Are you considering spending a considerable sum on sponsoring an individual or team as a business in the hope that the expenditure will be tax-deductible? Before you incur a costly misfortune, ensure your business meets the expectations for the costs to be considered by HMRC as being “wholly and exclusively” for the benefit of the business.

Whilst you would’ve no doubt have noticed some iconic sponsorships in your time, whether that be Rolex and Wimbledon or Barclays and the Premier League, the substantial sums spent by these companies doesn’t solely boost their brand image but also has the potential to reduce their profits subject to Corporation Tax. Key questions to bear in mind, in addition to the “wholly and exclusively test”, are whether the sponsorship actively benefits the business and improves its awareness.

Should the answer to these questions be yes, the following items can be claimed by the business both as a cost in its Profit & Loss as well as, if applicable, in its VAT Return should the business have paid any VAT:

1] Cost of clothing and merchandise: deemed to be pieces of clothing and accessories which contain the brand logo on them

2] Assets with the brand name on them: These are durable, long-term assets such as a vehicle, structure, or furniture.

3] Entry/membership fees provided there’s a tangible benefit from paying the fees

Should HMRC identify the benefit from the sponsorship to not be wholly and exclusively for the benefit of the business, it may disallow the expense and any VAT reclaimed on it. This is simply where there’s a dual (i.e. personal and professional) or purely personal benefit arising from the sponsorship. Examples include sponsoring a sporting event which is also a passion or interest of the director, sole trader, or partner in which they regularly participate. HMRC may find that the individual is merely financing their own lifestyle in such a case. Another example includes where the individual being sponsored is a related party such as close family member of the trader, partner or director.

A couple of additional factors to consider when determining whether HMRC might disallow the sponsorship costs include whether sponsoring is the most cost-effective way of promoting the business, have you paid more than what a reasonable and informed third party would consider to be a commercially reasonable sum and if you’ve sought to quantify the benefit from the sponsorship.

It is considered best practice to have a written Sponsorship Agreement in place which contains the worth of the sponsorship and the length of time that the sponsorship will last. Clauses including the option to terminate the agreement should the sponsor be unable to obtain the desired financial benefit should buttress the commercial nature of the transactions and therefore enable the expense to be claimed.

To find out more options available to your business in regard to sponsorship as well as other tax-related matters, contact Cheylesmore Accountants today to enable us to optimize your company’s operations so you can focus on what you love most. Trusting us with number-crunching and accounting should enable you to supercharge growth by focusing on different avenues for earnings growth.