Introduction »

Sponsorship - tax deductible or not?

Sponsorship can be a useful tool in promoting a business. Commercial sponsorship often involves some form of advertising of the business name and products. Association with popular events or persons can enhance reputation, goodwill and public image with resulting commercial benefits. This often includes links with sporting or cultural events such as:

• corporate packages – advertised on the club/venue website
• sponsor opportunities to individual productions, players or races
• longer term commitments e.g. sponsoring a football club.

Businesses will be keen to ensure that the cost of sponsorship is tax deductible in arriving at taxable profits. However, the costs will not be allowable where they are:

• capital expenditure
• expenditure not wholly and exclusively for business purposes, or
• expenditure which is specifically disallowed for tax purposes such as entertaining costs.

An example of the latter could include the hospitality element of a corporate sponsorship package.

Capital expenditure

Capital expenditure may include assets such as cars or racehorses. However, a contribution to a permanent exhibit could be disallowed if it was considered to be of enduring benefit to the business. Depending on the nature of the capital expenditure it might at least be possible for the business to instead make a capital allowances claim or if a company a claim for relief under the intangible assets rules.

Non business purpose

Expenditure which is not wholly and exclusively for business purposes because there is also a non-business purpose is not allowable. This is an area which can cause difficulty because of the perception of what sponsorship actually means. At one end of the spectrum, sponsorship can be of a charitable or philanthropic nature such as supporting the arts. Expenditure on this would not normally be wholly, let alone exclusively, incurred for the purposes of the sponsor’s business. At the other end of the spectrum, sponsorship could amount to pure advertising or pure public relations. In this situation the quid pro quo for the sponsorship payment will be, for example, the advertising facility and no more.

HMRC guidance gives details of other examples of non-business purpose including:

• circumstances where the sponsored person is a relative or close friend of the business owner or
• circumstances where the business owner has a personal involvement in the sponsored activity (such involvement often pre-existing the sponsorship).

A recent case concerned a company involved in the construction industry that, over a four year period spent nearly £400,000 on sponsorship fees on rally cars. It just so happened that the owner of the company had previously been a rally car driver and competed in vehicles owned by the sponsored business.

The Tribunal agreed with HMRC that the lack of commerciality in the transaction inferred that the sponsorship was not wholly and exclusively for the purposes of the trade and was therefore not allowable.

If this is an area of interest please contact us for further information to ensure your business maximises its allowable business expenditure.

Introduction »