How Sponsorship, Entertainment and Gifts Affect Your Tax

Tax

In the course of running your business, you might occasionally pick up costs that benefit other people, whether that means sponsoring a local sports team, entertaining a client or treating your staff with a small gift. In this guide we’ll examine the tax treatment of these expenses.

Tax Relief on Sponsorship

Sponsorship can be an effective way to advertise your business, creating an association between your company name and something your clients feel positive and passionate about. If the cost is incurred only for the purpose of generating additional profit for your company it can be treated as any other advertising cost, but you must be able to demonstrate that this is the only purpose.

Duality of purpose

If there is any non-business benefit, the cost is not an allowable expense. Examples of “non-business benefits” might include:

  • Funding a personal hobby, for example sponsoring a team or club that you’re involved in.
  • The party being sponsored is a relative, partner or friend.

Return on investment

If the sponsorship is a legitimate business expense, HMRC will expect you weigh the cost against the benefit to your business, just like you would when running any kind of advertising. The following are indications that the sponsorship is commercial decision rather than a personal one.

  • There’s a clear commercial benefit to your business. The aim of any advertising is to generate additional profit. Sponsoring an event in Glasgow when you operate in London is unlikely to win you any new business, while providing sponsorship of £100,000 to a local sports team is unlikely to give you a commercial return.
  • You’ve taken steps to ensure you get value for money. You should have a written agreement detailing your expectations in return for sponsorship and the expected benefit to your business. The sponsorship should cost less than the additional profit you expect to make. Evidence of negotiation will strengthen your case.
  • You’ve considered other options. Evidence that you’ve looked at a number of sponsorship deals and chosen the best one, or that you’ve tried other types of advertising, again strengthen your claim that the sponsorship deal was a commercial decision.

Business Entertainment

HMRC defines entertainment expenses as “the costs incurred when providing subsidised or free hospitality to clients or staff”. Examples include food and drink, tickets for the theatre, a concert or a sporting event, the use of company assets like an executive suite.

Entertaining clients

Entertaining clients may well help you secure new business, but it isn’t classed as an allowable expense. This includes entertaining clients, potential clients and suppliers, and event hospitality.

This doesn’t mean your company can’t pay for it, only that it won’t reduce your tax bill, and if the alternative is to pay for it from your personal, taxed income it might still be worth doing. This will depend on your personal situation and your accountant will advise you.

Entertaining staff

You can claim for entertaining staff, but there are strict limits. You’re allowed to claim up to £150 per head for entertainment for your staff and their partners. If you’re running a one-person limited company this still applies, so you could claim up to £150, or £300 if your partner is participating too.

You’ll need to actually hold an event and claim what you spent; you can’t simply make a cash claim for £150. If you hold more than one event – for example if you hold a summer event and another at Christmas, the limit applies across both events – so the annual total must be £150 per head or less.

If you claim over the limit the whole amount becomes taxable, so make sure you keep track of your spending.

Trivial gifts and benefits

You may want to treat your employees to a small gift or staff function. You can do so without creating a benefit in kind as long as:

  • You spend less than £50. This limit applies each time to provide a trivial benefit.
  • It’s not a cash payment. Gift vouchers are allowed provided they can’t be exchanged for cash.
  • It’s not dependent on work performance or pay for services performed as part of their work duties.
  • It’s not a contractual obligation.

As with staff entertainment, the whole benefit will become taxable if you go over the limit, so be careful not to overspend.

Trivial benefits for directors

As a director you are allowed to receive trivial benefits and provide them to family members. The director’s allowance is £300 per year. This includes any benefits given to family members who are not employees.

If you have questions about this or any issue please contact our expert team on 01296 468185 or email accountancy@orangegenie.com.

 

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