When are sponsorship costs tax deductible?

In some cases sponsorship is a great way to advertise your businesses. It is also about tapping into the passion of your target audience and having a story to tell. But when is it an allowable expense for tax purposes and when is it justifiable to claim back the VAT on the expense?

Legitimate sponsorship expenses

To be an allowable expense the cost of sponsorship must be incurred wholly and exclusively for the purposes of the trade; this statement should also apply for any aspect of expenses within your business.

Many sports clubs or sporting venues will have sponsorship and advertising opportunities that will help out your business in front of an audience you might not otherwise have had access to.

When considering sponsorship you should ask yourself:

Does the sponsorship…

• …Promote the business?
• …Is the purpose ‘wholly and exclusively’ business related
• …Is the benefit of the sponsorship ‘wholly and exclusively’ business related

If it meets the above conditions it may be a legitimate expense, so which costs relating to sponsorship can you claim as an expense? Items you can claim for (both in your VAT returns and end of year tax returns) include costs such as:

• Entry/ membership fees – providing your company is benefiting from paying the fee
• Branded clothing and accessories  – items which have the company branding on them
• Branded assets – a cycle, a motorcycle or a car if you are sponsoring a racer
• Facility expenses directly related to the party being sponsored – these should be outside of normal business activity

Sponsorship expenses are subjective in HMRC’s eyes, and there are several test cases where big sponsorship deals have been found by HMRC to fall outside the ‘wholly and exclusively’ test  – you have to be able to fully quantify exactly why it benefits the business – if you’re unable to do this you should disallow the expense.

Duality of purpose

If there is any element or implication of a non-business benefit, then the cost is not allowed.

• If the sporting field that you are sponsoring is a director, partner or proprietor’s regular hobby, that they actively take part in – HMRC may decide that you are ‘funding’ a personal hobby
• If the party being sponsored is a relative of the director, partner or proprietor – HMRC may decide that these spends are disguised earnings that you would have paid for anyway

Sponsoring a relative (in more detail)

We are often asked, if it’s acceptable to sponsor a relative. Generally no, unless the circumstances are exceptional.

In some cases sponsoring a relative may be justified, for example if your son was an Olympian, and your business was in that particular sporting field – you may be able to justify the business benefit with the association.

That does not mean that your relative has to be performing at a professional level to be allowed, a novice sportsman may still be a good investment providing they are advertising you in an appropriate manner.

However, you need to imagine the party being sponsored is not a relative; would your business still benefit from a similar sponsorship arrangement?

HMRC Commerciality tests

There are a few reasons why HMRC may disallow an expense for sponsorship, so it is important to note what they might be looking for: The type of evidence that may show a lack of commerciality includes:

• Sponsoring a relative or close friend – although as mentioned above there can be some acceptable circumstances, they must be fully justified to be in the benefit of the business. If there is any doubt; disallow the cost.
• Paying over the odds to the sponsored party – it should still be in the best interest of your business to save on costs and manage overheads so some consideration of the return on your investment should be evident, we would advise that a written sponsorship agreement be put in place setting out your expectations of the sponsored party in return for your sponsorship
• Not having considered the commercial effect of the activity sponsored – unless you were looking to launch in Wales – it might be outside your interest to sponsor someone in Wales.  If your business is solely based in Scotland for example, or for you to provide sponsorship of £100,000 to a local darts team. The commercial effect should be considered, documented and reasonable.
• Not considering any other option – have you considered or tried any other media for advertising?

Return On Investment

If you are going to invest your time and money in a sponsorship deal, then you will be doing it with the expectation of a return on your investment.

• How will you measure that return on investment? If you spend £1 on sponsorship, will you get that £1 back plus a % return in profit?
• What unique marketing proposition does your sponsored have to offer?
• Is there a competitive advantage to be gained?
• What outcome do you expect to achieve? Can it be measured? How often will you measure the return?
• If money is tight, are there other options that could provide a better return for your money?

If you can’t answer these questions, then the chances are that you will fail the HMRC Commerciality test by not being able to prove there is a benefit to your business.

Sponsorship Agreement

Always make sure there is a written sponsorship agreement in place. This should detail the value of the sponsorship and the duration of the agreement. There should be a termination clause that allows you to cease sponsorship if you find that you are not getting the returns that you had intended. These may not always be financial, your objectives might include an increase of brand awareness, an increase in traffic to your website, or an increase in sales leads.

Accounting Treatment

The accounting treatment would be determined by the actual agreement relating to the sponsorship.

• If the bike is being purchased and donated to the rider – it would be a P&L item.
• If it is an asset to be retained as a company asset and loaned then it would be an asset held in the balance sheet and depreciated.

 

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