The First-tier Tribunal has heard three cases regarding the deductibility of expenditure incurred by trading businesses. In two of the cases involving Grant Bowman t/a The Janitor Cleaning Company (TC02284) and Interfish Limited (TC02275), the decisions went in favour of HMRC. The third involving McLaren Racing Limited (TC02278) was won by the company albeit via a casting vote. All of the decisions were published on 9 October.
The facts of each case were as follows:
The issue in dispute was whether Mr Bowman, a sole practitioner was entitled to treat a consultancy payment of £11,000 as expenditure incurred wholly and exclusively for the purpose of the trade. HMRC asserted that the payment was capital and therefore not deductible.
Mr Bowman’s view was that if the payments were capital the expenditure was eligible for capital allowances however no rationale was presented to justify a claim and this was dismissed. In fact, Mr Bowman did not attend the hearing which did not help his case – which the Tribunal did not find compelling.
The fee comprised two elements:
- A one off payment of 3% of the contract value for assistance given in winning a three year cleaning contract worth £300,000 over three years (which in fact only ran for 10 months);
- A fee of £2,000 for identifying and then assisting in the negotiations for the business planning and potential purchase of “Cleaner Times”. Ultimately, the negotiations fell through at the last moment and the purchase was not completed.
The Tribunal found that both fees had nothing to do with the day to day running of the business. The £2,000 fee was made in connection with the acquisition of an identifiable asset and in line with the decision in Tucker v Granada Motorway Service Limited (1979) STC 393, constituted capital expenditure. The £9,000 payment was spent to help secure a contract which would provide the business with an annual income thus bringing into existence an asset providing an enduring benefit to the trade. In line with Atherton v British Insulated and Helsby Cables Limited (1926) AC 205, the expenditure was capital.
This case involved the deductibility of certain payments made by Interfish Ltd, fish merchants in Plymouth to the local rugby club.
An initial decision which had been made by the Tribunal in 2010 identified that most of the payments were made to improve the fortunes of the rugby club with the aim that trade benefits could be secured from those involved with the club, which included influential business people who would look favourably on Interfish’s benefaction. The Tribunal made the decision that these payments were not incurred wholly and exclusively for the benefit of Interfish’s trade as required under s74 ICTA 1988 (now s54 CTA 2009).
Evidence also suggested that payments may have been made to promote Interfish directly to the public. For example the company’s logo appeared on the player’s shirts. The Tribunal offered to hear further arguments if addition evidence of these payments could be provided.
A further hearing took place in February 2012. Interfish expressed the view that payments were made not only for advertisement and direct promotion but also to obtain the benefits a longer term commitment to the club would bring. Their view was to look at the value the payments made to the rugby club would bring to Interfish and where these exceeded the actual payment made, all the payments should be tax deductible. A list of reasoned annual values for items such as “logos on player’s shirts”, “being known locally as a significant supporter” etc. was provided.
With one exception, HMRC’s view was that there was insufficient evidence to demonstrate that any part of the disputed payments had been made exclusively for visible promotion, but that these had a dual purpose which included furthering the interests of the rugby club with a view to obtaining “reciprocal support” which had previously been ruled as non-deductible. HMRC did accept however that advertising and promotion could have been acquired separately and were prepared to allow a proportion of the payments as allowable.
The Tribunal found that the evidence provided fell short of supporting their purpose of obtaining visible promotion and were inclined to support the view of HMRC that the payments had at best the dual purpose of obtaining visible promotion and reciprocal benefits from improving the fortunes of the rugby club. Furthermore, they felt that HMRC’s willingness to allow a proportion as allowable did not sit well with previous case law and in their view all the disputed payments were non-deductible.
Included within the list of reciprocal benefits was an amount for “access to the club’s hospitality” and the question of whether this fell within the business entertaining restrictions under s577 ICTA 1988 (now s1298 CTA 2009) was considered. The judge concluded that the provisions did not apply but expressed the view that if they were wrong on the reciprocal benefits issue, such amounts would not be disallowed by virtue of s577 – thus casting doubt in their own decision and leaving the door open for further appeal to the Upper Tribunal.
McLaren Racing Limited
McLaren Racing Limited had broken the rules of the FIA International Sporting Code (“ISC”) and as a result were charged a penalty of £32m. The case centred on whether such a penalty imposed by a motoring organisation and not statute was tax deductible.
The penalty arose from actions taken by McLaren employees who obtained certain confidential information about the design and performance of the Ferrari car – a rival team. It was concluded by the World Motor Sport Council (“WMSC”) that some degree of sporting advantage had been obtained and as such McLaren had breached the rules of the ISC to which it was contractually bound.
McLaren argued that there was a distinct difference between a penalty levied to protect the public and the nature of a contractual payment such as that made by McLaren. Their view was that the fine was incurred in the course of its trade via the actions of its employees even though unauthorised.
HMRC’s view was that the penalty arose from McLaren’s interference with Ferrari’s intellectual property which was not part of their trade. The illicit gathering of information was also not part of their trade. The penalty was a punishment on McLaren for a serious breach of the rules and did not arise from the trade. The policy behind the sanction was the wider protection via the WMSC of motorsport and in their view had sufficient links with public concern.
Judges Hellier and Dee had differing views with Hellier having the casting decision. Hellier’s view was that McLaren’s trade is trying to make money from the design and racing of Formula One cars and therefore the actions of McLaren employees might fall within it. The penalty was one which McLaren were contractually obliged to pay under contractual obligations undertaken for the purposes of its trade. He dismissed the public interest argument stating that the FIA did not carry sufficient weight as a regulator of a profession based on trust. The penalty was connected with its trade and was incurred wholly and exclusively for the purposes of its trade.
These cases highlight the two factors which practitioners need to consider when considering the deductibility of expenditure. Firstly whether the expenditure is capital or revenue in nature and secondly whether the costs have been incurred wholly and exclusively for the benefit of the trade. Decisions will be based on the facts and supporting case law which as demonstrated in these cases – particularly Interfish where doubt was cast on the decision and McLaren won by a casting vote – are not always clear cut. It will be interesting to see if these two cases are taken forward to appeal.