Claiming tax relief on sponsorship costs
This blog discusses the rules for claiming tax relief on sponsorship costs. This may be useful if you're thinking of providing sponsorship to your local football team.
In order to obtain a tax deduction, sponsorship costs must be incurred wholly and exclusively for the purposes of the trade.
HMRC will challenge a claim for sponsorship costs where the main beneficiary is a family member or the sponsor is connected to the beneficiary. Additionally if there is no tangible benefit (e.g. increased sales) linked to the sponsorship, payment may also be disallowed.
The most common examples of a business claiming tax relief on sponsorship costs are in the following situations:
Claiming tax relief on sponsorship costs - supporting a local sports team
Because of Interfish Limited V HMRC the taxman is very aware to the possibility that a sponsorship cost can be disputed.
In this case the company were denied a tax deduction for sponsorship costs to a Plymouth Rugby Club. This claim alerted HMRC's suspicions because the amounts paid were in excess of the usual published advertising rates.
Secondly the monies paid were aimed at specific items of expenditure, for example the purchase of players. This was perceived as going beyond the normal role of sponsors, being more akin to patronage. Ironically if the company had made smaller payments maybe they would have succeeded in obtaining a tax deduction
Conversely in Southwest Communications Group v HMRC a claim for sponsorship costs to Exeter Chiefs Rugby Club was successful. Whilst this was initially challenged by HMRC they subsequently backed down.
The result went in the company's favour because HMRC had jumped to an incorrect conclusion. They had assumed because the director and controlling shareholder of the appellant company was also chief executive of the rugby club, there must be a personal motive behind the payments.
However the controlling director had distanced himself from the sponsorship payment. It was handled by another director of the company. This fact was verified by witness statements and explains why HMRC decided to withdraw before taking the case to the tribunal.
Claiming tax relief on sponsorship costs - sponsorship of a family member's sporting hobby
It's not uncommon for parents to sponsor their children's expensive hobbies such as motor racing and horse riding (I hope my teenage son isn't reading this!).
You are likely to be successful in any claim for tax relief if you can demonstrate the following:
These principles were tested recently in the case of The Crown and Cushion Hotel v HMRC. Here the taxman challenged sponsorship payments for the director's daughter’s motor sports activities. HMRC argued these were made out of natural love and affection for a close family member.
The company was successful ultimately because evidence supported their claim that the sponsorship payments were made specifically to benefit the company by attracting customers.
The tribunal decided that the director was not motivated by a desire to further his daughter's racing career. Any benefit to her was an incidental effect of making the sponsorship payments.
So if you are thinking of financing your children's hobby it may be worth doing a spot of background reading on this tax case!
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