When are sponsorship costs tax deductible for your limited company?

As a limited company contractor, you may come across opportunities to spend money on sponsorship.  This could be sponsoring a local sports team, having your company’s name displayed on a highly visible item such as a racing car, or sponsoring an event or organisation where your company name features in a brochure.

In many ways, all of the above are just a form of advertising and positively for PSCs ever conscious of the bottom line, genuine advertising is a legitimate business expense, writes chartered accountant Graham Jenner, founder of accountancy firm Jenner & Co.

'Is there really a commercial reason?' And other tough questions HMRC will ask

The problematical question for PSC contractors, though, is – ‘What is it that you are advertising?’ And we can add another question which HMRC would approve of; ‘If you use an agency to obtain contracts, or you find contracts yourself from job boards online, is there a ‘need’ to advertise?’

If there isn’t -- and, if sponsorship is a form of advertising, there is no commercial value for contractor limited companies in paying for sponsorship.

The limited company dad sponsoring his son’s footy team

In HMRC’s eyes when it comes to sponsorship, the issue is that it is often undertaken for the wrong reasons.

A father who wants to help out his son’s football team might agree to sponsor the team’s kit, in his company’s name. If there is some recognition of the sponsorship -- the company’s name on the shirt, or the company’s name mentioned in some brochure or at the end of year awards event, an argument can be made that it is a form of advertising.

However, to be tax-deductible, the cost must be “wholly and exclusively” for business purposes. In the above case, the purpose is more likely the father being prepared to help out his son’s football team. The remote possibility that having the company’s name on the shirts might bring in a contract, is very much a secondary consideration.

In this football father-and-son case, HMRC would not allow the sponsorship to be tax deductible. The Revenue’s stance would be; If the father is prepared to make the contribution then, by all means, he should do so, but without obtaining the tax relief. 

With this example, it is -- in fact -- more tax-efficient for the company to sponsor the team kit, even without tax relief, than it is for the father to, personally, support the club by paying for the kit out of his own taxed income!

What if the company sponsors an ‘unconnected’ sports team?

If there is no connection between the limited company or director and the team being sponsored – and there is a potential benefit to the company of the sponsorship, then this is more likely to be allowed as a tax deduction. 

The purpose of this ‘unconnected’ example appears to be to promote the company, rather than supporting the son’s football team. HMRC would likely NOT blow the whistle here!

Large amounts of sponsorship

Although genuine sponsorship to attract business is allowable, even if, in reality it leads to no more business, where large amounts are involved, with no realistic expectation of a return on the investment, HMRC will likely consider this to be something other than “wholly and exclusively” for business purposes.

It may not be clear what the purpose was -- though in some cases it might just be to boost the ego of the director/shareholder!

We also see companies ‘sponsoring,’ where it is actually no more than the company funding the hobby of the director/shareholder. Unfortunately, HMRC would NOT allow this as tax-deductible.

What about a limited company sponsoring ‘a student?’

We often see a company attempting to sponsor ‘a student’ but, of course, this is invariably not some random student -- it is usually the son or daughter of the director/shareholder. This is, quite clearly, not wholly and exclusively for business.

If there was a genuine sponsorship of a student, where there was publicity surrounding it, which might help the company attract new contracts, or the sponsorship was with a view to taking the student on as an employee once they complete their studies (less likely for a contractor limited company, but the intention might be to grow the business), then this would be allowable. Provided, I’d caveat, there was no other non-business reason.

Charity sponsorship

It’s important to differentiate between a donation to a charity (which is tax-deductible in its own right) and a sponsorship, where the company expects to receive something in return (such as publicity for the company). Provided there is a genuine expectation of a benefit to the company, then such sponsorship would be allowable for tax. If not, then the company should simply make a donation and remove any doubt about the nature of the payment.

Think it out, so you can pass HMRC’s ‘wholly and exclusively’ test

Although I have said that contractor limited companies often have a limited need to actively promote their services, that is not to say that they can’t or shouldn’t.

If you normally find contracts through agencies or via the internet, that doesn’t mean that you wouldn’t want to try to find a lucrative contract by promoting your services. Sponsorship could be a way of doing this but, give some considered thought to how you would justify the particular sponsorship as ‘wholly and exclusively’ for business purposes.

Your name in lights? Do it anyway

Even if you can’t justify it to HMRC, but you want to pay for the sponsorship, for altruistic reasons or otherwise, then do it anyway! Just don’t claim the tax relief on the cost.

After all, it is simply a matter of your accountant making an adjustment in the year-end tax computation.

Final words of warning

Be careful where the sponsorship has a personal element -- there could be greater tax implications due to the cost being regarded as a benefit-in-kind. I recommend speaking to your account beforehand -- and that goes for any sort of sponsorship via your company which you're depending on being tax-deductible. Other than that, and all the caveats above, happy sponsoring!

Wednesday 15th Nov 2023
Profile picture for user Graham Jenner

Written by Graham Jenner

Graham is a Chartered Accountant and has run his own accountancy practice, Jenner Accountants Ltd, for over 20 years and is the MD of Nopalaver Group, which provides Umbrella company and other services to contractors. He specialises in dealing with family run businesses and contractors, supported by a strong team including 5 qualified accountants.

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