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HMRC internal manual

Business Income Manual

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Wholly and exclusively: expenditure having an intrinsic duality of purpose: natural love and affection

S34 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)

Helping out/sponsoring a relative’s business

There are inescapable private considerations to dealings between a trader and close relatives. The sponsorship of children involves an inevitable sub-conscious private motive and so the expenditure is disallowable.

In the case of Executive Network v O’Connor [1995] SpC56, the company started trading as a specialist recruitment and personnel consultant for the information technology industry on 1 March 1986. Mr Toms was the majority shareholder and a director. The company’s trade was to act for a small number of clients establishing a close relationship with them at a high level. Mr Toms’ wife ran an equestrian business: buying, training and selling horses and participating in shows and events. Riders included the Toms’ children. The company made sponsorship payments to the equestrian business to:

  • provide working capital to build up the stock of horses
  • enable a new horse box to be purchased
  • provide opportunities for the children to develop their equestrian careers, and
  • preserve the solvency of Mrs Toms’ business

The Inspector took the view that the payments were not allowable under what is now S34(1)(a) ITTOIA 2005. The company appealed to the Special Commissioners contending that:

  1. the payments were expenditure incurred exclusively for the purposes of its trade based on a prudent and highly successful commercial decision, and
  2. any benefit to others was incidental and was not a purpose of the expenditure

The Special Commissioners decided that, whilst the payments were laid out for the purposes of the company’s trade, personal benefit played a part in the decision to make them. The benefit to Mrs Toms’ trade was more than incidental. The non-trade purpose (from Mr Toms’ company’s point of view) of benefiting Mrs Toms’ trade coupled with the furthering of the children’s equestrian careers could properly be described as conscious motives of the decision-makers so far as it concerned the decision to make the sponsorship payments.

The quantum of the payment to Mrs Toms’ trade was determined by reference to her requirements. Moreover, the non-trading result was one that was so inevitably and inextricably involved in the sponsorship activity that the result must have been a purpose of the activity. Even if the motive to provide funding for Mrs Toms’ trade and for advancing the equestrian careers of the children had not been a conscious motive, it was inescapably one of the objects for incurring the sponsorship expenditure. The Special Commissioners concluded that the expenses were not an allowable deduction.

The part of the Special Commissioners’ decision on which the above guidance is based is set out below:

`Here Mr Toms and his co-director, Mr Kemp, were witnesses of the highest integrity. We are entirely satisfied from their evidence that the sponsorship payments were laid out for the purpose of EN’s trade. But, however hard we review the evidence we cannot displace from our minds the conclusion that “personal benefit” played a part in the decision to make the sponsorship payments. The benefit to Mrs Toms’ trade was more than an incidental result of the expenditure. The decision to fund Mrs Toms in year 1 in her stocking-up with competition horses must, we think, have been a joint decision of both Mrs Toms and Mr Toms in which the long-term capital requirements of her personal business were a key ingredient. The decision to provide part of the cost of Mrs Toms’ new horse box in year 4 was another decision to lay out funds for the purpose of her business. The annual decision as to the quantum of the sponsorship was, once again, directed as much at the needs of Mrs Toms’ business as at the benefits obtained from sponsorship. It seems to us, therefore, that the non-trade purpose (from EN’s point of view) of benefiting Mrs Toms’ business coupled with the furthering of the children’s equestrian careers can properly be described as conscious motives of the decision-makers so far as concerned the decision to make the payments with which this appeal is concerned. The interposition of the BEF [the British Equestrian Foundation] from 1 January 1991 onwards does not alter our conclusion that benefiting Mrs Toms’ trade was a purpose of the expenditure. It is not, therefore, strictly necessary for us to apply the concluding sentence in the passage cited from Lord Oliver’s speech. However, even if we were wrong so far, we would still be against EN. It seems to us that the non-trading result (ie funding Mrs Toms’ business as distinct from EN’s) was a result that was so inevitably and inextricably involved in the sponsorship activity that the result must have been a purpose of the activity. In this connection we cannot accept Mr Ewart’s [appearing for the company] argument that that passage, which develops Lord Brightman’s reasoning in Mallalieu [Mallalieu v Drummond [1983] 57 TC 330, see BIM37910], is confined to the three instances of expenditure on necessities of life, ie clothing, food and accommodation. Nothing in Lord Oliver’s amplification of the Mallalieu reasoning suggests that he regarded Lord Brightman’s reasoning as being limited in the manner suggested by Mr Ewart. Even if the motive to provide funding for Mrs Toms’ business and for advancing the equestrian careers of the children had not been a conscious motive (which we think it was), it was we think inescapably one of the objects for incurring the sponsorship expenditure.’

As indicated in BIM37680, the precedent value of Special Commissioners’ decisions is limited.

For more general guidance on the allowability of costs of advertising and sponsorship, see BIM42550.