Are sponsorship costs tax deductible for my business?
Sponsorship can be a great way to increase the awareness of your brand and get your business name seen by a lot of people.
It can also be helpful in associating your brand name with the interests of your target audience. Depending on your area of business this can be more effective than less targeted adverting using TV, newspapers or radio.
If you are thinking of using sponsorship you may be interested to know that sponsorship costs can be tax deductable. However there are conditions to bear in mind before you commit to a sponsorship opportunity.
To qualify as a valid business expense, sponsorship costs must be exclusively for trade purposes. This principle applies to all business-related expenditures.
For businesses seeking exposure to a wider audience, sports clubs and venues often offer valuable sponsorship and advertising opportunities. Before committing, evaluate whether the sponsorship:
- Promotes your business.
- Serves a ‘wholly and exclusively’ business purpose.
- Provides ‘wholly and exclusively’ business-related benefits.
Meeting these criteria can make the expense legitimate. Eligible sponsorship expenses, reportable in both VAT and year-end tax returns, may encompass:
- Entry/membership fees (if they benefit your company).
- Branded clothing and accessories featuring your company logo.
- Branded assets, such as bicycles, motorcycles, or cars when sponsoring a racer.
- Facility expenses directly linked to the sponsored event, beyond regular business activities.
However, sponsorships are subjective to HMRC, and they must clearly benefit your business to be considered valid. You must substantiate the business value to avoid disallowance.
Duality of Purpose:
If a sponsorship implies non-business benefits, it won’t be allowed. HMRC may object if:
- The sponsored event involves a director, partner, or proprietor’s personal hobby.
- The sponsored party has a familial relationship with a director, partner, or proprietor.
Sponsoring a relative is generally discouraged unless there are exceptional circumstances, such as a relative excelling in a field relevant to your business. Consider whether your business would still benefit from a similar sponsorship if the party were not a relative.
HMRC Commerciality Tests:
To avoid disallowance, HMRC examines various factors, including:
- Sponsoring a relative or close friend, which should be justified as beneficial to the business.
- Overpaying the sponsored party; ensure your investment aligns with your business interests.
- Considering the commercial impact of the sponsored activity and exploring alternative advertising options.
Return On Investment:
Expect a return on your sponsorship investment, which can be measured by assessing:
- How much you spend versus the profit percentage you expect to gain.
- The unique marketing advantages the sponsorship offers.
- Potential competitive advantages.
- Measurable outcomes and regular evaluations.
- Exploring cost-effective alternatives if budget constraints arise.
Failing to answer these questions may hinder your ability to prove the sponsorship’s business benefit during HMRC’s Commerciality test.
Always establish a written sponsorship agreement specifying the sponsorship’s value, duration, and termination conditions. Objectives may include increased brand awareness, website traffic, or sales leads, not just financial gains.
The treatment depends on the sponsorship agreement. If you purchase and donate a bike to a rider, it’s a P&L item. If it’s retained as a company asset and loaned, it goes on the balance sheet and undergoes depreciation.
If you would like any help or advice regarding sponsorship please get in touch for a Free Consultation.