[2010] UKFTT 628 (TC)

TC00867

Appeal number: TC/2009/16187

Appeal against Closure Notice and discovery assessments – whether expenditure incurred for sponsorship was “wholly and exclusively” for the purpose of the trade

FIRST-TIER TRIBUNAL

TAX 

	PROTEC INTERNATIONAL LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	MISS J BLEWITT (TRIBUNAL JUDGE)						Mr M. J. H. BLAIN	(MEMBER)	

Sitting in public at Manchester Civil Justice Centre on 3 November 2010

Mr A. McKenna, Chartered Tax Advisor, and Mr I. Morris, Accountant, for the Appellant

Mr B. Morgan, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal by Protec International Limited (“the Appellant”) against HMRC amendments issued on 22 May 2009 for the accounting periods ended 31 December 2004 and 31 December 2005 and discovery assessments raised on 8 October 2007 for the accounting periods ended 31 December 2002 and 31 December 2003.
2.	The Appellant Company trades in supplies to the construction industry. The following amounts were paid to McKinstry Motorsports (“McKinstry”) described as sponsorship fees; during 2002 £70,000, during 2003 £70,000, during 2004 £125,000 and during 2005 £125,000, all sums net of VAT. The sole director and shareholder of the Appellant Company is Mr James Harrison.
3.	It was agreed by both parties during the hearing that the sole issue for the Tribunal to determine is whether the expenditure set out at paragraph 2 was incurred wholly and exclusively for the purpose of the trade and deductible within the provisions of Section 74 of the Income and Corporation Taxes Act 1988 (now superseded by the Corporation Taxes Act 2009) which was in force and therefore applies to the periods under consideration. The onus of proof rests upon the Appellant.
4.	The Tribunal had the benefit of a bundle agreed by the parties containing all relevant documentation. The Tribunal also heard oral submissions by Mr Morgan on behalf of HMRC and were given a copy of his “Speaking Brief”. Both Mr McKenna and Mr Morris made oral submissions to the Tribunal on behalf of the Appellant. 
5.	Mr McKenna conceded that no legal issues were taken by the Appellant and invited the Tribunal to determine the case on its facts. The Tribunal noted that Mr Harrison was not called as a witness nor was he present at the hearing. It was made clear to Mr McKenna by the Tribunal that where his submissions entered into the realms of giving evidence these could not be afforded much, if any, weight as there was no direct evidence by the Appellant or Mr Harrison in support. The Tribunal accepted there was correspondence between HMRC and the Appellant’s agents contained in the bundle in which many of the assertions made by Mr McKenna were reiterated, but noted that there was no corroboration of the assertions by Mr Harrison either in writing or orally. The only direct evidence from the Appellant/Mr Harrison was a letter from the Mr Harrison to Mr McKinstry which will be addressed in due course.
6.	Mr McKenna, on behalf of the Appellant, addressed each of the contentions raised by HMRC in reaching its decision as set out in the review letter dated 20 October 2009 and these can be dealt with in turn.
(a)	HMRC contend that the absence of any written agreement between the Appellant and McKinstry specifying the terms and what would be received in return for sponsorship fees is contrary to normal business practice particularly where such large sums are involved. It lends support when taken together with other factors, to the conclusion that the expenditure was not incurred wholly and exclusively for the purposes of the trade. 
Mr McKenna stated in response that it has always been accepted on behalf of the Appellant that no written agreement was in place and conceded that this is unusual business practice. Mr McKenna submitted that HMRC’s contention lacks merit as an oral contract is binding and the individuals involved, namely Mr Harrison and Mr McKinstry were known to each other, there being “a strong relationship between them”. Mr McKenna referred the Tribunal to the evidence that invoices were raised and paid in full and the fact that Mr McKinstry had responded to HMRC’s letter dated 8 October 2007 by confirming there had been sponsorship but that no written evidence of the agreement was in place. 
(b)	HMRC queries the fact that the Appellant’s trade in the construction industry is not linked to the automotive industry and questions the business purpose behind the expenditure. 
Mr McKenna stated that the Appellant’s banner was displayed on up to 12 McKinstry cars and also on their trucks. The Tribunal was shown additional photographs of cars displaying the advertising and a model car. The Tribunal was also shown pictures of Mr Harrison and his co-driver/navigator wearing racing overalls with a logo of Mann Direct taken some time in 2005 as depicted on a banner within the picture. Mr McKenna stated that the events were televised on Sky, featuring, for example, on programmes such as “Men and Motors” and numerous programmes in Ireland, Mr McKenna stated that the Appellant never actually drove the sponsored vehicles himself, which were driven by Mr McKinstry who is a former British champion.
(c)	HMRC relied as part of their case on the fact that there is no evidence or data to demonstrate the value of the advertising spend. 
Mr McKenna submitted that it is difficult to measure advertising value and stated that HMRC had no factual base for their submission. Mr McKenna stated that there had been a 76% increase in turnover between December 2002 and December 2005 and although there was no evidence to support such an assertion, the Tribunal was invited to make a link between the increase in turnover and the sponsorship. Mr McKenna stated that Mr Harrison would not spend money on analysing business expenditure; the decisions were made by the Appellant/Mr Harrison and he had been successful in his decision making. Mr McKenna stated that as a former driver the Appellant saw sponsorship as an advertising opportunity.
(d)	HMRC contended that the Appellant Company’s name appeared on cars without contact details or detailed information. 
Mr McKenna submitted that the form of advertising was the same for the majority of advertisers.
(e)	HMRC argue that there is duality of purpose in the expenditure laid out for sponsorship of McKinstry vehicles. In support of this assertion, in addition to the factors set out above, HMRC refer to the fact that Mr Harrison has been a rally driver since at least 2000 and has, in the past, competed in vehicles owned by Mr McKinstry. Several documents from the internet were produced within the bundle to confirm this assertion along with references to Mr Harrison as a “client” of Mr McKinstry and the Appellant’s use of McKinstry engineers as his back-up team. 
Mr McKenna on behalf of the Appellant accepted that Mr Harrison had raced rally vehicles for approximately 20 years however stated that this was a separate matter to the sponsorship. Mr McKenna stated that the driving had always been paid for by either Mr Harrison or the co-driver. Mr McKenna referred the Tribunal to pictures taken showing Mr Harrison driving a vehicle sponsored by Mann Direct, a large company with no link to the Appellant. He also produced a picture of Mr Harrison standing in a Mann Direct logo overall under a 2005 rally banner. He also referred to a letter from the Appellant’s agent to HMRC dated 5 October 2009 in which it was stated “Mr Harrison does not drive the vehicle being sponsored nor any of McKinstry’s vehicles.”
7.	Mr McKenna referred the Tribunal to a summary of the case of RS McQueen v HMRC Sp C [2007] SSCD 457 (Sp C 601) in which personal satisfaction from competing in rallies was held to be an incidental benefit of the expenditure rather than its purpose. It was noted that HMRC had not been referred to the authority prior to the hearing, nor had the Appellant’s requested its inclusion within the bundle. However, in the interests of justice, the Tribunal gave consideration to the case in reaching its decision.
8.	Mr Morgan then presented the case on behalf of HMRC in accordance with the Speaking Brief previously referred to in his decision. He also made the further following submissions: 
(a)	There was no evidence to link the alleged increase in business exclusively to advertising. 
(b)	Mr Harrison had not been put under any personal enquiry as there was no need for HMRC to do so. 
(c)	Mr Harrison is the sole shareholder/director and was the only person who could say what was in his mind when entering into the agreements with McKinstry Motorsports 
(d)	When the Appellants were asked for details of what links there were between the sponsorship and Mr Harrison’s driving and asked for relevant evidence none had been supplied. The only person who could supply the answers was Mr Harrison. 
(e)	 HMRC say there is a link between the sponsorship and a benefit to Mr Harrison. 
(f)	The statement made by Mr McKenna during the hearing that the sponsorship with McKinstry in Southern Ireland was to try and break into a new business was not supported by any evidence. 
(g)	That the documentary evidence in the bundle clearly showed that Mr Harrison was a client of McKinstry Motorsports. 
9.	In order to decide whether there was duality of purpose in the expenditure of money on sponsorship, the Tribunal considered the submissions of both parties. The Tribunal found the following as fact:
(1)	The Appellant company paid McKinstry Motor Sports as sponsorship/advertising fees: 
a) During 2002, £70,000 net of VAT 
b) During 2003, £70,000 net of VAT 
c) During 2004, £125,000 net of VAT 
d) During 2005, £125,000 net of VAT 
(2)	(a)  There was no written form of contract specifying full particulars of what was expected for the sponsorship. The invoice of McKinstry Motor Sports to the Appellant dated 28 December 2004 and an undated letter enclosing payment to McKinstry Motor Sports from the Appellant Company use the phrase “as discussed” in reference to the sponsorship arrangement between the parties. 
b) The discussions took place between Mr Harrison the sole director and shareholder of the Appellant Company and Mr McKinstry. Particulars of “the matters as discussed” have not been provided. 
c) Mr Harrison was invited by HMRC to voluntarily provide written responses to a request for further information concerning the sponsorship in a letter and questionnaire dated 29 September 2006 but he declined to respond. 
d) HMRC made an offer to the Appellant/Mr Harrison on 21 July 2006 to attend a meeting to discuss the issues but this offer was not taken up. 
e) Mr Harrison was not called to give any evidence in support of the appeal, the onus of proof being on the Appellant. 
f) No formal review of the benefits of the substantive expenditure incurred has ever taken place.
(3)	Requests for information from HMRC in respect of the sponsorship and any connection or benefit of Mr Harrison personally or his family from McKinstry Motor Sports was responded to in a piecemeal manner. There were delays in responding to requests for information leading to the issue of notices on the 17th of February and 16th of November 2006 which were not complied with resulting in the imposition of £50 penalties and subsequent daily penalties. 
(4)	Misleading statements/assertions were made during the enquiry to HMRC namely: 
a) In a letter by the company’s accountants of 9th October 2007 it was stated that Mr Harrison had no involvement in rallies since 2005. When this was challenged by HMRC it was accepted this was incorrect. 
b) In a letter dated 4th September 2006 the Appellant’s Accountant stated that Mr Harrison’s involvement in rallying was “low key.”  The documentation evidence in the hearing bundle demonstrates a substantial involvement of Mr Harrison in motor rallying. The rally reports demonstrate Mr Harrison competing regularly at a high level, winning the Dunlop National Championship in 2003 and a number of individual rallying events. 
c) In a letter dated 5th October 2009 the Appellant Company’s Accountant stated “Mr Harrison does not drive the vehicle being sponsored nor any of McKinstrys vehicles”. The rally reports in the hearing bundle together with the statements/assertions made by the Appellant’s representative at the hearing demonstrate that Mr Harrison had regularly driven rally cars belonging to McKinstry Motor Sports. The letter of 5th October 2009 refers to “the vehicle” whereas the assertions made at the hearing (uncorroborated by primary evidence) referred to 12 motor vehicles being the subject of the sponsorship. 
(5)		 The amount of sponsorship paid to McKinstry Motor Sport was substantial in comparison with the advertising expenditure incurred by the Appellant Company. In the year ending 2005 for example McKinstry Motor Sports sponsorship amounted to £125,000. The next highest payment for advertising was £12,986.50, £2,000 and £10,000 (totalling £24,986.50) in three separate payments to TLC Limited and the total advertising expenses for that year were £175,960. 21. Such other advertising was a more direct manner of advertising of the Appellant Company including for example the preparation of brochures. 
(6) 		The assertion made by the Appellant’s Accountants that there had been a 76% increase in turnover as a result of the sponsorship of McKinstry Motor Sports had not been corroborated by any detailed analysis as to the number of leads generated as a result of sponsorship as against the other forms of advertising. A letter from the Appellant/Mr Harrison to Mr McKinstry undated but contained within the bundle makes reference to customer comments received by the Appellant regarding the sponsorship seen on television coverage.  The Tribunal found that this reference was too vague to provide sufficient evidence for the Tribunal to conclude that the purported increase in turnover was directly linked to the Appellant’s expenditure on sponsorship. 
Case Law
10.	The Tribunal considered the case law referred to it by both Mr McKenna and HMRC. Each case must be decided on its own facts and its own merits. The Tribunal distinguished the case referred to it by the Appellant’s representative RS McQueen v HMRC on the basis that there was no evidence from the Appellant of any preferred leisure activity other than rallying and no evidence before it upon to conclude that the private satisfaction of Mr Harrison was an incidental benefit of the expenditure. 
11.	The principles involved in determining such cases are well known and best summarised by Sir Stephen Oliver QC in Executive Network (Consultants) Ltd and O’Connor [1996] SpC 56. The Tribunal considered the two ends of the spectrum; sponsorship of a charitable or philanthropic nature and sponsorship amounting to pure advertising or public relations. The Tribunal found that there was a clear inference given the accepted link between Mr Harrison and Mr McKinstry together with Mr Harrison’s longstanding and significant involvement in rallying. The Tribunal went on to consider the Appellant’s objective in making the payment but found that without any direct evidence at all from Mr Harrison it could not be satisfied as to his subjective intentions on behalf of the Appellant Company at the time of entering into the Agreements. Given the distinct lack of evidence from the Appellant/Mr Harrison, either orally, in writing or documentary, the Tribunal found there were no satisfactory answers to the questions which had been posed by HMRC throughout the duration of the enquiry. In particular why Mr Harrison decided to sponsor McKinstry vehicles in particular, the nature of their relationship, whether any alternatives had been considered, the nature of the business agreement between the parties particularly bearing in mind the lack of any formal contract or business plan and how the sponsorship was intended to bring the name of the business or its products before the intended target audience.
12.	The Tribunal found the demonstrable lack of formal commerciality in the transaction inferred non-trade purpose. Taken together with the apparent lack of any type of review of the effect on the trade of the sponsorship, contradictory and misleading assertions and absence of any evidence from Mr Harrison, the Tribunal could only reach the inevitable conclusion that the Appellant Company had been deliberately evasive in order to hide the benefit Mr Harrison received from the sponsorship and therefore there was a duality of purpose in the expenditure. The Tribunal found that the onus of proof had not been discharged by the Appellant.
13.	The appeal is dismissed.
14.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

TRIBUNAL JUDGE
RELEASE DATE: 2 DECEMBER 2010