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It's quite common for businesses to agree sponsorship deals with charities. Businesses (companies, sole traders or partnerships) often get something in return for a sponsorship payment. For example, linking their company name (as sponsor) with the charity or project could give the business valuable publicity.
Sponsorship payments that a business makes in return for something from the charity are treated differently for tax purposes from simple donations. The way they're treated, and whether or not the business can claim tax relief for them, depends on the type of business, the nature of the sponsorship arrangement and on the particular circumstances.
This guide explains when you can and when you can't claim tax relief for sponsorship payments your business makes to charity. It also outlines how VAT can apply to things a charity gives your business in exchange for sponsorship.
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Sponsorship payments that your business makes to a charity in return for something are treated differently for tax purposes from any donations it might make to charity.
Your business might do a deal with a charity to sponsor it, either by funding a particular event or project, or by sponsoring the charity's general work. The sponsorship deal might involve a one-off payment or a regular amount.
If your business gets something in return for its sponsorship payment then it's likely to be regarded as a business expense. This could be high-profile advertising and publicity, for example, or perhaps access to the charity's mailing list.
Your business may be able to deduct the sponsorship payments as an expense when it works out its profits for tax purposes. But the charity would have to pay tax on the money if it can't use one of the special tax exemptions available to charities. This is because the payments would be trading income for the charity, not a donation.
If your business gets nothing in return for the money it gives to charity then it's a straightforward donation. A simple public acknowledgment of your donation by the charity, perhaps in their newsletter for example, wouldn't normally change this. And there's no reason why you can't generate some positive publicity for your business yourself by highlighting its links to charity.
Companies - but not sole traders or partnerships - that give money to charity can deduct the value as a 'qualifying charitable donation' from their Corporation Tax profit. The charity won't pay any tax on the donation either, provided they use the money for charitable purposes. See the section below 'Claiming tax relief for donations to charity'.
Donations to charity by sole traders and partners may fall under Gift Aid scheme for individuals provided all the conditions of that scheme are met.
Find out more about claiming tax relief for donations to charity in the section below.
Any business - whether a company, partnership or sole trader - may be able to claim tax relief for sponsorship payments it makes to charity if it gets something in return that is related to the business - for example, advertising. You get this relief by treating the payments as allowable business expenses when you work out your profits for tax purposes.
Some examples of things your business might get from a charity in return for sponsorship payments that would count as business expenses include:
Generally, any payment your business makes to a charity in return for advertising and publicity is treated as a business expense if your company gets a reasonable return from the charity for its money. However, there are some situations when it may not be completely clear whether a payment you make to charity is:
Some payments can be a combination of the two.
If in doubt about how to treat a payment you should seek professional advice.
If your business makes a qualifying charitable donation of money to a charity, it can deduct the amount of the donation from its profits for Corporation Tax - potentially reducing its profits to nil. Although it can't use any excess donations to create or increase any losses.
If you're a sole trader, or your business is a partnership, payments you make to charity may qualify as donations under the Gift Aid scheme. They're personal donations so you won't be able to set them against your profits for tax purposes. But your chosen charity will be able to claim back an amount equivalent to tax on the donation at the basic rate.
If a charity agrees to give your business something in return for the sponsorship payment(s), then the whole of the payment is considered a 'taxable business supply' for VAT purposes. This means that the charity may have to account for VAT on the money it gets. It usually applies if you do a deal with a charity under which it's obliged to give your business something that benefits it significantly, like publicity.
For example, if your business sponsored a charity in return for the right for your logo to appear on its website, this could be a supply of services on which the charity would have to account for VAT. The size or prominence of the logo doesn't really matter - it's the fact that you've paid for the right to have it displayed that counts. The same would apply if the charity agreed to give you the right to use its own logo on your material in return for your sponsorship.
In some cases a charity may give your business something as small as an acknowledgement of your payment. It's not part of any sponsorship deal, just a way for the charity to thank you for your support. In this situation your payment is treated as a donation for VAT purposes, meaning that the charity doesn't have to account for VAT on it.
Some examples of things a charity could give you to acknowledge your support without having to account for VAT include:
You can read more about VAT and sponsorship payments to charities in Notice 701/41 Sponsorship.
For more help you can contact the HMRC Charities Helpline.