLS 
LORD JUSTICE MOSES
and
LORD JUSTICE PATTEN
- - - - - - - - - - - - - - - - - - - - -
Between :

	Interfish Ltd	Appellant	
	- and -		
	The Commissioners for HM Revenue and Customs	Respondent	
- - - - - - - - - - - - - - - - - - - - -

(Transcript of the Handed Down Judgment of
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No:  020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -

Mr J Peacock QC (instructed by Forbes Hall Llp) for the Appellant
Mr Owain Thomas (instructed by Her Majesty’s Revenue and Customs) for the Respondent
- - - - - - - - - - - - - - - - - - - - -

Hearing date: 12th May, 2014
Judgment
Lord Justice Moses: 
1.	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.  The club was in severe financial difficulties.  Although it drew considerable crowds when playing in the Rugby Football Union’s National Division 1 and national cup competition, it needed substantial sums to make up a deficit in its player budget and to improve, amongst other things, its squad of players.
2.	Interfish’s fishing business included fishing, fish processing and wholesaling, and a fish retailing business based in Plymouth.  Payments were of benefit to Interfish because they visibly promoted South West Foods and made it easier to obtain bank funding for its expansion.
3.	Judge Nicholas Paines QC, sitting as the First-tier Tribunal (Tax Chamber), found two purposes in the making of the payments.  The payments were made in order to improve the financial position of the rugby club and to ensure that those involved in the club would look favourably upon Interfish in ways that would assist its trade (FTT paragraph 47).  In its computation of profits for the purposes of Corporation Tax, Interfish sought to deduct the payments made in its accounts under the heading Advertising and Marketing.  The First-tier Tribunal and, on appeal, the Upper Tribunal [2013] UK UT 0336 (TCC), held that those disbursements were not deductible because they were not “wholly and exclusively laid out or expended for the purposes of the trade” (s.74(1) of the Income and Corporation Taxes Act 1988).
4.	The provisions in s.74(1)(a) first appeared in the Income Tax Act 1842.  Courts have never wavered from the proposition that the business purpose must be the sole purpose.  You might have thought, therefore, that once it had been found as a fact by the First-Tier Tribunal that the payments by Interfish had two purposes, that was the end of its appeal.  If you had thought that, you had not reckoned with the advocacy of Mr Peacock QC.  In beguiling submissions, he accepted that essential proposition but argued that Interfish 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 Interfish (and the FTT had so found – FTT paragraphs 47, 48).  Where, he asserts, there are two purposes, but one is merely an intermediate purpose, on the road to a final purpose, then the requirements of s.74(1)(a) are satisfied.  The purpose of Interfish was to improve the financial position of the rugby club in order to achieve Interfish’s ultimate business purpose.  That satisfies the requirement that the payments were made exclusively for the purposes of Interfish’s trade.  The failure, either of the FTT or the Upper Tribunal, to recognise that one purpose may be intermediate or incidental to the ultimate purpose, namely, a trade advantage, amounted to an error of law.
5.	As I have already indicated, Mr Peacock QC was not foolhardy enough to seek to gainsay the proposition of law that the statutory restriction on deductibility requires the business purpose to be the sole purpose.  If authority is needed for so elementary a proposition, it can be found in the judgment of Romer LJ in Bentley Stokes and Lowless v Beeson [1952] 33 TC 491 at 504.  The proposition was repeated by Lord Brightman in Mallalieu v Drummond [1989] 2 AC 861 at 870:-
“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.”
6.	Nothing daunted by so clear a statement of principle, Mr Peacock QC seeks to find in Bentley authority for the proposition that an intermediate purpose on the way to achieving an ultimate purpose may be disregarded.  The authority for his proposition, he says, is to be found in Bentley itself.  In happier days, partners in the solicitors firm of Bentley Stokes and Lowless lunched their existing clients in a social club in St. James’s Street 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 (page 84F).  It was this element on which the Revenue relied in seeking to reverse the decision of Roxburgh J, who had himself reversed the decision of the Special Commissioners, who had regarded the social element as precluding the deductibility of the expense.
7.	Mr Peacock QC, on behalf of the taxpayer, relied upon a passage which I must set out in full:-
“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.” (85A-B)
8.	Mr Peacock QC sought to underline the word ‘independent’.  Interfish’s purpose in benefiting the rugby club’s financial position was not independent of its purpose of furthering Interfish’s trade.  The promotion of Interfish’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 Interfish’s business”.
9.	This ingenious deployment of particular words and phrases in a paragraph of Romer LJ’s judgment is, in my view, contrary to the principles expressed and the decisions themselves in a number of unquestioned revenue cases dealing with the requirement of exclusivity.
10.	It is important to have in mind what Bentley decided.  The Special Commissioners had given two reasons for disallowing the deduction of the business lunches.  First, they said it was not necessary.  Second, they said that:-
“We cannot come to the conclusion that the monies expended on entertainment were expended solely for the purpose of the profession and were entirely divorced from the element of hospitality and the relationship of host and guest” (paragraph 11 of the case 33 TC 493). (my emphasis)
11.	Romer LJ jibbed at so restrictive an interpretation of the requirement of exclusivity:-
“If A pays for B’s lunch, A cannot be altogether divested of the role of host, nor can the element of hospitality be wholly wanting, however businesslike the occasion may be in every other respect.  If the presence of this element, in however small and subordinate a degree, is fatal to a claim for deduction under Rule 3(a), (the predecessor to section 74(1)(a)) then no money spent by, for example, a manufacturer in entertaining a prospective or existing customer could ever be allowed.”
Romer LJ rejected the contention that the Commissioners were intending to find a dual purpose, namely, the furtherance of professional interest and social entertainment, but concluded that the Commissioners’ finding was not the finding of a second or even subordinate purpose but no more than that it was not possible “entirely” to divorce the expenditure from the element of hospitality:-
“Once it is established that the Commissioners rejected the claim on the single ground that in every case there was present the element of hospitality, it necessarily follows from the course taken in the present case that the whole of the expenditure must be allowed.”
12.	The Court of Appeal, therefore, upheld the reversal of the Commissioners’ view because the nature of business entertainment necessarily involved an element of hospitality.  The case decides no more than that.  It certainly does not decide that if there are two purposes, one may be regarded as subordinate or intermediate to the other.
13.	In the instant 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] 2 AC 861 at 870, 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, as Lord Brightman quaintly described it, as apparel with which to clothe herself, was, in Peacockian terms, a subordinate or intermediate purpose.  Nonetheless, the barrister failed.  It was “inescapable” that one object, though not a conscious motive, was the provision of the clothing that she needed as a human being.  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 (875D-E).
14.	Similarly, in McKinley v Arthur Young McClelland Moores and Co [1990] 2 AC 239, there were two purposes in meeting the expenditure of removal, first, the purposes of the partnership business and second, to serve the personal interests of the partner.  Some partners did not wish to move, but were required to do so.  The personal interests of those partners whose removal expenditure were met was “necessarily and inherently intended to serve” his personal interests in establishing his private residence for himself and his family (255D-E).  As Mr Peacock QC would have it, that purpose was subordinate to the main purpose of achieving the partnership business.  Such an approach cannot stand with the decision in Arthur Young and Co any more than it can with the case of Mallalieu.
15.	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 Lord Elwin Jones’s view in Mallalieu: the benefits derived from the expenditure on warmth and decency was regarded by him as purely incidental (868D).  But by no stretch of even Mr Peacock’s advocacy could the purposes of meeting the financial needs of Plymouth Albion Rugby Football Club be described as incidental.
16.	Both tribunals referred to Millett LJ’s summary of the effect of the authorities in Vodaphone Cellular Limited v Shaw [1997] 69 TC 376.  This is not an occasion to analyse the utility of that summary.  Since it has already been set out twice, it is unnecessary to do so for a third time.
17.	I would dismiss the appeal.  In the First-tier Tribunal Judge Nicholas Paines QC said:-
“The outcome will be different only if there were a rule that a purpose that is pursued with a view to an ulterior purpose somehow drops out of the picture, but such an approach would be inconsistent with the nature of the exercise prescribed by the authorities, namely, that of identifying the purpose or purposes being pursued.” (paragraph 49)
I need say no more than that.
Lord Justice Patten:
18.	I agree.
Master of the Rolls:
19.	I also agree.