Tax implications of paying sponsorships and donations from your company
Sponsorship can be a great way to advertise your company and in many cases can show your customers that you are involved with a local club or event. In order for sponsorship costs to be allowable in your company accounts they must be incurred wholly and exclusively for the purposes of trade.
Many sports clubs, sporting venues and outdoor events will have sponsorship and advertising opportunities that will help out your company in front of an audience you might not otherwise have had access to.
If the sponsorship is promoting your company, and the purpose and benefit of the sponsorship is wholly and exclusively business related it may be a legitimate expense. There are a wide range of costs which your company can you claim for, such as entry and membership fees – providing your company is benefiting and branded clothing and accessories bearing your company’s brand. If there is any element or implication of a non-business benefit, then the cost is not allowed.
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.
There are dangers in sponsoring an organisation or activity in which you or your family are involved. In such cases HM Revenue & Customs tend to argue the sponsorship was undertaken for personal and not business reasons, in which case no tax deduction is allowed.
As a sponsor you may receive ‘free’ tickets to the sponsored event as part of the sponsorship deal. If your company gives these tickets to employees the ticket value is classed as employee entertaining, which is tax deductible. However, if the free tickets are given to suppliers or customers the cost becomes a disallowable entertaining expense. So it’s essential to record what happens to any free tickets or gifts.
If you want to support a charity through sponsorship and expect nothing in return, a donation may be more tax efficient as your company will pay less corporation tax. When the company donates money, you deduct the value of the donation from the profits before paying tax.
If you donate money to a charity or community amateur sports club and your company, a related company or close relative are given something in return it must be under a certain value. If you donate up to £100 the maximum benefit you can receive is 25% of the donation. If you donate between £101 and £1,000 the maximum benefit you can receive is £25 and you donate over £1,001 the maximum benefit you can receive is 5% of the donation up to £2,500.
Your company will also pay less corporation tax if it gives equipment or items it makes or sells to a charity or community amateur sports club. If you give equipment such as office furniture, tools or cars you can claim full capital allowances. If you donate items you make or sell you don’t have to include anything in your sales income for the value of the gift. This means you get tax relief on the cost of the stock you’ve given away.
If your company is VAT-registered, you’ll need to account for VAT on the items you give away. However, you can apply zero VAT to the items if your company makes the donation specifically so that the charity can sell the items, hire out the items or export the items. This means you can reclaim the VAT on the cost of the items you donate. If you can’t zero rate the items, use the VAT rate you normally apply to them.
Please seek advice if you’re thinking of sponsoring or donating to a charity or event to ensure your company gets the best available tax treatment.
Leanne Humphrey
