Sponsorship – make sure you get the costs and benefits documented for tax relief

As a form of promotion, sponsorship can be a really effective way for a company to connect with its target market and, you’d expect, the whole cost would be allowed tax relief.


In a tax case a few years back, however, HMRC refused to allow tax relief on a high proportion of the cost incurred by a company in sponsoring its local rugby club. Their reason was based around the ‘wholly and exclusively’ test which says that for something to be a tax-deductible business expense, it must have been incurred ‘wholly and exclusively’ for the purpose of the company’s trade or business.


HMRC argued here that this was not the case. The Managing Director had close connections to the rugby club and HMRC argued that there were personal motives for the sponsorship payments. This next bit is really important; even though there was a business motive too, technically a cost must be incurred ‘wholly and exclusively’ for business purposes in order for any of the expense to be tax-deductible; where there’s a mixture of personal and business motives, or where it’s possible for HMRC to argue that there is, they can disallow the entire cost for tax purposes.


There is a way that you can try and prevent this problem from happening to your business; the secret is to speak with the sports club (or whatever organisation or event you’re sponsoring) and ask them to set out, in writing, precisely what the sponsorship cost includes. Their written document should set out all of the 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, and importantly a specific monetary value should 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.


One other tip here, too; 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. These steps will reduce the ambiguity over exactly what benefits the sponsorship deal delivers and explicitly show that the entire cost relates to business motives, therefore satisfying the ‘wholly and exclusively’ test.

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David Elliott

Chartered Accountant, BSC, FCA

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