A First-Tier Tax Tribunal decision has the potential to upset a lot of businesses (and sporting clubs, or other organisations that benefit from business sponsorship).
Many businesses sponsor local clubs and organisations. In return sponsorship for a business will be allowed to display advertising boards around grounds, add logos to shirts and advertise on literature, tickets etc. A main sponsor may generally also benefit by being invited as a special guest to lunches and events and will also get to know the board or management, in short sponsorship is a public relations tool and a good way to accelerate networking opportunities.
It is widely accepted, or has generally been widely accepted that sponsorship is classified in the accounts under the heading of “advertising and promotion”, and providing that the payments do not double up to benefit the managing director’s personal hobby, or those of his family, should qualify for a deduction for tax, or will they?
Interfish Limited is a highly successful fish processing company based in Plymouth. Its managing director, Johannus Colam has made the Sunday Times Rich list and over the course of the last few years his company has donated over a million pounds to support its local rugby club Plymouth Albion.
Cash was donated by Interfish to the club at different times, firstly it was used to prop up the club financially and then specifically to purchase higher quality players. Mr Colam had already acquired shares in the club and was able to assert influence at board level. This also assisted the club.
Mr Colam in giving evidence told the Tribunal that making the payments to Plymouth Albion was beneficial to Interfish in various ways, as well as providing visible promotion he also described the Club as ‘one of the most, if not the most, influential business meeting place in Plymouth’.
Mr Colam got to know, amongst other people "on the best table" at events and functions there, a Nat West bank manager who served on the club's board. The Nat West subsequently lent funds to Interfish, when other banks had already turned the company down. Mr Colam said that he felt that his company’s involvement with the club had “opened doors’ within NatWest and the Plymouth business community.”
In short Interfish accrued significant but immeasurable benefits as a sponsor, but were these a commensurate return on £1.2 million?
The upset
The Tribunal Judge did not concur with Mr Colam’s views. For example, he thought that it was “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.”
He found that advertising could have been obtained at the Club’s published rates for about £10,000. Although, it was noted that 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”.
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. However, the judge seems to have gone a stage further and decided to focus on who really benefited from certain payments made by Interfish which were applied directly by the club to purchase players. He considered that these specific payments did not meet he requirement of ‘wholly and exclusively ... for the purposes of the trade’ a requred by s.74 ICTA 1988 (now s.54 CTA 2009). He remarked that “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.”
Editorial comment
The result is something of a shocker for wannabe sponsors. The judge seemed to think that it was necessary to try and cost out the benefits of sponsorship, whereas relationships are built up over time, and often over lunch and from that respect are intangible.
A sponsor pays what he thinks something is worth, but more importantly one only pays what one can afford, and so if you are a large successful company you will pay more than a small unsuccessful company. The judge decided that it was necessary to look at the objective and motive behind each payment made, rather than considering the arrangement in the round. In most cases a company would just make a one-off sponsorship payment, or series of payments and that would be that: however in this case, the arrangememt continued over the years and Mr Colam made payments to Plymouth Albion which were designed to cover specific items of expenditure, such as the purchase of players. This appears to have tripped things up. Presumably if Mr Colam had just made large round sum payments and had no influence on the way that the club used them there would have been a different result. Presumably the fact the Mr Colam had shares in Plymouth Albion (but saw no financial benefit from them) had also a bearing on the case. It would have helped if the judge had made a better job of writing up his decision, because this could have clarified this points better.
Decision: Interfish Limited V HMRC [2010] UKFTT 219 (TC)
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