CORPORATION TAX - 21.09.2018

Ensuring corporate sponsorship is deductible

Donation or sponsorship?

It’s common for companies to support charities or community amateur sports clubs (CASCs), especially ones that are local to them. One way of doing this is by making donations. These are deductible from the company’s profits when working out what the tax bill for the year is as long as they are genuine, i.e. they are not really a loan or conditional upon the charity using the company as a supplier etc.

It is permissible for a client who has made donations to receive small benefits from the donee, provided they don’t exceed the following limits:

Sponsorship

Sponsorship is an alternative way of assisting a charity or CASC. It entails payments made by your client in return for specified commercial benefits. Rather than being treated as charitable donations, sponsorship payments are business expenses. This means that they can be deductible, but they must be incurred wholly and exclusively for the purposes of the trade under s.54 Corporation Tax Act 2009 . This can lead to problems if your client has a pre-existing connection to the entity, as a successful company learned to its cost.

Rugby club

Interfish Limited is a company based in Plymouth. Over the course of several years, the company provided financial support to the tune of £1.2 million to the local rugby club, which it claimed as deductible expenses on its tax returns. HMRC argued that as the managing director had a close connection to the club, there was a duality of purpose. Indeed, some of the benefits certainly appeared to be personal in nature, though the director argued that these were of benefit to the business.

In Interfish Limited V HMRC [2013] UKUT 0336 (see Follow up ), the Upper Tribunal agreed with HMRC, upholding the earlier First-tier Tribunal decision. The company’s argument that the personal nature of the director’s perks had significant benefits via making connections was dismissed, costing the company dearly.

Unascertainable

Part of the issue was that the business and personal purpose of the majority of the payments, and their underlying value, could not be identified and separated. If they could have been identified, at least some relief could have been obtained, i.e. on the business part. The way the money was used also suggested a relationship that went beyond what would be usual for a sponsorship.

Help your client

If your clients are considering sponsorship of a local charity or CASC, advise them to ask the donee to list and ascribe a realistic cost to every benefit the company is going to receive in return. This will provide assurance regarding a claim for deduction if HMRC asks for justification.

Interfish Limited v HMRC [2013] UKUT 0336