Interfish is the holding company of a group based in South West England which included a Plymouth based fish retailer, South West Foods. Over three years it made payments to Plymouth Albion RFC totalling £1.2m. The Court of Appeal has upheld the decisions of both the First Tier Tribunal and Upper Tier Tribunal that the payments are not deductible in computing Interfish’s profits for corporation tax.
The fact that there was duality of purpose in making the payments was the reason the claim floundered. In order to be tax deductible, the expenditure had to be “wholly and exclusively laid out for the purposes of the trade” (ICTA 1988 s 74(1)). The FTT had held that the expenditure was made for two purposes: a business purpose to promote South West Foods (a member of the Interfish group) and to improve the financial position of the rugby club. It was irrelevant if one reason for the payment was subordinate to another. Counsel for Interfish had argued that the purpose of improving the financial position of Plymouth Albion was necessarily involved in promoting Interfish’s business. This was roundly rejected with reference to case law, principally Bentley Stokes & Lowless v Beeson (33 TC 491), the very case that Counsel for the taxpayer was attempting to use to support his line of argument.
The tax law rewrite equivalent of what was ICTA s 74(1) is CTA 2009 s 54.
It may be helpful to contrast a payment by way of sponsorship with the payments that were made by Interfish. In gauging the amount a trader would be willing to pay for sponsorship it will consider the benefits it expects to receive. It will seek to extract value in return for the payment from the entity sponsored. It will not have a purpose of ensuring the survival of the sponsored organisation. Whilst it may be difficult to value the benefits of sponsorship objectively, nevertheless the business will in essence only be looking after itself, believing that it is receiving full value for payments made. Interfish’s aim was the financial survival of the rugby club and improving its squad as well as benefitting it and its subsidiaries’ trades by enhancing its reputation in Southwest England. Duality of purpose was fatal. (Where a business receives sponsor’s benefits which it uses for entertaining, that part of the sponsorship payment will not be an allowable corporation tax expense and the input tax will be blocked).