Businesses that benefit from sponsorship may also have the expense deducted from their taxable profits if it is done correctly; as these extracts from HMRC website set out.
The costs of sponsoring sporting, cultural or other events for the purpose of business promotion/publicity are not disallowable under ICTA88/S577. However, it is common for sponsors of such events to be entitled to a certain number of free tickets, private boxes or other benefits as part of the sponsorship package. The cost of sponsorship is not allowable in full if the sponsor receives tickets or other benefits. HMRC normally accepts a disallowance equal to the value of the tickets or other benefits received.
For further information on sponsorship expenditure, see BIM42555 – BIM42565.
In some cases the sponsor may also pay for additional events such as a dinner dance for members of the football club, or a private reception for certain theatre-goers. This will come within the normal definition of entertainment and the cost is disallowed under Section 577.
To be an allowable expense the cost of sponsorship must be incurred wholly and exclusively for the purposes of the trade or profession. Commercial sponsorship is rarely limited to paying over funds to the sponsored activity. The sponsorship will be part of a targeted marketing scheme. When significant sums are involved, the payer will look to maximum exploitation of the sponsorship vehicle.
The following principles need to be taken into account in deciding whether the sponsorship was paid wholly and exclusively for the purposes of the trade:
These principles are drawn from the judgement of Millett LJ in Vodafone Cellular & Others v Shaw [1997] 69TC376 at page 436G to 437H. Further information on this case can be found at BIM38220.
Typically (but not exclusively) there may be a non-business purpose where:
The purpose or purposes of expenditure is ultimately a question of fact to be determined by the Commissioners. It is important to obtain and review the contemporary factual evidence.
The type of evidence to look for includes (but is not limited to):
The Internet is a useful additional source of information:
A demonstrable lack of commerciality in the transaction may indicate a non-trade purpose. However, this requires more than simply poor commercial judgement. A sponsor may make a poor choice of vehicle for sponsorship, but that decision may still have been taken purely for business purposes. A bad decision made with purely commercial motives, is still a decision made for the purposes of the trade. Lord Reid makes the point in Ransom v Higgs (50TC1 at page 82) that:
“If a trader is actuated by none but commercial motives the Revenue cannot merely say that he has paid too much. He may have been foolish or he may have had what could be fairly regarded as a good commercial reason for paying too much.”
The type of evidence that may show a demonstrable lack of commerciality includes:
In particular where the parties are connected you should pay close attention to commerciality of the sponsorship.
The case of Executive Network (Consultants) Ltd v O’Connor, [1996] SpC56 (see BIM37970), is an example of where the Special Commissioner found that sponsorship payments were not made wholly & exclusively for the purposes of the trade. The Special Commissioner found that the fact that the amount paid was determined by the amount that the sponsored party needed. This showed that the purpose of the payment was at least partly that of the sponsored party.
As the test is the purpose of the expenditure, the success (or otherwise) of the sponsorship (either in terms of generating commensurately more income or the success of the sponsored person/entity in their chosen field of endeavour) is not by itself a relevant factor. Where the sponsorship fails to generate commensurately more sales it is reasonable to expect, in a purely commercial arrangement, that steps will be taken to improve matters. Failure to identify and take the necessary measure may indicate that the arrangement is uncommercial.
Further evidence that may show a lack of commerciality includes:
The fact that a trader chooses to sponsor a novice does not, of itself, mean that they have not acted from a commercial motive. Novice sports persons do seek commercial sponsorship.
The trader may be able to demonstrate that they wanted their name and brand to be associated with a rising star and obtain publicity as a result. If this is their only purpose then the sponsorship is allowable. If the novice sports person is a relative or associate of the proprietor/director(s), then there may also be a non-business purpose to the sponsorship as in Executive Network (Consultants) Ltd v O'Connor. If so, the whole of the expenditure is disallowable.
For example, a trader may decide, for purely commercial reasons, to sponsor a novice athlete who had appealed for sponsorship in the local media after reaching the finals of a major tournament at an unusually early age. There is an agreement between the parties setting out how much the trader will be paying and what services the sports person will perform in return; including a requirement that their equipment will be prominently marked with the sponsor's name. In addition they will appear at certain corporate events. The cost of the sponsorship is allowable (apart from any sums disallowable as capital or entertaining - see BIM42555).
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