Tribunal rules on teenager's racing sponsorship

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Sports sponsorship has long been a minefield for businesses and tax advisers, but imagine the complications when it involves an ambitious teenager who wanted to be a Formula 1 driver.

In The Crown & Cushion Hotel v HMRC [2016] UKFTT 765 (TC), first tier tribunal judge Harriet Morgan devoted 158 paragraphs to the intent and details of the sports sponsorship deal within this family business. Alongside the technical arguments, the case has some classic soap opera ingredients in the shape of a bluff, headstrong hotel entrepreneur, the motor-racing dreams of his teenage granddaughter and the misgivings of her mother, a director of the hotel business at the heart of the case.

This issue of sports sponsorship went all the way to the Court of Appeal in 2014 in the Interfish case, which was decided in favour of HMRC. In that instance payments to Plymouth Albion Rugby Football Club were not deductible expenses of the company because there was a duality of purpose.

Based on the precedent established by the Interfish decision, HMRC argued in the Crown & Cushion case that there was a personal purpose behind the hotel’s payments, arising through the “natural love and affection” for aspiring racing car driver Alice Powell, the daughter of the hotels’ officers and granddaughter of the man who controlled a group of six similar businesses.

In contrast to Interfish, however, first tier judge Harriet Morgan decided in favour of the appellant.

The backstory

The tribunal judgment tells how Jim Fraser bought The Crown and Cushion Hotel company in Chipping Norton when it comprised one hotel. Through a series of high-risk growth strategies he expanded it by 2008 into a group of six. Boasting a total capacity of 176 rooms, the hotels were all located within 45 minutes of the Silverstone grand prix race track.

Fraser had negotiated a series of tenancy/franchise agreements with the hotel managers. He would pay them an extra £20,000 if they made a profit and share the proceeds. The terms of the agreement allowed him to vary the rent paid.

While he used the term “rent”, Fraser explained in evidence that the terminology of his agreement was not particularly precise as he had based it on an adaptation of a “tied house” agreement typically used between pub landlords and breweries. The agreement also gave the parent company the rights to commission advertising to promote the group.

Throughout the period covered by the tax dispute the company was owned by Fraser’s daughters Eileen Powell and Julie Sugawara, with Powell the sole director. Day-to-day control, however, remained in Fraser’s hands.

Powell’s daughter Alice, meanwhile, had shown considerable promise as a kart and racing car driver in her early teens. With her father’s and grandfather’s encouragement and support, she had taken part in the British Racing Driver Club Formula JICA Karting Championship.

In March 2006 and August 2007 Fraser organised the purchase of two cars, with VAT clearance obtained by company accountants Howes & Co from HMRC for the purchases. As Powell gained more publicity and talk began circulating of the possibility of her competing in Formula One, Fraser urged his son-in-law to sign a contract with The Crown & Cushion (Chipping Norton).

An agreement was reached under which the 15-year-old would receive £160,000 sponsorship annually for four years to promote the hotel group, which styled itself as “Silverstone Hotels”. Her mother, the company director, would have preferred not to enter such a risky and potentially expensive venture. She characterised her role as that of a bystander during all this activity.

While Eileen Powell made it known when she disagreed with her father, “he does not really listen”, the decision noted.  But she did not think it would be right to use her legal authority to overrule her father as he was the one who had built up the business.

The young racer continued to excel, and in 2010 won the Formula Renault BARC Championship - the first female to do so and also the youngest ever winner.

She was selected as a rising star by the British Racing Driver Club and was invited to race in the Indian Grand Prix Formula One support race. That led to a trade mission trip alongside then Prime Minister David Cameron (the local MP for Chipping Norton). As well as promoting British racing car products, she also did her bit for the family’s hotel group.

A company, Alice Powell Racing, was set up to receive her earnings, which the family said had verbal confirmation from HMRC that the money had funded her racing and Alice had not had any personal benefit from those payments. 

Enter HMRC

In 2014, however, HMRC came back with corporation tax amendments showing an additional £155,355.17 due to payments in the years to 31 March 2011 and 2012 that it ruled were not made wholly and exclusively for the purposes of the appellant’s trade under s54 of the Corporation Tax Act 2009.

When the appeal reached the tribunal, HMRC referred to previous decisions (Bentleys and Exectuive Networks) that the 2008 deal was a funding to further the younger Powell’s racing career rather than a sponsorship agreement.

While accepting that she was a talented driver, the tax department argued that she was only 15 when the agreement was made and “could by no means be described as a household name” Advertising was therefore unlikely to have much impact.

The decision

HMRC also argued that the relationship between the appellant and the managers was that of landlord and tenant.  But the judge knocked back this point, noting that the working arrangements as presented in evidence made it clear this was not the case. Additionally, the analysis would be the same whether the appellant was conducting a trade or a property business; “The profits of a property business are computed on essentially the same basis as those of a trade,” the judge noted.

The Upper Tribunal Interfish precedent also failed to impress her. “There is no argument being raised that there was an intermediate purpose of benefiting Miss Powell and/or the managers but that the ultimate intention was to benefit the appellant’s business,” she concluded.

“The finding we have made is simply that the sole purpose was to benefit the appellant’s business.”

In the judge’s view, “If the sole object of the expenditure was the promotion of the business, the expenditure is deductible, even though it necessarily involves other consequences (as set out in Vodafone to which both parties referred).  The existence of, for example, a private advantage does not necessarily mean that the expenditure is disallowable.”

She continued: “We do not mean to suggest that Mr Fraser is devoid of love and affection towards his granddaughter or that he does not take pride in her achievements.  But it is clear that he is a person who, in business matters, is strong minded and focussed and is able to and does act and take decisions without the nature of a personal relationship influencing his business decision.”

About John Stokdyk

John Stokdyk, AccountingWEB head of insight

AccountingWEB’s Head of Insight has been with the site since 1999 and likes to spend his time studying accountants’ technology habits. When not nerding out, you can find him exploring obscure indie music and searching for the perfect organic sourdough loaf from his base in Brighton, UK.


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05th Dec 2016 10:04

HMRC is must surely take case is to appeal at Upper Tribunal. I can't see that they will accept this decision without further arguement.

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05th Dec 2016 10:32

Another terrible decision from the FTT. Surely they need to start applying some sort of arms-length test to these sorts of arrangements. Was there such a huge demand to sponsor her that they had to pay massive sums, or could they in fact have paid a pittance for the sponsorship rights because, essentially, there was no commercial reality to the deal?

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By keithas
05th Dec 2016 12:02

I hate "comprised of".

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to keithas
05th Dec 2016 16:59

So do I!! The text has been corrected and some stern words have been issued and there will be lines such as "There is no 'of' after comprised... There is no 'of' after comprised... " will be assigned within our production team.

In retrospect, because it causes so much trouble, comprised is best avoided - my mistake for leaving it in there in the first place.

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05th Dec 2016 13:17

Has anyone tried to quantify the benefit to the business of this sponsorship deal? Given the high profile nature of the level of racing and the circles the parties were moving in it's clear there was a reasonable level of commercial involvement.

However, if you're going to ban this then any companies placing advertising with their director's favourite football team will also fall foul of this ruling due to a "duality" of purpose. Not surprising to see the tribunal accept the shades of grey here...

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to rememberscarborough
05th Dec 2016 13:42

Not strictly tax related, but there's been disquiet over certain high-profile football clubs bought by middle-eastern consortiums receiving sponsorship for way over market value (to circumvent financial fair play rules) where the benefit to the entity doing the sponsorship isn't entirely obvious. Thin end of the wedge?

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to rememberscarborough
05th Dec 2016 17:04

The benefits to the company were examined in some detail in the Crown & Cushion case decision.

Paragraph 77 states: In 2012, in the course of HMRC’s enquiry, a report was commissioned to value Alice’s advertising value, looking at the media coverage received in the year prior to the report. The total media value (including print and broadcast media) was stated to be over £1 million for one year (comprising £379,020 for print media and £638,270 for broadcast media). The report notes that:

“Whilst there is not an exact science to evaluating the value of media coverage, it is industry practice to use the equivalent advertising value to that of the editorial coverall received. For broadcast media, particularly BBC titles, where money can’t buy a presence, conservative estimates have been used. Once these figures have been established editorial is intrinsically more credible than paid advertising, so it is standard to multiply the advertising equivalent by three to calculate the editorial value equivalent.” There is no information on who prepared this report.

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07th Dec 2016 23:07

I go to lots of race tracks as a hobby and see dozens of small firms promoting their family businesses. I see some larger teams with students from motor racing colleges sleeping in the back of trucks to get hand on experience and many go to F1. The industry employs 25,000 UK engineers and brings in £2BN a year in foreign currency. Most of the F1 engineers are British and that is why all the F1 drivers have to learn English. This was a victory for common sense and would have been another nail in the coffin of British industry if they had lost. Some people abuse sponsorship and use the money to drive around in swanky cars, which means that HMRC have to be vigilant at the same time. Racing Fan

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09th Dec 2016 16:04

I'm amazed that HMRC lost.

Of course FTT decisions carry no weight so HMRC might not appeal if they'd just done a really bad job on the case.

But as others have said - would they have sponsored anyone else to that degree? Would anyone else have sponsored the girl to that extent?

That 'report' sounds pretty hokey. What did they do? Just add up the time and words that her races were on TV and in the media and work out how much an advert of similar size would have cost? And surely it's the sort of thing that would have been needed BEFORE sponsorship was entered into.

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