In The Crown and Cushion Hotel (Chipping Norton) Ltd v HMRC  UKFTT 765 (TC), the First-tier Tribunal (FTT) allowed the appeal of the appellant company against HMRC's disallowance of expenditure it had incurred in sponsoring a racing driver who was the daughter of its sole director. The FTT concluded that the payments were made "wholly and exclusively" for the purposes of the company's trade as required by section 54, Corporation Tax Act 2009 (CTA).
The Crown and Cushion Hotel (Chipping Norton) Limited (the Appellant) operates a family owned hotel business comprising of six hotels. Mr Fraser established the business in the 1980s and is the company secretary. Throughout the relevant period, Mr Fraser was the driving force behind the business and ran the business on a day-to-day basis, notwithstanding that the Appellant is owned by his two daughters, one of whom, Mrs Powell, is also the sole director of the Appellant.
In 2008, Mr Fraser put an agreement in place between the Appellant and Miss Alice Powell, his granddaughter and the daughter of Mrs Powell, under which the Appellant would sponsor Miss Powell, who was a young aspirational racing driver who had begun to attract substantial media attention, in return for Miss Powell undertaking various promotional and advertising activities in relation to the Appellant's business.
HMRC conducted enquiries into the Appellant's corporation tax returns for the accounting periods ended 31 March 2011 and 31 March 2012. In June 2014, HMRC issued closure notices in respect of its enquiries and amended the returns. HMRC claimed additional corporation tax for the above periods in the sum of £155,355.17, on the basis that the Appellant was not entitled to a corporation tax deduction in computing the profits of its trade in relation to the motor racing sponsorship payments made to Miss Powell, as such expenditure had not been incurred "wholly and exclusively" for the purposes of its trade, as required by section 54, CTA. HMRC was of the view that the expenditure had a dual purpose of both advertising the hotel business and advancing Miss Powell's racing driving career.
The Appellant appealed against the amendments.
In allowing the Appellant's appeal, the FTT confirmed that the “wholly and exclusively” issue has to be determined by ascertaining the object of the taxpayer in incurring the expense, which is a question of fact. In making that factual assessment, the FTT has to observe a number of principles established by relevant case law and summarised by Millet LJ in Vodafone Cellular v Shaw  STC 734 (at page 742) as follows:
- The words “for the purposes of the trade”’ mean “to serve the purposes of the trade”. They do not mean “for the benefit of the taxpayer”.
- To ascertain whether the payment was made for the purposes of the taxpayer’s trade it was necessary for the FTT to discover the taxpayer's 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.
- 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.
- 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.
- 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 in issue. Once that has been ascertained, its characterisation as a trade or private purpose is a matter for the FTT to determine.
HMRC argued that the payments made by the Appellant to Miss Powell were not "wholly and exclusively" for the purposes of its. They were of a personal nature, arising out of natural love and affection for a close family member.
The FTT disagreed with HMRC and found in favour of the Appellant. The FTT commented that Mr Fraser’s sole object in the Appellant making the payments to Miss Powell was to benefit the Appellant by attracting customers to the hotels, which were situated near Silverstone race track. He was not motivated by a desire to further Miss Powell’s racing career and any benefit to Miss Powell was merely an incidental effect of the sponsorship payments.
Whether an expense has been incurred "wholly and exclusively" for the purposes of the taxpayer's trade will of course depend on the individual facts of the case under consideration, but this decision demonstrates that it is possible for businesses to make sponsorship payments to family members and for such payments to be tax deductible provided that any benefit to the family member was an "incidental effect" of the sponsorship payment.
A copy of the decision can be found here.