Sponsorship is a way for businesses to obtain the commercial benefit of bringing their name, products or services to public attention say Harris & Co chartered accountants Northampton, the specialist motorsport accountants.
Sponsorship is often a form of advertising. A business tries to obtain benefits for its products, goodwill or reputation and public image by association with a popular or successful event or person.
Although often associated with sporting or cultural events, business sponsorship is not confined to those areas. For example, there is growing expenditure on ‘product placement’ – paying to ensure that a particular product or service features prominently in a successful television series or film.
Sports clubs and cultural venues offer a range of options for potential sponsors. These include:
•corporate sponsorship packages, often advertised on the club or venue website,
•sponsoring individual productions, players or races,
•long tem deals such as sponsoring a football club.
These packages may include both advertising (for example in the event"s programme, on clothing, at the venue, through to the name of the event) and hospitality. The hospitality may simply be a certain number of tickets or it may include meals or access to hospitality boxes.
Sponsorship costs are allowable in arriving at the profits of a trade or profession except where they are:
•expenditure not made wholly and exclusively for business purposes, or
•expenditure which is specifically disallowed (such as any entertaining expenditure).
Sponsorship costs may be disallowable as capital expenditure if, for example:
•a contribution to a permanent exhibition provides an enduring benefit, or
•the sponsor buys capital assets such as racehorses or cars.
Where enduring benefit takes the form of an intangible asset and the sponsor is incorporated, relief may be available under the intangible assets regime.
Relief will not be available under the intangible assets regime where the intangible asset is linked to a right over land or over a tangible, moveable property (FA02/SCH29/PARA73).
Where the sponsor acquires capital assets such as horses or cars they may be able to claim capital allowances.
Wholly & exclusively
Sponsorship costs are subject to the ‘wholly and exclusively for business purposes’ test in ICTA88/S74 (1)(a) and ITTOIA/S34. This means that if there is a non-business purpose to the sponsorship (even if there is also a business purpose) no allowance is due. This is usually where we find most challenges by HMRC to sponsorship payments.
The purpose or purposes of expenditure is a question of fact to be determined by the Commissioners, in cases of dispute.
For an example of where the Special Commissioners found that payments of sponsorship were not paid wholly & exclusively for the purposes of the trade, see Executive Network v O"Connor SpC56.
There have been a few recent tax cases that have proved very helpful – two were motorsport cases (McQueen and McKinstry) and one was a rugby case (Interfish).
What was obvious in all three cases was that they had not made out a clear business case of the benefits of the sponsorship. We would always recommend that you prepare a sponsorship proposal to the potential sponsor before the deal is signed and that it clearly sets out the business benefits that the sponsor will get. It is also important to have a trail of exchange of correspondence about the commercial benefits before the deal is signed (as this helps meet the purpose test).