It is probably no exaggeration to say that the Upper Tribunal decision in Interfish Ltd v CIR [2013] UKUT 0336 (TCC) will rock the world of corporate sponsorship to its foundations. It’s a case which will potentially affect any business which claims tax relief for sponsorship payments: and, indirectly, any concern which seeks to raise money through commercial sponsorship. Many will find the decision bizarre: but as an Upper Tribunal decision it has the force of legal precedent so, bizarre or not, you can’t ignore it.
The facts are pretty simple. Interfish Limited carried on in Plymouth a substantial business of catching, processing, wholesaling and retailing fish. The local rugby club, Plymouth Albion, was one of the largest clubs in the south-west. Interfish sponsored Albion.
It’s crucially important to note at this point that although Interfish was a private company effectively controlled by a Mr Colam, the decision was expressly not based on any contention that Mr Colam was a rugby footballer manqué or that the payments were made to gratify his personal interest or to support his hobby of watching rugby, or were tainted by any private considerations of that kind. Nor was it particularly relevant that Mr Colam was a director and shareholder of the Club. On the contrary, it was accepted that Interfish sponsored the club partly for the advertising benefit it conferred and partly because it “opened doors within the business community.”
Examples of the first were the emblazoning of Interfish’s logo on the players’ shirts, match programmes, website etc, and in visits which club players made (in playing kit) to Interfish’s retail counters which were agreed to be a very effective way of promoting the retail business: an example of the second was when Interfish were in urgent and unexpected need of bringing a large vessel into Plymouth at short notice and, owing to the goodwill felt towards Interfish, temporary use of a ferry berth was forthcoming.
In summary, as the First Tier judge put it “his position as the benefactor of the city’s Rugby Club will have given Mr Colam a particular status among those in the local community who were aware of it – and those people will have included business and professional people who frequented the Club – of a sort that will have favourably disposed them towards Mr Colam and his business. I consider that Mr Colam was generally aware of those possibilities when he embarked on the series of sponsorship payments; in my judgment he would not have made the payments if he had not anticipated benefits of that sort for Interfish.” Indeed, by 2006 Interfish had achieved what it needed to achieve from its connection with the Club and the sponsorship payments were reduced: hard-nosed, these fishermen.
So why was tax relief denied?
The answer lies in the “wholly and exclusively” rule. The payments were made to improve the financial position of the Club and to assist it in becoming successful. Thus the payments were not made “wholly and exclusively” for the purposes of Interfish’s trade, but partly for that trade and partly for the purposes of the Club’s trade.
Of course, Interfish had what might be termed an ulterior motive in improving the financial position of the Club – if the Club prospered Interfish’s commercial interests would be furthered: no-one, after all, wants to be associated with a loser. But that was not enough: once it was accepted that one of the motives of making the payment was to give financial support to the Club, duality of purpose came in and tax relief went out.
By contrast, HMRC had agreed that amounts which Interfish had paid specifically for promotion on hoardings at the ground were tax-deductible, presumably on the basis that that had simply been the payment for a service rather than a payment made with intention of supporting the Club. And therein lies the lesson for those affording or seeking sponsorship. A subsidy which is paid for the general purpose of supporting the activities of the organization being sponsored runs a serious risk of failing to qualify for tax relief under the “Interfish” principle (though of course where the organization in question is a charity, relief under the Gift Aid provisions may well be in point). If you want to maximize the chances of tax relief for non-charitable payments, ensure that they are made in return for separate, specific, identified and quantifiable benefits – advertising space on programmes, hoardings, websites or whatever; endorsements; promotional visits and events, for example. Payment for such things may of course incidentally benefit the organization in question, but there is at least a reasonable prospect of demonstrating that that it is not the purpose of making the payment (any more than, for example, a trader buying stock from any supplier has the purpose of benefiting the supplier’s trade).
For more on this, (or for the recipe for our delectable fish pie) contact David Whiscombe or your usual BKL contact.