After such a successful Olympic games for team GB, it is sad to see it come to an end. The athletes have now arrived home and I am sure businesses will be lining up with sponsorship deals, unlike Ryan Lochte who came home to the news that among other Speedo and Ralph Lauren have ended his sponsorship deals.
The Olympics may have made you consider sponsoring a local athlete or a sports team and this would not only make a huge difference to the recipient, but it might also be tax effective for yourselves.
First of all, there is no specific rule in dealing with the deductibility of sponsorship payments, which means we have to look at the law that states when calculating profit, no deduction is allowed for:
- Expenses no incurred ‘wholly and exclusively’ for the purposes of the trade
- Losses not connected with or arising out of the trade
It also states that if an expense is incurred for more than one purpose and section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense, which is incurred wholly and exclusively for the purposes of the trade.
Therefore, whether you can deduct sponsorship is down to the ‘wholly and exclusively’ rule. If you can display how your business expects to benefit from the sponsorship and that there are no personal ties to the sponsorship, then it should be tax deductible. This law prevented Interfish Ltd from deducting his sponsorship of a local rugby club from his taxes, as he was heavily involved in the club.
You could avoid this situation by having a document written by the charity outlining exactly what is included in the sponsorship. This should outline business-related costs such as:
- pitch-side advertising
- names on shirts
- access to special events (where other business owners will be present)
and so on.
Cost must be attached to each of these, with the total sponsorship cost shown against each ‘item’. The business benefits of each component of the sponsorship deal should also be set out in this document. It would also be a good idea to keep records of board minutes showing you have discussed the motives and potential benefits of sponsorship and ensure that you record the actual benefits that it delivers by being able to show the number of leads and turnover generated from this method of promotion. This demonstrates that the entire cost relates to the business motives.
You may receive free tickets to the event as part of your sponsorship deal. Employee entertaining is tax deductible, so giving these tickets to employees is fine. However, if you use the tickets to give them to suppliers or customers the cost becomes a disallowable entertaining expense.
If the institution that you are sponsoring are eligible and you are expecting nothing in return for the sponsorship, then gift aid might be more tax efficient for both parties.
You don’t have to be a multinational company to sponsor a major team and the increase in publicity can bring huge benefits, making it worthwhile. If you have any questions about the tax implications of sponsorship, then please do not hesitate to give us a call on 0121 559 1071 or email partners@ergrove.co.uk.
