Sponsorship is a powerful tool for small businesses looking to increase their visibility, expand their reach and build recognition. But, as any business owner’s know, it also comes with financial obligations. Many people don’t know they can potentially claim tax relief on certain sponsorship costs. So read on to find out what sponsorship is tax-deductible in the eyes of HMRC.
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Can sponsorship be tax-deductible?
In certain circumstances, HMRC will accept sponsorship costs as allowable expenses. However, the purpose and benefits of any sponsorship costs must be incurred “wholly and exclusively” for the purpose of the trade. In other words, there has to be a demonstrative benefit to the business, such as greater brand awareness or more sales leads.
The following items are legitimate expenses that business owners can claim in VAT returns and year-end tax returns:
- Membership and entry fees (providing they benefit the business)
- Branded clothing and accessories featuring the company’s branding
- Branded assets, such as sponsored motorcycles or racing cars
- Facility expenses beyond normal business activities
Claiming tax on sponsorship – Sports Teams
Sports team sponsorship is tax-deductible in the right circumstances. Again, the sponsorship costs must be “wholly and exclusively” for business purposes for any form of team sponsorship to be tax-deductible. If there is any duality of purpose – such as sponsoring a relative or friend (except in exceptional circumstances), having close ties with the sponsored activity, or receiving personal benefits from the sponsorship – the expense will be disallowed.
Claiming tax on sponsorship – Charity
The UK tax system allows limited companies to deduct certain donations to charity from their taxable profits. This includes money, land, property, shares in another company, or the secondment of staff. Charity sponsorship payments differ from donations because a business can expect to receive something in return, such as the charity’s public support of your goods or services. In this case, this type of sponsorship is tax-deductible.
Claiming tax on sponsorship – Sponsoring an employee
Sponsorships are highly subjective in the eyes of the taxman. Therefore, HMRC will likely challenge any tax-deductible expense claim for sponsorship costs associated with family members or beneficiaries connected to the sponsor. Employees fall into this bracket. However, some circumstances make claiming sponsorship as a tax-deduction possible. For example, if the employee is an athlete and can advertise the business appropriately.
When are sponsorship costs not tax-deductible?
Certain sponsorship costs are not tax-deductible in the UK. Sponsorship costs that are considered excessive and don’t consider the commercial effect of the sponsorship are not eligible for tax relief. Some form of return on investment should be evident, which is where a written sponsorship agreement can be useful for evidence. Sponsorship costs may also be disallowed if no other forms of advertising have been considered beforehand.
We mentioned “duality of purpose” earlier, which is another major factor that will invalidate a sponsorship tax deduction. Duality of purpose refers to any type of sponsorship cost that isn’t solely for business purposes. Therefore, if a director was seen to be funding their personal hobby with a sponsorship, or if they were deemed to be providing disguised earnings to a relative, then any related sponsorship costs wouldn’t be tax-deductible.
Get sponsorship tax advice from IN Accountancy
In conclusion, UK businesses can claim tax relief on certain sponsorship costs. These costs include payments and equipment donations to sports teams and charity sponsorship payments. However, sponsorship costs must be “wholly and exclusively” for business purposes. Any sponsorships that fall out of that scope are unlikely to be eligible for a sponsorship tax deduction. So it’s worth understanding what HMRC will and won’t accept.
Always ensure that you have a written sponsorship agreement in place that details the sponsorship’s value, duration and expected return on investment. The ROI doesn’t necessarily have to be monetary. It can be about wider benefits, such as greater brand awareness or increased website traffic. Just be sure to include a termination clause if you don’t see any returns, and be sure to keep your paperwork up to date in case HMRC ask for proof.
If you’re unsure about your business’s eligibility for tax relief on sponsorship, contact IN Accountancy for further advice and assistance. With the professional help and expertise of our experienced team of accountants, you can ensure that your business complies with all the relevant tax regulations and makes the most of any potential tax relief. So, before you commit to any sponsorship agreements, contact IN Accountancy for support and guidance.
Our award-winning Stockport accountancy firm is committed to helping small and medium-sized businesses flourish. We care about your business and will always go the extra mile to help you to grow your organisation, boost your profits, and reduce your tax liability. So for more information about tax relief on sponsorship costs, please get in touch with the IN Accountancy team today on 0161 456 9666 or email firstname.lastname@example.org.