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Cite as: [2007] UKSPC SPC00601, [2007] UKSPC SPC601

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McQueen v Revenue & Customs [2007] UKSPC SPC00601 (19 March 2007)

SPC00601

ASSESSMENT – Discovery – Whether discovery assessment could be made to correct alleged overclaim of the expenditure relating to motor rallying – Whether Revenue officer could have been reasonably expected, on the basis of information made available to him before the relevant date, to be aware that the original self-assessment was insufficient – No – Taxes Management Act 1970 s.29(5) and (6)

DEDUCTION IN COMPUTING PROFITS – Expenditure wholly and exclusively laid out for purposes of trade – Purpose of expenditure – Motor rallying expenditure – Trade carried on by sole proprietor – Whether expenditure on motor rallying carried on by sole proprietor is expenditure wholly and exclusively laid out for the purposes of the trade – Yes – Income and Corporation Taxes Act 1988 s.74(1)(a)

THE SPECIAL COMMISSIONERS

R S McQUEEN Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: SIR STEPHEN OLIVER QC

Sitting in public in Edinburgh on 27 and 28 February 2007

Crawford Herald of Jeffrey Crawford, accountants, for the Appellant

Brendan Hone for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Mr R S McQueen appeals against discovery assessments under section 29 of Taxes Management Act 1970 ("TMA") for the years 1998/99, 1999/00 and 2000/01 disallowing rally car marketing expenditure of £11,733, £11,747 and £25,018 respectively for those years. Also appealed is the disallowance of capital allowances for those years in respect of the rally cars. The appeals against the discovery assessments and a 2002 closure notice were made on 14 February 2005.

The grounds of appeal are as follows:

(1) 2001/02

The advertising costs in respect of a rally car were wholly and exclusively laid out or expended for the purposes of the trade as prescribed by section 74 of the Income and Corporation Taxes Act 1988. Similarly the claim for capital allowances in respect of the rally car was allowable.

(2) 2000/01

The grounds of appeal are as stated for the year 2001/02 but with the additional ground that reliance cannot be placed on the provision for section 29 of TMA in raising an assessment outside the prescribed time limit.

(3) 1998/99 and 1999/2000

The grounds of appeal are as set out in 1 and 2 above.

I shall deal first with the question of whether the assessments for the periods 1998/99, 1999/2000 and 2000/01 were made within the prescribed time limits. I will then address, as a separate issue, the question whether the expenses incurred on the rally car and the capital allowances are allowable.

PART I

Were the assessments in time?

The assessments resulted from an enquiry. They are designed to recover excessive claims for relief in computing Mr McQueen's trading profits. 2002 was the year of enquiry. The alleged innocent mistakes occurred in the years to 5 April 1999, 5 April 2000 and 5 April 2001. This being a case of alleged innocent mistake, the twelve months limitation in section 9A of TMA applies. The discovery regime is explained in the Court of Appeal's decision in Langham v Veltema [2004] STC 544 (Court of Appeal) in paragraphs 1-10. The Revenue may make a discovery assessments under section 29 TMA. The question here is whether the Inland Revenue officer "could not reasonably have been expected on the basis of information available to him … to be aware of such … excessive claims for relief" (section 29(5)). Section 29(6) provides that "information made available" includes information in the return and accompanying documents and any other documents provided by the taxpayer for the purposes of any enquiry and any information the existence or relevance of which to any insufficiency in the self-assessment could reasonably be expected to be inferred by the officer from any of those documents.

What information was made available to the Inland Revenue officer in the returns for the three years to which this argument relates?

A "Computation Report" for 1998/99 was annexed to the 1999 Return. Under the heading "Audit Notes" are these entries:

"A good trading year; gross profit improved due to changes in business mix.

Capital allowances claim as follows:

Vehicles:

N 200 …

Transit van …

Additions ...

Rally car (marketing of business) £24,995 wda, £3,000 wda, £21,999 c/fwd."

Nothing in the main body of the return links the rally car with any particular box or entry.

The 2000 return contains the words "See Overflow Report" at the end of the "Self Employment" supplementary pages. The Overflow Report is headed "Garelochhead Minibuses". Under the heading "Capital Allowances" are four entries relating to coaches and other items; entry (e) contains these words:

"Rally car

wda b/fwd 24.9.94

Addn 400

wda c/fwd £25,395 no wda claim".

The 2001 return contains an entry in Box 3.57 of the Self-Employment Supplement (advertising, promotion and entertainment) for £25,018. The Additional Information Box (3.116) contains the words – "See Overflow Report". The Overflow Report lists six items for capital allowances. Item (3) reads:

"Rally car b/fwd 25.3.95

wda minus 3,000

C/fwd 22,395"

That is the totality of information available to the Revenue prior to the enquiry.

Did Mr McQueen's returns and accompanying information alert the Inland Revenue officer to the insufficiency of the self-assessment?

The alleged excessive claim relates to motor rallying expenses. The closest that the information disclosed in the accounts gets to this is the entry in the Computation Report annexed to the 1999 return. This refers to "Rally car (marketing of business)" under the heading "Capital Allowances". Later Overflow Reports refer only to "Rally Car" under the capital allowances headings. That was the limit of the Inland Revenue officer's awareness. Did those points clearly alert the officer to the possibility of an excessive claim? Mr Herald, representing Mr McQueen, states of the references in the capital allowances claim that they clearly referred to the rally car and therefore make sufficient disclosure. I do not agree.

In the first place 1998/99 was the first year in which the McQueen business had been claiming motor rallying expenses. There should have been something in the return information for that year to record that the trading expenses included motor rallying expenditure. And there should, I think, have been something to explain how this had come about; for example, mention should have been made of the fact that Mr McQueen (or the partners) had formed the view that motor rallying was for the advancement of the Garelochhead Minibus business and that the car had been driven under that name. Second, there should have been a more explicit linkage between the reference to the rally car capital allowance figures and the entry in the main part of the return to which it related.

For the years 2000 and 2001 the reference to the rally car is even less explicit. It makes no mention of "marketing of business".

In my view the reference to "rally car" in the capital allowances computations serves as a clue to the reasonably alert revenue officer, but it gets no where near clearly alerting him to the possibility of an excessive claim. The reference to "rally car" in the capital allowances is not, in my view, enough to draw attention to the fact that the computation of trading income including expenditure on motor rallying; nor did it indicate how a rally car was seen to be a means of marketing the minibus business.

For those reasons I think that the discovery assessments were all made in time.

PART II

Was the disputed expenditure properly deductible?

The question I now have to decide is whether the motor rallying payments are properly deductible in computing the Garelochhead Coaches profits for tax purpose or whether they are disallowed by virtue of section 74(1)(a) as amended of the Income and Corporation Taxes Act 1988 as "not being money wholly and exclusively laid out or expended for the purposes of the trade".

The argument for Garelochhead Coaches was that the expenditure on motor rallying was for the purposes of the trade. The expenditure resulted from a rational and, in retrospect, successful commercial decision. So far as any benefit accrued to Mr McQueen personally by way of the motor rallying expenditure, that benefit was purely incidental and could not rightly be said to have been the purpose of the expenditure. Mr Hone, for the Revenue, contended that the evidence showed that the non-business advantage to Mr McQueen of promoting his own motor rallying interest and career was the, or at least an, object of the expenditure. On that basis section 74(1)(a) applies to prohibit the deduction of the expense and the assessments should be upheld accordingly.

The following cases were cited in the course of argument:

Executive Network (Consultants) Ltd v )'Connor [1996] STC (SDC) 29

Dhendsa v Richardson (Inspector of Taxes) [1997] STC (SCD) 265

Murgatroyd v Evans-Jackson 43 TC 581

Bentleys, Stokes & Lowles v Beeson 33 TC 491

Vodafone Cellular v Shaw [1997] STC 734

KPL Enterprises (2006) VAT Dec

Mallalieu v Drummond [1983] STC 665, 57 TC 330 (HL)

Executive Network (Consultants) Ltd v O'Connor [1996] STC (SCD) 29

Ransom v Higgs 50 TC 1

I heard evidence from Mr R S McQueen, the proprietor of the business and from three other individuals who came from the Gareloch area. These were Mr Alistair Wilson, a bus and coach operator from Rhu, Mr Stuart Grant who runs a body vehicle repair business in Garelochhead and Mr James Hamilton, also of Garelochhead, who runs a plant hire business.

Mr McQueen

Mr McQueen was born in the 1960s. His hobbies include sailing and motor sport. He has been interested in motor sport since quite young. He is a local councillor in Garelochhead.

Until about 1992 Mr McQueen was employed in bodywork repair businesses. He then bought a taxi and, a bit later, a 14-seater van. He ran these as a business from his parents' home while still carrying on body repair work activities. He used "Garelochhead Minibuses" as the business name. At a later date (sometime after 1999) the business name became "Garelochhead Coaches".

Until the start of 1999 the taxi and minibus business was carried on in partnership. From small beginnings it had expanded by 1999 to a turnover of £286,000 for the year. It had been publicized through word of mouth and by use of small advertisements. By degrees the business had been built up through contracts with the Ministry of Defence and local authorities. The customers included social and sports clubs and businesses (such as Vickers the shipbuilders who required the transportation of staff between Coulport and Barrow-in-Furniss). The business took on a scheduled bus service between Helensburgh and Coulport operating a regular service six days a week.

Business premises were purchased beside the main road in Garelochhead and these are now used as the main base for the Garelochhead Coaches business.

Mr R S McQueen's personal interest in rallying

Mr McQueen had been driving in motor rallies, quite actively but in a relatively small way, from 1986 onwards. This had been a private activity. Until 1995/96 he had been driving a modest car and had not been achieving a great deal of success. It is not entirely clear what happened over the next two years. Mr McQueen says he did little or no rallying during that period. In interview with the Revenue during the course of the enquiry he said that he had bought a Mitsubishi EVO5 in or about September 1998. Certainly, for the 1999 season onwards, Mr McQueen was competing at a high level. His achievements included "class winner", "Top Newcomer in Scotland", fourth overall in Scotland and sixth, eighth and tenth in class. He also competed in the British Championship for a season, finishing sixth in Group N.

Rallying in the name and livery of Garelochhead Minibuses/Coaches

By 1999 Mr McQueen, according to his evidence (which I accept), had decided that motor rallying was a means of marketing the Garelochhead Minibuses (shortly to be changed to Garelochhead Coaches) business. He believed that it attracted media interest; he was aware of the newspaper and TV coverage of motor rallying; the TV coverage got frequent repeats on certain channels.

By then the minibuses and coaches were painted in a professionally designed livery and lettering. The Mitsubishi EVO5 was painted in the same livery. When the name Garelochhead Minibuses was changed to Garelochhead Coaches, the livery and the lettering were changed both for the coaches and minibuses and for the rally car.

The car was entered for motor rallying and, over the years, Mr McQueen enjoyed the success already referred to. Rallies run by the Lanarkshire Motoring Club were co-sponsored by the business. Customers were invited to the Garelochhead Minibus/Garelochhead Coaches tent on "test days" and on "PR days". Typically the invitees included executives with responsibility for transportation of personnel. An example of such an invitee was the transport manager of a company called "Turnkey". That company produced computer components for IMB. It engaged Garelochhead Coaches to transport staff between factories. Another company's employee who enjoyed the hospitality of Garelochhead Coaches was the events manager of the Loch Lomond Golf Club which engaged Garelochhead Coaches to transport competitors.

On at least two occasions Garelochhead Coaches sponsored its own rally, the Garelochhead Coaches rally. This was publicised by poster and publicity notices sent to newspapers. Garelochhead Coaches took the opportunity on one occasion of producing a calendar with pictures of its rally car and coaches; these were sent to all customers and employees.

Garelochhead Coaches' rally car was displayed beside the main road each day outside Garelochhead Coaches' Garelochhead premises.

A series of 4-wheel drive cars were used for the rallying from 1999 onwards. It is the expenditure on the rallying, both capital and revenue, that is in dispute in the present appeal. The first (the Mitsubishi EVO5) was used for rallying from 1999 until 2001. The second, a Mitsubishi EVO7, was used until 2002 when it was exchanged for a Subaru Impreska WRC. All the rally cars were, as already mentioned, painted in Garelochhead Coaches livery and carried the Garelochhead Coaches name and telephone number prominently displaced.

Rallying required Mr McQueen and his co-driver to travel and stay from home, sometime in bed and breakfasts. If a win was achieved, the celebration was funded out of Mr McQueen's private pocket.

Mr McQueen's belief that motor rallying was good for Garelochhead's business

The idea of using motor rally events as a means of publicizing the Garelochhead Coaches business came to Mr McQueen, he said, in the year 1998/1999. He consulted his accountant as to the financial and fiscal implications and went ahead with the idea.

Mr McQueen took the view that motor rallying was better value as an advertisement than buying a daily advertisement in a newspaper. Motor rallying, he understood, has as large an audience as any spectator sport. It attracts TV coverage which, through repeats, continues throughout the year. Sponsored events can be used for the entertainment of customers, existing and potential. Mr McQueen attributed at least one major client (Turnkey, see above) and possibly another (Loch Lomond Golf Club) to motor rallying connections. He was a good and successful driver and saw no need to sponsor an independent driver. I accept Mr McQueen's evidence on these points.

Of the other witnesses who gave evidence, Alistair Wilson said of Mr McQueen's publicity that "it would be difficult to ignore", particularly as the rally car was placed outside the Garelochhead Coaches premises. Stuart Grant accepted that rally driving had given "much more profile to Mr McQueen's business". Ian Hamilton said that he had been aware of Mr McQueen's success in his business and in the course of his rally driving.

The Revenue's scepticism

Mr McQueen's claim to be motor rallying wholly and exclusively for business promotion purposes wears thin when it is borne in mind that no business plan had been prepared, that no motor rallying records were kept as evidence of the business purpose and that people who spotted the Garelochhead Coaches name and style on TV were, more likely than not, to be locals. Moreover, Garelochhead Coaches' bigger clients were institutions such as the Ministry of Defence and schools and social clubs who are unlikely to have been influenced by the motor rallying publicity. The local users of Garelochhead Coaches' services were more likely to have become customers on account of local knowledge. Indeed the other three witnesses referred to above appeared to have known very little about Mr McQueen's motor rallying success. A further point of concern to the Revenue was that certain of the exhibits (especially the photographs of the Garelochhead Coaches Rally of 2003) showed the position after the Garelochhead business had been incorporated at the start of 2003.

Looked at overall, the Revenue suggested, the benefits of advancing his motor rallying career were more than incidental. They were the purpose for the rallying; the benefit to the business was incidental.

Findings of fact

I am satisfied from the evidence that Mr McQueen's motor rallying activities from 1999 onwards were for the purposes of the Garelochhead Coaches trade. He knew he was good behind the wheel and I believe he derived considerable personal satisfaction from the motor rallying activity; but nonetheless he incurred the expenditure and participated in the events for the purposes of promoting Garelochhead Coaches (and its predecessor Garelochhead Minibuses) and getting the names and liveries into the public awareness. The facts that I have taken into account in reaching this conclusion are:

(i) the use of the business livery and lettering on the rally cars;

(ii) the sponsorship of events on a wide scale and the exclusive promotion of the Garelochhead Coaches Rally. (In this connection I am satisfied that at least one of the Garelochhead Coaches Rallies had taken place prior to 2003; the fact that another such rally took place in 2003 and was sponsored by the successor company shows that that form of publicity was regarded as of continuing benefit to the business);

(iii) the use of those events to entertain customers and potential users of the Garelochhead Coaches facilities;

(iv) the publicity derived from newspaper coverage and TV features including repeats and

(v) the daily display of the cars outside the Garelochhead Coaches premises.

In reaching this initial conclusion, I should also mention my impression from Mr McQueen's own oral evidence that he was convinced that motor rallying did promote the business and he pursued that end with a single-minded determination. I have also taken account of the fact that Mr McQueen by his own efforts produced a significant upward trend in sales, i.e. £286,000 in 1999, £400,000 in 2000, £580,000 in 2001 and £670,000 in 2002. There is no reliable way of determining whether the motor rallying activities caused the improvements in sales. But I am satisfied that motor rallying complemented the business and vice versa. I acknowledge, in this connection, that Mr McQueen did no research, other than discussing the matter with his accountant, and produced no business plan to demonstrate the potential advantages or otherwise of motor rallying. However at the start (1999) the business was relatively small and was run by Mr McQueen himself and the five specific factors identified above are positive evidence in support of the assertion that business promotion was Mr McQueen's objective.

Conclusions

It follows from the findings of fact so far that the whole of the disputed expenditure served the purpose of the Garelochhead Coaches trade and that Mr McQueen's intention (in his capacity as the proprietor of the business) was to benefit the Garelochhead Coaches trade by promotion of the name and facilities that it offered.

Did the motor rallying (i.e. the product of the disputed expenditure) secure a private benefit to Mr McQueen? This question is relevant because a distinction must be drawn between expenditure incurred with the object of securing a private benefit and the incurring of expenditure where the securing of the private benefit was not the object of the payment but merely a consequential and incidental effect of that expenditure. (I refer for example to the judgment of the Court of Appeal in Vodafone Cellular v Shaw supra at 742g-h.) Mr McQueen claimed that he only participated in motor rallying to promote the Garelochhead Coaches business; his real leisure interest was in sailing.

I see it this way. Mr McQueen took part in motor rallying because he enjoyed it and it gave him satisfaction. If he had not been good behind the wheel it would have been pointless to have incurred the expenditure. In this connection I should mention that Mr McQueen said in evidence that sponsorship of an independent driver would have been so expensive as to have been out of the question. My conclusion therefore is that Mr McQueen was using his skill and enthusiasm for motor rallying as the best means available to him for promoting the Garelochhead Coaches business. He enjoyed it and it has given him satisfaction in just the same way as running an evidently successful business has done. Nonetheless the securing of the private satisfaction of success on the rally circuit can, in my view, properly be described as an incidental effect of the payment.

The Vodafone Cellular approach goes on, on page 742h, with this passage:

"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."

There just might be something in the point if the evidence showed, for example, that Mr McQueen was an addict for whom motor rallying was a compulsion. But that was not the case here. Mr McQueen has many other interests. He is an active local councillor and his preferred leisure activity is sailing.

Standing back and looking at all the circumstances I am satisfied that the particular object that Mr McQueen sought to achieve from the disputed expenditure on motor rallying was the promotion of the Garelochhead Coaches business. On that basis I conclude that the disputed expenditure was laid out wholly and exclusively for the purposes of the Garelochhead Coaches trade. It is not therefore excluded from deduction in computing the profits of the trade by section 74(1)(a) of Income and Corporation Taxes Act.

The appeals are allowed in principle. I leave it to the parties to determine the amounts. The matter need not be referred back to me unless the parties are unable to agree figures.

SIR STEPHEN OLIVER QC

SPECIAL COMMISSIONER

RELEASED: 19 March 12007

SC 3040/06