In April, Inland Revenue published Interpretation Statement IS 26/10 on the income tax implications of sponsorship. It explains when expenditure is deductible where a business supports an organisation, event, person or cause to promote or advertise its activities.
Sponsorship may be provided in money, products or services. To qualify for a deduction, there must be a sufficient connection between the expenditure and the sponsor’s business, supported by evidence that the purpose was business promotion or advertising. Relevant indicators include:
• The sponsorship agreement requires promotion, advertising or branding of the business.
• The arrangement supports the business’s marketing strategy and reaches a potential market.
• There is a clear relationship between the business and the audience reached; for example, an event connected with the products or services sold.
Even where this connection exists, a deduction may be denied or limited in the following circumstances.
Capital expenditure
Capital sponsorship expenditure is not immediately deductible. For example, a business cannot deduct the cost of buying a van for its own use merely because a sports club uses it at weekends. However, reimbursing a club for a van it owns may be deductible where the business receives only promotional exposure, such as prominent display of its logo, and obtains no asset or enduring advantage.
Private expenditure
If an arrangement also provides a private or domestic benefit, only the portion attributable to promoting the business is deductible.
Entertainment expenditure
The entertainment limitation may reduce an otherwise allowable deduction to 50%. This can apply to costs such as corporate boxes, holiday accommodation, pleasure craft, and food and drink.
Other forms of sponsorship
The statement also addresses non-cash sponsorship, including:
• Trading stock: Goods provided for sponsorship, such as supermarket supplies for a school fundraiser, are generally dealt with under the trading stock rules.
• Services: A service provider cannot deduct the value of free time, but associated business expenses, such as fuel and materials, may be deductible.
• Employee sponsorship: Where employees receive money, goods or services connected with an event relevant to the business, employment income and fringe benefit tax issues must be considered before deductibility is determined.
Sponsorship arrangements can be more complex than they first appear. Businesses should document the commercial purpose, promotional obligations and expected audience, and retain the agreement and supporting evidence. Professional advice is recommended where an arrangement includes capital, private, entertainment, employee or non-cash elements.