[2010] UKFTT 219 (TC)

TC00520
Appeal number: SC/3227-8/2008

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 benefitting sports club and taxpayer’s trade – payments not deductible - Income and Corporation Taxes Act 1988, s 74

FIRST-TIER TRIBUNAL
TAX CHAMBER

	INTERFISH LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Corporation Tax)	Respondents

				TRIBUNAL: 	JUDGE NICHOLAS PAINES QC

Sitting in public in London on 8 and 9 March 2010

Andrew Thornhill QC and David Yates, for the Appellant

Simon Foxwell, Appeals and Reviews Unit, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	The issue in these three appeals is whether a number of very substantial payments made by Interfish Ltd to Plymouth Albion Rugby Football Club in the accounting periods to 31 January 2003, 2005 and 2006 are deductible in computing the company’s profits for corporation tax.  This turns on whether they are excluded from deduction by the former section 74(1) of the Income and Corporation Taxes Act 1988, which provided so far as material:
74(1)	... in computing the amount of the profits to be charged to corporation tax under Case I or Case II of schedule D, no sum shall be deducted in respect of
(a)	any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade ....
2.	The sums were described in argument as ‘sponsorship’ payments; this is a convenient description of them and I shall use it.  They were substantial: approximately £300,000 in 2003, nearly £400,000 in 2005 and over £500,000 in 2006.  Interfish has made payments to the Club in other years, but these are not in issue in these appeals.  The company also made substantial loans to the Club at various times.  
3.	Interfish was incorporated in 1977.  It was founded and is controlled by Mr Jan Colam; he and a family trust are the shareholders.  It is common ground that he exercises day to day control of the company; the company’s accounts describe him as its ultimate controlling party.  Mr Colam gave evidence; I did not hear evidence from anybody else from the company.  Mr Andrew Thornhill QC, who appeared for Interfish with Mr David Yates, treated the state of mind of Mr Colam amounting to the state of mind of the company, and Mr Simon Foxwell of HMRC’s Appeals and Reviews Unit, who represented HMRC, took the same approach.
4.	Interfish is now the holding company of a group of companies involved in the fisheries industry.  It has been a remarkably successful business, and having heard Mr Colam give evidence I can understand why.  Mr Colam impressed me as an intelligent and enterprising businessman.  I found his evidence, though occasionally inaccurate in detail, to be given honestly; if the resolution of these appeals depended on whether I believed that his motive in causing Interfish to make the payments to which the appeal relates was purely to benefit Interfish’s business, I would not be able to reject his evidence to that effect.  In my judgment, however, the appeals must fail on a correct application of section 74.
5.	Mr Colam (who has both English and Dutch parentage) returned to Plymouth from the Netherlands as a young man in 1977.  He set up Interfish with his father.  The business initially involved purchasing, freezing and exporting fish.  In 1985 it purchased its first freezer trawler, equipped to catch fish and freeze them on board.  In 1986 it moved to a newly built factory and office building also in Plymouth and also expanded into deep sea fishing.  The business grew gradually until the late 1990s and has grown dramatically since then.  The evidence as to the precise timing of expenditure on this more dramatic expansion is not entirely clear.  I was shown a prospectus issued in 2006 with a view to raising finance for Interfish’s last major acquisition; according to that document, Interfish had spent some £35 million on acquiring fishing boats, fishing licences and fishing quotas between 1998 and 2001.  Mr Colam’s witness statement referred to expenditure of over £40 million, including the 2006 acquisition, incurred mainly in the four year period between 2002 and 2006.  In 2002 Interfish expanded into retailing, operating wet fish counters within Sainsbury supermarkets under the brand ‘South West Seafoods’.  Currently, the group’s main activities are operating seven fishing vessels, exporting fish to over thirty countries and the wholesale and retail distribution of fish within the United Kingdom.
Mr Colam’s involvement with the Rugby Club
6.	Mr Colam told me that, being interested in rugby and a good player himself, he had visited Plymouth Albion on first moving to Plymouth, but found the ground and the people unwelcoming and decided to play for a rival club, which he did for a few months before giving up owing to pressure of work.  In 1994 he visited Plymouth Albion as the guest of a local solicitor.  He did not particularly enjoy the visits, but came to realise that involvement with the Club gave access to senior members of the local business and professional community.  In 1995, Mr Colam accompanied a Mr Dennis Spencer and a couple of other members of the Club on a tour of South Africa to watch rugby matches in the World Cup series.  Mr Spencer was the regional corporate director of the National Westminster Bank in Plymouth and was also closely involved with the running of the Plymouth Albion Club, which banked with National Westminster and was overdrawn.  Mr Colam told me that Mr Spencer badgered him for at least a year and a half to move Interfish’s banking to National Westminster.  Mr Colam eventually did so, as I describe below.  At some point in the 1990s Mr Colam or Interfish (he could not recall which) sponsored a player at the Club; that was the only sponsorship payment made prior to Mr Colam becoming heavily involved with the Club, which occurred in 1999.  
7.	In the late 1990s Interfish was already engaged in expanding its fishing business, as I have indicated.  This involved investing in larger, more profitable boats and also acquiring fishing licences and quota without which the boats could not lawfully fish.  The amount of fishing quota available to the United Kingdom fleet is limited but quota can be transferred from a vessel which already holds it to another vessel.  The amount of fishing quota required by a vessel is related to her fishing capacity – broadly a combination of size and engine power – so that the combined quotas of a number of smaller or less powerful boats are needed to provide the quota required by a larger, more powerful one.  Interfish needed to acquire and combine quotas for its new, larger vessels in this way.  In order to fund the acquisitions of vessels and quota, Interfish was borrowing from its then bankers, Lloyds; but in early 1998 Lloyds decided to refuse further funding at a point at which not all the necessary quota had been acquired, and also forced Interfish to sell a boat at a substantial loss  Mr Colam turned to Mr Spencer and within six weeks National Westminster agreed to take Interfish as a customer and to provide the required finance.
8.	In 1999, Mr Colam was approached by the Club chairman, a Mr Pinches, and invited to join the board.  The Club was in the process of becoming incorporated.  It was also in severe financial difficulties and the management hoped that Mr Colam might help out.  £10,000-£12,000 were needed urgently.  Only £6,000-£8,000 had been raised through 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 1998/99 the Club had debts in the region of £200,000, including loans from members who had lent money to keep it afloat and a bank overdraft; it was in debt to the brewery for its bar supplies.  The overdraft was an embarrassment to Mr Spencer, who was extremely keen to see it paid off.  
9.	Evidence was also given by Mr Roger Harris, the partner in charge of the local office of a well known firm of Chartered Accountants who was also involved in the management of the Rugby Club between 1995 and 2006 and was for a period its President and then Chairman.  Mr Harris said that at the beginning of his period of involvement the Club was in poor shape.  In particular, it needed to improve its income by increased sponsorship, building on the fact that the Club was the focal point for the local business community.  Mr Harris favoured the idea of assembling a consortium of sponsors.  Mr Colam appeared on the scene and was looked at along with others.  It was realised that he would be a hard taskmaster, but he impressed them as a young, energetic business man with an emerging local business.  Other sponsors would not increase their contributions over what Mr Harris called a ‘magic threshold’; Interfish was prepared to be more generous.  Mr Harris viewed the Club’s relationship with Mr Colam as a business relationship; they wanted to know what he wanted for his money.  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.  The Club management set out to provide that.  He said that Mr Colam made no secret of the fact that he wanted to obtain influence for Interfish among the business community for which the Club acted as a focal point.  In Mr Harris’s judgment, Mr Colam did obtain significant influence in that community through being the Club’s major sponsor, in a way that could not have been achieved by simply participating as a director.  I accept Mr Harris’s evidence.
10.	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.  He tried to ensure that Committee meetings were conducted in a businesslike fashion.  He realised there was a need to help the Club avoid bankruptcy.  In order to do this, the Club needed to sell its existing ground and move to a new one as well as improving its players.  These things happened.  By the time of Mr Colam’s statement to the Board in December 2003, the Club had twice achieved promotion in the League and was in fifth place in National Division One; it had a 25-year lease on two pitches, a clubhouse, changing rooms and hospitality facilities; further developments were in prospect.
11.	In October 2003 Mr Colam acquired a further 210 shares.  He told me that he did this because he did not want 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.  Later he gave some of his shares to a Mr Dawe (to whom I refer below) and another person; he did not know how may shares he currently held.  Interfish has made sponsorship payments subsequent to the ones at issue in this appeal, but Mr Colam has achieved what he wanted to achieve for Interfish and has told the Club that he is reducing his sponsorship payments.
Interfish’s financial contributions to the Rugby Club
12.	Not surprisingly, the Club seeks sponsorship and seeks to raise money through advertising and providing hospitality facilities at matches.  Some website pages from June 2006 that are in evidence refer to advertising opportunities in the match day programme and on the perimeter of the pitch and to a range of sponsorship opportunities including shirt sponsorship and stand sponsorship.  Interfish has advertised its South West Seafoods brand on a perimeter hoarding and on players’ shirts, as do 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.  Interfish may (the evidence was not clear on the point) have paid fees for some of the above.  But, most significantly, 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.
13.	The Club’s accounts for the calendar year 2002 state that the maximum amount borrowed by it from Interfish in the course of that year amounted to £492,202, with interest accruing at 1.5% above base rate; sponsorship of £200,000 was obtained and at the balance outstanding at 31 December was £292,202, having been £182,402 as at 31 December 2001.  Mr Colam said this was the first substantial sponsorship paid by Interfish to the Club, but the accounts confirm that Interfish had already advanced a substantial amount of money by way of loan by the end of 2001.  In addition, Mr Thornhill QC told me on instructions, and I accept, that Interfish made a sponsorship payment of £50,000 in 2001.  Mr Colam said in cross-examination that Interfish lent the Club the money in order to prevent it going bankrupt; he was prepared for Interfish to make the loan because he expected it to be repaid out of the proceeds of sale of the rugby ground.  I infer from what is said in the Club accounts that the 2002 sponsorship money was not paid over by Interfish to the Club but was set off against the loan.  Interfish’s accounts for the year to 31 January 2003 include sponsorship payments to the Club of £311,140.
14.	The Club’s next set of accounts, for the 15 months to 30 April 2004, state that Interfish advanced cash of £560,000 and incurred expenditure amounting to some £393,232 on behalf of the Club in the period.  Sponsorship from Interfish of £50,000 was obtained and at 30 April 2004 the amount outstanding stood at £653,921.  I infer that some of the loan money was repaid by the Club to Interfish during the period.
15.	The Club’s accounts for the year to April 2005 record sponsorship from Interfish of £325,000 by way of reduction of the Club’s loan.  At 30 April 2005, the amount outstanding stood at £328,921.  Mr Colam told me that the loan was paid off, and produced an Interfish bank statement recording a credit of that amount paid in on 4 April 2006.  Interfish’s accounts to 31 January 2005 include sponsorship payments to the Club of £389,783.
16.	The Club’s accounts to 30 April 2006 state that sponsorship of £355,000 was received from Interfish by way of reduction of the Club’s loan account with Interfish.  They confirm that no money was owed by the Club to Interfish as at 30 April 2006.  I infer that Interfish had loaned a further £355,000 to the Club during the year and that the loan was converted into sponsorship.  Interfish’s accounts for the year to 31 January 2006 include sponsorship payments to the Club totalling £529,204.
17.	One of the Club’s needs was to improve its squad of players.  Interfish’s first sponsorship payment enabled the Club to recruit the Plymouth-born Graham Dawe, a former Bath, England and British and Irish Lions player whom Mr Colam knew slightly, 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.  Mr Dawe would say how much he wanted by way of player budget; Mr Colam would check the figures and would pressurise Mr Dawe to spend as little as possible.  The Club’s financial staff would say how much of the budget the Club could afford to bear itself, and there would be a negotiation between Mr Colam and the other board directors with a view to arriving at figure to be contributed by Interfish.  Interfish would be flexible; for example, he might stretch an offer of £100,000 upwards to £125,000, but he would take note of what other sponsorship money came in.  Mr Harris’s account of the way in which the level of Interfish’s sponsorship payments was arrived at was consistent with Mr Colam’s.
18.	The process is exemplified by some board minutes from the summer of 2004 that were in evidence.  On 22 April a budget for the year 2004/05 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 and he said it was risky but possible.  The budget was approved.  In June, however, there was discussion of an additional player budget of £260,000 which Mr Dawe wanted, and of an offer from Mr Colam of an additional £130,000 which was conditional upon it being matched by the Club.  By the July meeting, increases in other sponsorship and income led the board to believe it could reasonably increase the player budget by £260,000 on this basis.  
19.	Mr Colam said in evidence that in early 2004 Defra closed the local mackerel fishery, on which his factory was dependent for three quarters of its throughput, causing major financial problems for Interfish, and that he did not make any sponsorship payment in that year.  That is contradicted by the evidence of these board minutes.  It may be that Mr Colam is mistaken about the date of closure of the fishery, having overlooked the fact that the Interfish accounts which do not contain a sponsorship payment - those for the year to 31 January 2004 - mainly cover 2003.  Even if so, the Club’s accounts that I have referred to in paragraph 14 above document a sponsorship payment, modest by the standards of other years, of £50,000.  That and other apparent discrepancies between the sponsorship payments recorded in Interfish’s and the Club’s accounts were not explored at the hearing, but there is in my judgment no reason to suspect a sinister explanation.  In addition to differences in the periods covered by the respective sets of accounts, they may be explained by Interfish having made payments, over and above the player budget funding, for advertising, shirt sponsorship, hospitality and the like.  I do not consider that Mr Colam was at all dishonest in his evidence about the fishery closure and its effect upon his sponsorship payments, though the accuracy of his evidence here seems to have suffered from a lack of recollection of detail.
20.	Mr Colam’s evidence was that making the payments was beneficial to Interfish in various ways, apart from the visible promotion of South West Foods.  Mr Colam described the Club as ‘one of the most, if not the most, influential business meeting place in Plymouth’.  Mr Harris’s evidence was to similar effect.  Mr Colam said in his witness statement that he built relationships with Interfish’s principal solicitor and accountant, as well as the company’s bank manager, through his involvement with the Club.  He also gave evidence of a number of examples of benefits that he considered his role in the Club produced for Interfish.  Particular emphasis was placed on easier access to bank funding for Interfish’s expansion.  
21.	Interfish was already in the process of acquiring two new ‘Wiron’ class freezer vessels when Lloyds Bank refused further funding, and Interfish moved to NatWest, in early 1998.  That, of course, occurred before Interfish made its first substantial sponsorship payment, as did much of the expenditure of £35 million on acquisitions mentioned in the prospectus that I have referred to in paragraph 7 above.  Apart from the funding of the 2006 acquisition, for which £21 million were borrowed, the evidence is not clear as to the amount of borrowing for which Interfish needed bank approval from 1999 onwards.  I accept that the role that Mr Colam had taken on at Club in 1999, his promise of financial support and the loan that Interfish was making to the Club at least by December 2001 will have been perceived by him as likely to earn Interfish the goodwill of Mr Dennis Spencer.  Mr Spencer resigned from the Club board on 15 April 2003, which I was told was about the time of his retirement from National Westminster.  Mr Colam gave evidence that most of the quota that Interfish needed to buy for the Wiron vessels was bought after Mr Spencer’s retirement but, apart from the later acquisition of a majority share in a further vessel in 2006, I was not given details of dates on which offers of bank funding were made.  
22.	Mr Spencer, whom Mr Harris described as the best known bank manager in Plymouth, was not replaced within the bank at equivalent status.  Initially he was replaced by a former assistant who was not in good health and was himself replaced within a few months.  The evidence shows that the further replacement, a Mr Mark Price, was in post by December 2003.  Neither of Mr Spencer’s successors became involved in the management of the Club as Mr Spencer had been.  The first of them had enjoyed visiting the Club; Mr Colam told me of an occasion during his period in post when it became clear that Interfish needed to borrow more money for the acquisition of quota than had originally been forecast.  Mr Colam was able to smooth the situation over by entertaining him at the Club and conversing with him about proposed new player acquisitions.  Mr Price was in post for one to two years before moving to join the credit committee at NatWest in London; as Mr Harris put it, he ‘made his mark and moved on’.  He was a member of the committee that approved the financing of Interfish’s 2006 acquisition, which other banks refused to finance.
23.	Mr Colam’s view of his position as director and benefactor of the Rugby Club was that it ‘opened doors’ within NatWest and the Plymouth business community.  I can see that it eased Mr Colam’s dealings with Mr Spencer and to some extent with his successors.  I did not hear from Mr Price who, on the evidence, must have left Plymouth in 2004 or 2005, whereas the decision to finance the 2006 acquisition will not have been taken until around Easter of 2006.  It is unrealistic to assume that the National Westminster credit committee were influenced to fund an unduly risky venture because Interfish was the benefactor of Plymouth Albion Rugby Club.  From what was said about Mr Price, I doubt that he would have advocated such a course.  NatWest must have funded it because they had confidence in Mr Colam and Interfish.  Having seen and heard Mr Colam, I can well understand that, and it may be that Mr Price’s respect for Mr Colam was in part due to what Mr Price saw of Mr Colam’s stewardship of the Rugby Club.  Mr Colam said in his witness statement ‘it was ... the understanding and trust and relationships built through the Club ... that gave them the confidence that I could deliver on the business plan that had been presented’.  That is, however, a slightly different matter from the sponsorship payments.
24.	Mr Colam’s witness statement described Mr Price as having become closely connected with the Club, but from what was said about him I do not consider that he was as enthusiastic about the Club as his predecessors.  Mr Colam confirmed in oral evidence that Mr Price attended matches, but he said that he and Mr Price did not get on well at first and that he did not get to know him as well as Mr Spencer and his immediate successor.  Mr Colam’s December 2003 statement to the board indicated that he believed Mr Price would have put the Club into receivership if the overdraft had not been repaid.
25.	Other instances were cited of advantages that Mr Colam’s position at the Club brought to Interfish.  Mr Harris referred to an occasion when the Lord Mayor of the city, at that time a solicitor, came to the Club as a guest and asked to meet the sponsors.  As a result, Mr Harris took him to Interfish’s factory and the Lord Mayor later described Interfish to the City Council as a significant emerging company in the area.  Mr Colam referred to an occasion when it had been necessary for Interfish to bring a large vessel into Plymouth unexpectedly at short notice; arrangements were quickly made for Interfish to have the temporary use of the ferry berth.  I can well understand that business people who frequented the Club – and particularly those involved its affairs - were disposed to assist Interfish.
26.	In 2002 Interfish expanded into retailing, operating wet fish counters within Sainsbury supermarkets under the brand ‘South West Seafoods’.  This is the brand that is promoted on Club rugby shirts, advertising hoardings at the Club and the Club’s website.  At one point Interfish lost the business of another supermarket chain and in Mr Colam’s view (which I accept) the wet fish counters were influential in its retaining the business of Sainsbury’s.  Mr Colam’s position at the Club had enabled him to have Club players, who understandably enjoy a degree of star status locally, visit the counters dressed in playing kit; this had been a very effective way of promoting the counters.
27.	Mr Colam used the Club for business entertaining.  His status within the Club assisted there.  The best table would be provided for him and people such as Mr Dawe or the team captain would come over and speak to him and his guests.  He had been able to organise a visit by a rugby team from Japan, a very important export market for Interfish, and this had earned considerable goodwill for Interfish in Japan.
28.	Mr Colam was clear in his view that his involvement in, and Interfish’s sponsorship of the Club brought benefits to Interfish of the sort I have described.  He was also emphatic that the payments were made with a view to achieving those benefits and not for any other reason.  He supported that by referring to his reduced sponsorship now that he had achieved what he wanted for Interfish.
29.	I asked him to tell me in how own words why he considered that the sponsorship payments brought those benefits.  His answer was that he was helping the people involved with the Club out of a difficulty – they did not want the stigma of having to close the Club down – so that they could help him out.  I find that he appreciated that benefits of the sort described in his evidence would accrue to Interfish when he decided to make the sponsorship payments.  In summary, his position as the benefactor of the city’s Rugby Club will have given Mr Colam a particular status among those in the local community who were aware of it - and those people will have included business and professional people who frequented the Club – of a sort that will have favourably disposed them towards Mr Colam and his business.  I consider that Mr Colam was generally aware of those possibilities when he embarked on the series of sponsorship payments; in my judgment he would not have made the payments if he had not anticipated benefits of that sort for Interfish.  I do not consider that he was using Interfish’s funds to finance the Club simply in order to give himself the satisfaction of being the benefactor of the Club or of enjoying the status which that position carried with it.  I consider that he did derive satisfaction out of what he and Interfish were doing for the Club and his status within it; he would not be human if he did not derive pleasure when, for example, a team strengthened through Interfish’s financial contributions played successfully or when the team captain came over to speak to guests Mr Colam was entertaining at the best table in the hospitality suite.  But I do not find that his motive in making the payments was to gratify himself in those sorts of ways.
30.	At the same time, I do not consider that Mr Colam can have been confident that the financial benefits to Interfish’s business would necessarily be equal to the amounts the company was contributing; these were of the order of £1.2 million in the financial periods to which the appeal relates plus £175,000 in the financial year to 31 January 2007 and a sum probably in the region of £400,000 in the year to 31 January 2008 (the amount paid was higher, but Mr Colam said that a large part of it was the cost of an Interfish 30th anniversary party that had been held at the Club).  In answer to a question in cross-examination, Mr Colam said it was good value for money to spend £1 million to get £45 million – referring to the loans that National Westminster had made to Interfish; I accept that the loans were crucial to Interfish’s expansion and can see that the sponsorship payments may have assisted, particularly in the time of Mr Spencer, but I do not accept that they were determinative of NatWest’s decision to make them.  The influence and connections that Mr Colam established can only have been beneficial to Interfish, but again to an extent that cannot be quantified financially.  As Mr Colam said to me of the benefit of the best table in the hospitality suite and the opportunity for guests to converse with the team captain, ‘you can’t put a value on that’.  In their Skeleton argument submitted on behalf of Interfish, Mr Thornhill QC and Mr Yates describe the benefits of presence and influence among the local business community, rightly in my view, as ‘intangible and difficult to quantify’.  That difficulty would have hampered any attempt to predict whether Interfish would get a commensurate return on its money.
Submissions
31.	For Interfish Mr Thornhill presented the appeal as involving a factual dispute as to the motivation behind Interfish making the sponsorship payments.  Both he and Mr Foxwell referred me to a passage from the judgment of Millett LJ in Vodafone Cellular and Others v Shaw (HM Inspector of Taxes) 69 TC 376 and to two decisions of Special Commissioners, Executive Network (Consultants) Ltd v O’Connor [1995] Sp C 56 and McQueen v HMRC [2007] Sp C 601.  Mr Thornhill rejected the suggestion that a purpose of the payments was to benefit Mr Colam financially in his capacity as a shareholder in the Club.  I too reject that.  The Articles of Association of the Club prevent any shareholder holding more than 24% of the shares and preclude the distribution of assets to members, beyond repayment of sums subscribed for shares, upon winding up, though they do not preclude payment of dividends.  The sponsorship payments reduced the profits of Interfish, in which Mr Colam is a major shareholder.  The likelihood (if any) of dividends on the Club shares could not sensibly have led to a decision to contribute well over £1 million of Interfish’s funds.
32.	Dealing with HMRC’s assertion in correspondence, that the visible benefits of the sponsorship (i.e. the visible promotion of South West Foods) could have been obtained at the Club’s published rates for about £10,000, the Skeleton argument points out, correctly, that that overlooks the benefits deriving from contacts and influence in the business community as a result of Mr Colam’s position as benefactor of the Club.  Accepting nevertheless (possibly with some understatement) that the payments were ‘reasonably substantial’, the Skeleton argument invites me to compare them with Interfish’s turnover in the years in question, of which they respectively accounted for 1.15%, 2.29%  and 3.22%; the point is made that this was a smaller proportion of turnover than in McQueen (where the corresponding figures were 2.94%, 4.10% and 4.31%).  Reliance is also placed on the dictum of Lord Reid in Ransom v Higgs 50 TC 1 at 82F that “if a trader is actuated by none but commercial motives, the Crown cannot merely say he has paid too much”.  
33.	Mr Thornhill took me to passages in Vodafone, Ransom v Higgs, McQueen and Executive Network.  In reliance on Vodafone he submitted that the test was what was in the mind of Mr Colam in making the payments.  As a fallback position, he submitted that, in the event that the payments were not deductible in their entirety, a portion could be deductible on the strength of Lord Reid’s dictum in Ransom v Higgs (not deciding the point as the Revenue had conceded it) that ‘if it was shewn that a part of the expenditure was in fact wholly and exclusively for trading purposes, then that part is a proper deduction’.  But his main argument was that the whole of the expenditure was deductible in this case.  Accepting that all cases turn on their own facts, Mr Thornhill submitted that the case was analogous to McQueen.
34.	Mr Foxwell relied on Bowden (HM Inspector of Taxes) v Russell & Russell 42 TC 301 as an authority that, to be deductible, expenditure had to be exclusively for trade purposes and that ‘dual purpose’ expenditure was not deductible.  He maintained that the expenditure could not have been for the purposes of Interfish’s trade, or at least was ‘dual purpose’.  He relied on another passage in Ransom v Higgs at page 100, where Lord Cross considered the hypothetical case of a trader who transferred his custom to his son-in-law; Lord Cross said that if the trader paid the son-in-law a fair commercial price, the motive of assisting the son-in-law would not prevent the expenditure on purchases from him being deductible, but if the trader paid an excessive price, at least the over-payment would not be deductible.  Mr Foxwell relied on this as establishing a presumption that an excessive payment is not for the purposes of the trade.  He submitted that the payments were excessive in relation to the visible benefits.
35.	Mr Foxwell submitted that the purpose of the payments was, at least in part, to support the Club ‘as an end in itself’ and to enable Mr Colam to pursue his personal interest in the Club.  In support of that, he submitted that the payments were not apt to further Interfish’s trade.  In that connection he submitted that Interfish’s customers were primarily business purchasers not located in Plymouth or south western England, so that promotion of Interfish through the Club was not an effective way of reaching them.  In any event, Interfish could have obtained the same degree of public exposure at the Club for £10,000-£20,000; for less money than it paid the Club it could have sponsored a range of clubs and thereby reached a larger audience.  As regards Interfish’s case based on access and influence, Mr Foxwell submitted that the sponsorship payments only began after the funding for the first wave of expansion was in place.  
36.	Mr Thornhill rejected Mr Foxwell’s assertion that supporting the Club was an end in itself; he said that that view of things ‘turned Mr Colam into a devotee of the Club’, whereas the evidence showed that Mr Colam’s motive was to obtain advantages for Interfish rather to support the Club as an end in itself.  Mr Thornhill said that Mr Foxwell’s focus on the ‘visible’ benefits to Interfish – the promotion of the South West Seafoods brand – did not meet Interfish’s case based on contacts and influence.  There was some debate about the extent to which that category of benefits had been relied on in correspondence between Interfish’s advisers and HMRC.  Having re-read the correspondence, I find that they were indeed mentioned but with nothing like the detail or prominence that they received at the hearing.  Nothing turns on that.
37.	On the submissions, the competing purposes of the payments appeared to be achieving benefits for Interfish and furthering a private interest in the Club of Mr Colam’s.  But at the end of his reply I raised with Mr Thornhill a point that had not been explicitly made by Mr Foxwell, but which was troubling me.  It was that, whether or not Mr Colam was pursuing a private interest of his, benefitting the Club was not merely an incidental effect of achieving benefits for Interfish; it was the very means by which the benefits for Interfish were achieved and could be said to be a purpose of the payments.  Mr Thornhill was under the difficulty of not having had an opportunity to formulate a response to an argument to that effect, instead being called upon to deal with the point in response to a question from me after he had concluded his submissions.  The answer he gave was that the same would be true of any sponsorship payment, yet sponsorship payments had been recognised as deductible.  I do not doubt that some sponsorship payments are; but, having reflected on the issue, I have concluded that at all events the bulk of Interfish’s sponsorship payments are not deductible, for reasons close to those I advanced in discussion with Mr Thornhill.  
My decision
38.	The starting point in considering the operation of section 74 is the summary of the effect of the authorities given by Millett LJ (as he then was) in Vodafone, on which both parties relied.  It is convenient to set it out.
The leading modern cases on the application of the “exclusively” test are Mallalieu v Drummond [1983] AC 861 and Mackinlay v Arthur Young McClelland Moores & Co. [1990] 2 AC 239 . From these cases the following propositions may be derived: 
1	The words “for the purposes of the trade” mean “to serve the purposes of the trade”. They do not mean “for the purposes of the taxpayer” but for “the purposes of the trade”, which is a different concept. A fortiori they do not mean “for the benefit of the taxpayer.” 
2.	To ascertain whether the payment was made for the purposes of the taxpayer's trade it is necessary to discover his object in making the payment. Save in obvious cases which speak for themselves, this involves an inquiry into the taxpayer's subjective intentions at the time of the payment. 
3.	The object of the taxpayer in making the payment must be distinguished from the effect of the payment. A payment may be made exclusively for the purposes of the trade even though it also secures a private benefit. This will be the case if the securing of the private benefit was not the object of the payment but merely a consequential and incidental effect of the payment. 
4.	Although the taxpayer's subjective intentions are determinative, these are not limited to the conscious motives which were in his mind at the time of the payment. Some consequences are so inevitably and inextricably involved in the payment that unless merely incidental they must be taken to be a purpose for which the payment was made.
To these propositions I would add one more. The question does not involve an inquiry of the taxpayer whether he consciously intended to obtain a trade or personal advantage by the payment. The primary inquiry is to ascertain what was the particular object of the taxpayer in making the payment. Once that is ascertained, its characterisation as a trade or private purpose is in my opinion a matter for the [Tax Tribunal], not for the taxpayer. Thus in Mallalieu v Drummond the primary question was not whether Miss Mallalieu intended her expenditure on clothes to serve exclusively a professional purpose or partly a professional and partly a private purpose; but whether it was intended not only to enable her to comply with the requirements of the Bar Council when appearing as a barrister in Court but also to preserve warmth and decency. 
Similarly, in my opinion, the present case does not involve an inquiry whether the directors who resolved to enter into the fee cancellation agreement consciously intended to obtain a benefit thereby for one company rather than another. The primary inquiry is to ascertain the particular object which the directors sought to achieve by it. Once that is ascertained the characterisation of that object as serving the purposes of the trade of one particular company or another is not a finding of primary fact, but a conclusion based upon the primary facts.

39.	Lord Millett’s first numbered proposition indicates that, contrary to the decision of the Special Commissioners in that case, the fact that persons other than the taxpayer (there, other group companies) benefit from the fact of a payment being made by the taxpayer is not fatal.  The final quoted paragraph indicates that it is not relevant to consider for whom those controlling the taxpayer consciously intended to obtain a benefit.  Nor, according to the third numbered proposition, is the effect of the payment determinative: the fact that a payment secures a private benefit (or a benefit for someone other than the taxpayer) is not an objection if it is ‘not the object of the payment but merely a consequential or incidental effect’.  The issue is whether the payment was made for the purposes of the taxpayer’s trade, which depends on what the taxpayer’s object in making the payment was.  That generally (but not in ‘obvious cases which speak for themselves’) involves an enquiry into the subjective intentions of the taxpayer, but the answer is nevertheless not dictated by what the taxpayer says his intentions were: first, according to the fourth numbered proposition, the taxpayer’s subjective intentions are not limited to the conscious motives in his mind at the time but include inevitable consequences of the payment unless merely incidental; secondly, the final, unnumbered proposition shows that the question does not involve an enquiry of the taxpayer as to whether he consciously intended to derive a (qualifying) trade advantage or a (non-qualifying) personal advantage.
40.	Lord Millett’s reference to ‘the particular object of the taxpayer’ suggests that, for the purpose of characterising that object as either trade or non-trade, the Tribunal has to express it as a single object.  But it is clear that an object can involve more than one purpose.  In Mallalieu Lord Brightman, giving the leading speech of the majority, said at 870E-F
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 to the application of section 130(a) [of the Income and Corporation Taxes Act 1970, a predecessor to section 74] that the business purposes are the predominant purposes intended to be served.
41.	Dealing with the view of the courts below that ‘the conscious motive of the taxpayer was decisive’, Lord Brightman continued (at 875)
My Lords, I find myself totally unable to accept this narrow approach. Of course Miss Mallalieu thought only of the requirements of her profession when she first bought (as a capital expense) her wardrobe of subdued clothing and, no doubt, as and when she replaced items or sent them to the launderers or the cleaners she would, if asked, have repeated that she was maintaining her wardrobe because of those requirements. It is the natural way that anyone incurring such expenditure would think and speak. But she needed clothes to travel to work and clothes to wear at work, and I think it is inescapable that one object, though not a conscious motive, was the provision of the clothing that she needed as a human being. I reject the notion that the object of a taxpayer is inevitably limited to the particular conscious motive in mind at the moment of expenditure. Of course the motive of which the taxpayer is conscious is of a vital significance, but it is not inevitably the only object which the commissioners are entitled to find to exist. In my opinion the commissioners were not only entitled to reach the conclusion that the taxpayer's object was both to serve the purposes of her profession and also to serve her personal purposes, but I myself would have found it impossible to reach any other conclusion.

42.	Mr Foxwell relied on the following passage from the judgment of Pennycuick J in Bowden v Russell & Russell:
I confess that the more I read section 137(a) [of the Income Tax Act 1952, another predecessor provision] the greater difficulty I find in the expression “money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation.” However, this paragraph has received authoritative analysis recently in Bentleys, Stokes & Lowless v. Beeson 33 TC 491. Beyond citing the judgment of Romer L.J., who delivered the judgment of the Court of Appeal in that case, I am not concerned to go further into the matter. At page 503 Romer L.J. states the principle as follows: 
“The relevant words of paragraph 3 (a) of the rules applicable to Cases I and II — ‘wholly and exclusively laid out or expended for the purposes of the profession’ — appear straightforward enough. It is conceded that the first adverb — ‘wholly’ — is in reference to the quantum of the money expended and has no relevance to the present case. The sole question is whether the expenditure in question was ‘exclusively’ laid out for business purposes, that is: What was the motive or object on the mind of the two individuals responsible for the activities in question? It is well established that the question is one of fact: and again, therefore, the problem seems simple enough. The difficulty however arises, as we think, from the nature of the activity in question. Entertaining involves inevitably the characteristic of hospitality. Giving to charity or subscribing to a staff pension fund involves inevitably the object of benefaction. An undertaking to guarantee to a limited amount a national exhibition involves inevitably supporting that exhibition and the purposes for which it has been organised. But the question in all such cases is: was the entertaining, the charitable subscription, the guarantee, 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.”
Then Romer L.J. gives a number of examples.
As appears from that judgment it may often be difficult to determine whether the person incurring the expense has in mind two distinct purposes or a single purpose which will or may produce some secondary consequence. But, once it is found that the person has a distinct purpose other than that of enabling him to carry on and earn profits in his trade or profession, section 137(a) prohibits deduction of the expense.
43.	Pennycuick J went on to hold, on the basis of the General Commissioners’ finding  that the taxpayer’s object in incurring travel expenditure was both to promote his profession abroad and to take a holiday, that the expenditure was not deductible.
44.	Section 74 was applied by the Special Commissioners in the two decisions to which I was referred.  In Executive Network (a decision of HH Stephen Oliver QC and Mr THK Everett) the taxpayer company sponsored the equestrian activities of members of the family of one of the shareholders with a view to promoting the company through their participation in and equestrian events.  Holding that the expenditure was not deductible, the Special Commissioners reasoned as follows:
The expression ‘business sponsorship’ has a wide significance.  At one end of the spectrum is sponsorship of a charitable or philanthropic nature of, for example, the arts or sport.  Expenditure on that will not normally be wholly, let alone exclusively, incurred for the purposes of the sponsor’s trade.  At the other end of the spectrum is sponsorship amounting to pure advertising or pure public relations.  In that situation the quid pro quo for the sponsorship payment will be, for example, the advertising facility and no more.  The fact that the sponsorship arrangement provides a commercial benefit to the ‘spondee’ will not disqualify the payment as a deduction of the sponsor’s trade.  Here the evidence shows the situation to lie somewhere in the middle.  The sponsorship payments do not merely secure for EN the facilities of advertising and public relations, and they do more than provide Mrs Toms, the spondee, with an advertiser’s or public relations consultant’s profit.  The ‘sponsorship’ payments in the relevant years provided at least four extra benefits.  These were, additional working capital in Year 1 to build up Mrs Toms’ stock of horses (which ... were to belong to Mrs Toms), a new horse box in Year 4, opportunities for the Toms children to build up their equestrian careers and a year-in-year-out revenue subvention which had the effect of underpinning and preserving the solvency of Mrs Toms’ own trade. 

45.	The Special Commissioners went on to hold that personal benefit played a part in the decision to make the payments, observing that ‘the annual decision as to the quantum of the sponsorship was ... directed as much at the needs of Mrs Toms’ business as the benefits obtained from sponsorship’ and was a conscious motive of the decision makers or at least a result that was so inevitably and inextricably involved in the sponsorship activity that it must have been a purpose of the activity of the sort recognised in Mallalieu.  
46.	Conversely, in McQueen Sir Stephen Oliver held that expenditure incurred by the taxpayer, a sole trader, in competing in motor rallies in a rally car decorated in the livery of the taxpayer’s motor coach business was deductible.  He said
Mr McQueen took part in motor rallying because he enjoyed it and it gave him satisfaction.  If he had not been good behind the wheel it would have been pointless to have incurred the expenditure.  In this connection I should mention that Mr McQueen said in evidence that sponsorship of an independent driver would have been so expensive as to have been out of the question.  My conclusion therefore is that Mr McQueen was using his skill and enthusiasm for motor rallying as the best means available to him for promoting the Garelochhead Coaches business.  He enjoyed it and it has given him satisfaction in just the e same way as running an evidently successful business has done.  Nevertheless the securing of the private satisfaction of success on the rally circuit can in my view be described as an incidental effect of the payment. 

47.	In the present case, Interfish’s purpose in making the payments can best be stated as being to improve the financial position of the Club, in particular by enabling it to enhance its squad of players without incurring a deficit, in order that those involved with the Club would thereby be induced to look favourably on Interfish in ways that would assist Interfish’s trade.  I find that improving the financial position of the Club in this way was a conscious purpose in the mind of Mr Colam (and therefore the company); the amounts contributed were tailored to the Club’s reasonable requirements for players and contributing them formed part of Mr Colam’s plans for the Club which he did not want to see outvoted.  The improvement of the Club’s financial position was also an inevitable consequence of the payments.  On the basis of the evidence of Mr Colam and Mr Harris I find also that in Mr Colam’s mind was a reasonably held expectation that those involved with the Club would in return look favourably upon Interfish in ways that would assist Interfish’s trade, and that it was also his purpose was to achieve that.
48.	It is true that the pursuit of one purpose (obtaining the benefits for Interfish) depended on pursuing the other: the purpose of the payments was to improve the Club’s position so that Interfish’s commercial interests would in consequence be furthered.  Lord Millett’s third proposition indicates that something which is ‘merely a consequential and incidental effect’ of making a payment is not to be regarded as part of the object of the taxpayer, but I do not see how in this case the furtherance of the Club’s trade can be dismissed as merely a consequential or incidental effect of the payments.  As I accepted in debate with Mr Thornhill, the acquisition of goods or services for the purposes of a trade will inevitably involve contributing to the turnover, and usually the profits, of the supplier.  But in most cases the taxpayer does not set out to promote the business of the supplier; he pays him in order to obtain in a lawful manner the goods or services necessary for his own trade.  Promotion of the business of the supplier is an unintended consequence of the purchase – ‘merely a consequential and incidental effect’.  Here, by contrast, promotion of the business of the Club was not an unintended consequence of Interfish’s payments; it was a consciously intended consequence and, indeed, necessary if Interfish were to derive benefit.  The business interests of Interfish would not be furthered, or at least not as effectively, if Interfish were not seen to be the benefactor of the Rugby Club.  As Mr Colam put it (and I do not see how he could have put it otherwise), Interfish would ‘help them [the Club people] out so they could help Interfish out’.  
49.	It can be said that the helping out was a means to an end, the end being furtherance of Interfish’s trade through what Mr Thornhill described in opening as ‘reciprocal support’.  But that does not in my judgment make it ‘consequential and incidental’ in the sense in which the words were used by Lord Millett, as meaning not a purpose being pursued.  Mr Thornhill submitted, in effect, that if I found that supporting the Club was not in Mr Colam’s mind an end in itself, the consequence would be that the expenditure was deductible.  That seems to me to be contrary to Lord Millett’s final proposition based on Mallalieu v Drummond: it did not matter in Mallalieu whether Ms Mallalieu’s conscious intention when maintaining her professional wardrobe was exclusively to comply with the dress requirements rather than to clothe herself.  In simple language, this indicates to me that, where a payment has more than one purpose, the issue of deductibility is not determined by the taxpayer saying ‘the purpose I had in mind was securing the trade advantage’.  The outcome would 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. 
50.	I do not consider that this case is analogous to McQueen, where rally driving in the business livery was an effective way of advertising the business, for that purpose somebody had to drive the rally car and the only economically viable course was for Mr McQueen, who enjoyed rally driving, to do so himself.  His enjoyment of doing so was not the purpose but merely an incidental effect, just as the remunerating of another driver, if one had been employed, would not have been the purpose but an incidental effect.  This case is, if anything, more like Executive Network, where the payments were tailored to the requirements of Mrs Toms’s business.  A point of distinction is that Mrs Toms was the wife of one of the shareholders, who would be likely to want to see her business prosper for her own sake, whereas Mr Colam wished to benefit the Club so that Interfish might benefit in consequence; but that is not a point of distinction if (as I consider) a purpose that is pursued with a view to another purpose does not thereby cease to be a purpose. 
51.	I am fortified in my conclusion by the fact that it is consistent with the approach taken to sponsorship payments by the Special Commissioners in the passage I have cited from Executive Network, with which, though it is not binding on me, I respectfully agree.  My conclusion also seems to me to be consistent with the legislative purpose underlying section 74.  The requirement of ‘wholly and exclusively ... for the purposes of the trade’ is a restrictive one, and it would be surprising if the provision allowed the deduction of sums (and in this case substantial sums) laid out for the immediate purpose of promoting the trade of someone other than the taxpayer, in circumstances where the ‘knock-on’ benefits to the taxpayer’s trade, whilst real, were intangible and hard to quantify.  
52.	It follows that in my judgment the sums paid by Interfish for purposes such as increasing the Club’s player budget are not deductible.  Within the sums at issue in the appeals there may be sums which fall on the right side of the line drawn by the Special Commissioners in Executive Network or are deductible for some other reason.  If Interfish and HMRC are unable to agree on the treatment of the deductions claimed by Interfish in the tax years in question in the light of this Decision, I shall hear further argument.

JUDGE NICHOLAS PAINES QC
TRIBUNAL JUDGE

RELEASE DATE: 13 May 2010