Corporate sport sponsorship deals have widely been seen as a good way for companies to increase their exposure whilst at the same time offering a valuable corporation tax deduction. However, a recent tax case heard by the Court of Appeal has raised serious questions about the attractiveness of these deals.
In June 2014 the Court of Appeal rejected the appeal by a Plymouth-based seafood supplier, Interfish Ltd, who argued that there should be permitted tax deductions in respect of sponsorship payments made to a local rugby club. HMRC had argued that because the payments had two purposes in terms of both increased publicity for Interfish Ltd and improving the financial position of the rugby club, that the sponsorship payments were not made ‘wholly and exclusively’ for the purpose of the trade and consequently Interfish Ltd was not allowed to claim a corporation tax deduction. This view was upheld by both the First Tier Tribunal and the Upper Tribunal before being finally confirmed by the Court of Appeal.
Interestingly, the Tribunal ruled in this case that there could be no apportionment where dual purpose sponsorship expenditure is deemed to have been made. The expenditure is either wholly allowable or wholly disallowable. However, the tax legislation does not prohibit a deduction for any expenditure that is identifiable as being wholly and exclusively for the purpose of trade. In the Interfish Ltd case, a deduction was allowed in respect of £25,000 which were identified as having being spent on advertising hoardings.
This case would appear to suggest that all sponsorship is non-deductible for tax purposes but other conflicting court decisions suggest that it is not quite that cut and dried. In a similar case, South West Communications Group was granted a tax deduction for a large sponsorship payment made to Exeter Chiefs Rugby Club and in the case of McQueen v HMRC the proprietor’s interest in rally cars was deemed to be ‘incidental’ to the purpose of promoting his business’s name when making rally driving sponsorship payments. A tax deduction for the expenditure was subsequently allowed.
So, what can you do to maximise the likelihood of securing a tax deduction for sponsorship expenditure? There are a number of things that could be advisable for you to do. Firstly, it would be a good idea to undertake a review of the anticipated business benefits that are expected in return for the sponsorship expenditure so that you can argue a business case for going ahead with the sponsorship. This review and its conclusions should be documented in board minutes. Secondly, we would recommend that there be a formal sponsorship agreement outlining the payments that are to be made and what benefits will be received in return. Care should be taken to ensure that the cost does not appear excessive in relation to the stated benefits. Finally we would recommend that the company receives proper invoices in respect of any sponsorship payments made.
If you are thinking of going down a corporate sponsorship route and feel that you would benefit from some further guidance please feel free to give us a call.