If your children play for the local rugby team or take part in show jumping or if you take part in motor sports, it might be tempting for your business to enter into a sponsorship deal to help fund these activities and claim a sponsorship tax deduction but, as is often the case, HMRC aren’t always so keen on allowing you to set off costs against your tax bill as you might like.
The general rule on business expenses is that they must be “wholly and exclusively” for trade purposes. This can be tricky to demonstrate if there is an obvious personal connection between you as a business owner and the activity being sponsored.
What HMRC will be looking for will be whether the expenditure has or is likely to benefit the business. What you might want to ask yourself is whether you would have spent the money if there was no personal connection.
If you have decided to fork out to have the company name on the shirts of your child’s team, you should do some research into how much it will cost, how you expect to get ‘value for money’ for the costs and whether there is any way you can measure this. You might want to compare other similar, or very different forms of advertising to see how the two choices compare. Most importantly, you should document what you are doing, so you can show HMRC if you need to. Some things to consider would be;
o Is the amount excessive compared to that which an unrelated third party might invest?
o Are the amounts out of line compared to the other advertising costs of your business?
o Can you measure the exposure (media coverage of an event or social media exposure)?
o Is there any way you can measure the return on the investment by sales or referrals (you might give a 5% discount to members of the sports club you are sponsoring and be able to document how much business was generated)?
Make no mistake, HMRC can get tough on these costs. They have recently taken two high profile cases to court, one involving sponsorship of Plymouth RFC which HMRC won and another involving sponsorship of a grand-daughter’s motor racing career which (much to my personal amazement) HMRC lost. If you like reading about these things, Google “Interfish v HMRC” and “Crown & Cushion Hotel v HMRC” which will give you an idea of how tough a line HMRC can take.