When your business sponsors a racehorse, football team etc. are you able to obtain a tax deduction for the payment?
To demonstrate the tax issues we will consider the following scenario:
- Your senior partner has an interest in horse racing and owns two racehorses. His son is an amateur jockey.
- You invite some of your clients to a lunch at the race meeting.
- The sponsorship and lunch are a package agreed with the racecourse.
- The racecourse has dilapidated dining facilities and you contribute towards their refurbishment so that a better image can be presented to your clients in the future. HMRC can challenge the tax deductions in various ways.
Beware mixed expenditure
Client entertainment is not tax deductible so it is important to split the payment made into sponsorship of the race (potentially allowable) and the lunch (client entertainment, so disallowable).
The motive behind the payment
In the 1996 Special Commissioners case Executive Network (Consultants) Limited v O'Connor, in which the facts are fairly similar to the above, it was held the primary motive was personally beneficial, even though it was accepted that the business had benefitted from the sponsorship.
If there is a personal or family connection playing a part in the sponsorship decision, the claim for a tax deduction could be denied.
Who will benefit?
The requirement that the payment should be wholly and exclusively for the purposes of the sponsor's own trade is a constraint on tax relief.
In the recent case of Interfish Limited, the company made payments to a rugby club. The company director had considerable involvement with the club. The club was seen to receive significant benefits from the sponsorship and even though Interfish's business benefitted from the sponsorship, this was considered a secondary purpose.
The judgement included the following statement.
"It would be surprising if the provision allowed the deduction of sums laid out for the immediate purpose of promoting the trade of someone other than the taxpayer, particularly in circumstances where the 'knock on' benefits to the taypayer's trade, whilst real, are intangible and hard to quantify".
Using our example above, the refurbishment of the dining facilities is unlikely to be allowed.
Conclusion
Therefore, in conclusion, check with your adviser before you commit to sponsorship expenses, as having no tax relief and your horse losing the race may be a bitter pill to swallow.
Smith & Williamson LLP Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.
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