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HMRC’s view on apportionment

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Reclaiming VAT on advertising costs

Sponsorship

We’re often asked questions about the tax position for sponsorship. In theory, the answer is straightforward but in practice the position is often far from clear. There are two tax aspects to consider: deductions from profits and reclaiming VAT. While the arguments for and against are similar for both we’ll focus on VAT and look at deductions from profits in another article.

Sponsorship or advertising

Simply describing an expense as sponsorship isn’t enough to determine if any VAT can be reclaimed. You must apply normal conditions for reclaiming VAT on purchases (input tax). It can only be reclaimed if there’s a direct link and business motive. The usual motive cited for sponsorship expenses is advertising.

Tip. Unlike direct tax where a deduction isn’t permitted if there’s both business and non-business purposes for an expense, with VAT you’re allowed to apportion an expense and reclaim the VAT relating to the business element.

Trap. It’s not sufficient to show that an expense has produced a benefit to your business if the purpose is personal. Example . Sarah owns two hair and nail salons. She pays for a gym membership near her home. She promotes her business by chatting to other gym members and doing so brings in 100 or more customers to her salons a year. There’s a clear business benefit to the gym membership for Sarah but she’s a member because she wants to keep fit - promoting her business is incidental. She is not entitled to reclaim the VAT on the membership fees.

A business purpose

It’s usual for sports teams to allow their sponsors to include advertising in the form of logos and names printed on sportswear. This is usually sufficient to persuade HMRC that there is a business reason for the expenditure. However, that won’t be enough in every case. For example, a court ruled against a taxpayer who reclaimed VAT on the cost of his microlite even though he had the name of his firm emblazoned on the underside of its wing. The court decided that too few people saw the craft while it was on the ground and that the so-called advertising wasn’t readable when it was in the air.

Trap. If barely anyone will see your advertising despite it plastered on the front of, say, a sports kit, HMRC is likely to dispute your VAT claim.

Tip. A possible counter argument is that as well as the limited audience for the advertising on kit the team and all those associated with it will promote your business by word of mouth.

VAT apportionment

In the case of sponsorship for your son’s rugby team, by paying for kit showing your firm’s name HMRC is likely to accept that there is a direct business purpose but also that there is a private one because it’s your son’s team. You must therefore apportion the VAT and reclaim only that related to the business purpose. The calculation of what’s business and what’s not depends on the circumstances, i.e. there’s no single formula (see The next step ).

For a link to HMRC’s view on apportionment, visit https://www.tips-and-advice.co.uk , Download Zone, year 22, issue 5.