As annual sponsorship budgets have been tightened in the past few years, it has become increasingly difficult for sporting organisations, particularly at amateur and grassroots level, to secure support from commercial partners. Many businesses will be scrutinising their potential expenditure on sponsorship in order to assess the likely return on investment before signing up.
So how can a sporting organisation incentivise a prospective commercial partner to pledge their support?
The tax status of the sporting organisation can be a compelling factor to highlight in discussions over corporate support or partnerships. Many sporting organisations which operate entirely on a ‘not for profit’ basis have opted to secure charitable status by restructuring and registering with the Charity Commission for England and Wales.
Charitable status brings with it access to various tax reliefs and benefits, including in relation to contributions made as Gift Aid donations. It can be useful to explore these in discussions with prospective commercial partners as the tax treatment of sponsorships and donations is markedly different.
In addition, you may find that separate budgets for sponsorship/promotional activity and corporate social responsibility (CSR) are often handled by separate departments of the same company, each of which may have distinct funding requirements and different objectives in mind. Corporate support for your sporting organisation, whether in cash or in kind, may therefore depend on how you choose to make the approach, so it is important to recognise the differences.
If your sporting organisation is a registered charity, there are two distinct options to consider depending on what (if anything) the commercial partner wants to achieve from the arrangement.
Sponsorship payments which a business makes in return for something from the charity are for tax purposes treated differently from genuine donations. As a general rule, the receipt by a charity of “sponsorship” income is generally regarded by HM Revenue & Customs (HMRC) as being a “business activity” and a taxable supply for VAT purposes.
If the commercial partner gets something in return for its sponsorship payment, it is likely to be regarded as a business expense. For example, this benefit could be the provision by the charity of advertising and promotional services or of access to its database (subject to strict compliance with applicable data protection regulations).
If it is regarded as a business expense, the commercial partner may be able to deduct the sponsorship payments when it works out its profits for tax purposes. However, the charity would have to account for VAT on the money which it receives.
The fundamental question is whether the charity agrees to provide the commercial partner with a benefit “in return” for their sponsorship payment? If so, it is likely that the income could be taxable.
Examples of other types of benefit conferred on the commercial partner include a public endorsement by the charity of the commercial partner’s products or services, the right to use the charity’s logo in printed material, a link from the charity’s website to the commercial partner’s own e-commerce website, or giving free or reduced price tickets to the commercial partner.
The nature of the arrangement therefore depends ultimately on what (if anything) the commercial partner wants in return for their involvement with the charity.
Corporate Gift Aid donations
In contrast, if the commercial partner gets nothing in return for the money it gives to charity, the contributions may be regarded as a genuine donation. It is permissible for the charity to “acknowledge” a company’s support provided that no benefit is agreed to be provided by the charity or deemed to be received by the donor company in return.
In certain circumstances, it may be preferable for a company which wishes to assist the charity in the delivery of its charitable activities to make a corporate Gift Aid donation rather than enter into a formal sponsorship arrangement. The effect of this is that the full amount of the gross donation is deductible from the donor company’s profits for the purposes of assessing corporation tax liability; but for donations to qualify, any benefits provided to the commercial partner or a ‘connected’ person (e.g. owner/manager) in connection with the donation must be within certain prescribed limits established by HMRC.
HMRC has issued guidance on acknowledgements of support which a charity could give to a commercial partner without having to account for VAT. These include:
- flags, lapel pin badges and stickers;
- a mention in its list of sponsors, perhaps in a programme or on a notice;
- naming a building after the commercial partner; and
- putting the commercial partner’s name on the back of a seat in a sporting venue.
So what options can you suggest to commercial partners?
It is crucial to ask your commercial partner(s) at the outset what essentially they are seeking to achieve from their relationship with the charity.
- if the commercial partner requires the charity to provide active promotional or other services in return for the payment, it is likely that this would constitute a “sponsorship” arrangement. For Charity Commission and HMRC purposes this is a trading activity and could be taxable; or
- alternatively, the commercial partner may simply wish to make an unconditional cash contribution to allow the charity to deliver a project furthering its charitable objectives and in respect of which the charity could make a “mere acknowledgement of support“. If so, it may be possible to treat the contribution as a corporate Gift Aid donation. This would have the effect that the commercial partner, assuming it is a corporate donor, would receive corporation tax relief on the gross gift, provided that certain strict HMRC criteria are met.
It is important to distinguish the subjective features of each such arrangement to ensure that the charity is not in breach of applicable charities and VAT legislation. As a general rule, if any specific conditions are attached to the arrangement, the more likely it will be deemed by HMRC to be sponsorship, regardless of what it is called or referred to by the parties.
If a sponsorship arrangement is chosen, there is of course scope for the charity to apply to a match funding body (e.g. National Sports Foundation, Sports Match, etc.) for the commercial partner’s cash contribution to be match funded. It essentially comes down to what is the most cost-effective way to structure the relationship based on both the commercial partner’s and the charity’s respective key requirements.
It is important to recognise and address such issues in relation to your future dealings with potential commercial partners. For contributions to be regarded as a genuine donation, only a mere acknowledgement of support is acceptable whereas the active promotion of the commercial partner in return for payment is not.
If Benfield Motor Group supported a charity project, it would be acceptable for the charity to acknowledge on literature that the project was “Kindly supported by Benfield Motor Group” – but to say “Sponsored by Benfield Motor Group “Enjoy the Journey” www.drivebenfield.com” would be categorised as active commercial promotion and is therefore sponsorship.
The use of advertising slogans, tag lines, web links and addresses or other contact details denotes commercial activity, as opposed to a mere acknowledgement of support.
It may not always be completely clear whether a payment you make to charity is a donation or a sponsorship payment that is a business expense. In some cases, it can be a genuine combination of the two; but it is crucially important to know how these are assessed for tax purposes and, where necessary, obtain prior clearance from HMRC in writing, particularly in relation to any apportionment.
Special rules also apply in relation to granting exemption to sponsorship of qualifying fundraising events, but again this requires strict compliance with specific criteria. HMRC will look at the facts of each arrangement, rather than relying on the parties’ intentions, however well intentioned.
This is a complex area but one which can produce enhanced rewards for your sporting organisation if handled correctly. We would recommend that you consider the specific details of any such opportunities and proposals with your professional advisers in each case before proceeding.
For more information, help or advice please contact John Devine on 0191 211 7905.