Reclaiming VAT on Sponsorship

January 15th 2022

Your son’s rugby club has approached you regarding sponsorship support to pay for his team’s kit. A member of the club says that if you put the cost through your business then you’ll get a tax deduction and can reclaim the VAT. Are they correct? John Craig explains the position.

The tax position for sponsorship is something that we are often asked about. In theory, the answer would seem straightforward but, the position is often far from clear. There are two tax aspects to consider, firstly deductions from profits and secondly, reclaiming VAT. In this article we focus on the VAT aspect.

Simply describing an expense as sponsorship isn’t enough to determine if any VAT can be reclaimed. You must apply normal conditions for reclaiming VAT on purchases (input tax). It can only be reclaimed if there’s a direct link and business motive. The usual motive cited for sponsorship expenses is advertising.

Unlike direct tax where a deduction is not permitted if there’s both business and non-business purposes for an expense, with VAT you are allowed to apportion an expense and reclaim the VAT relating to the business element. However, it is not sufficient to show that an expense has produced a benefit to your business if the purpose is personal.

For example:
Julia owns two hair salons. She pays for a gym membership near her home. She promotes her business by chatting to other gym members and in doing so brings in around 100 customers to her salons each year. There is a clear business benefit to the gym membership for Julia but she’s a member of the gym because she wants to keep fit – promoting her business is incidental. She is not entitled to reclaim the VAT on the membership fees.

It’s usual for sports teams to allow their sponsors to include advertising in the form of logos and names printed on sportswear. This is usually sufficient to persuade HMRC that there is a business reason for the expenditure. However, that won’t be enough in every case. For example, a court ruled against a taxpayer who reclaimed VAT on the cost of his microlite even though he had the name of his firm emblazoned on the underside of its wing. The court decided that too few people saw the craft while it was on the ground and that the so-called advertising wasn’t readable when it was in the air.

If barely anyone will see your advertising despite it being featured on the front of, say, a sports kit, HMRC is likely to dispute your VAT claim.

A possible counter argument is that as well as the limited audience for the advertising on kit, the team and all those associated with it will promote your business by word of mouth.

VAT apportionment
In the case of sponsorship for your son’s rugby team, by paying for kit showing your firm’s name HMRC is likely to accept that there is a direct business purpose but also that there is a private one because it is your son’s team. You must therefore apportion the VAT and reclaim only that related to the business purpose. The calculation of what is business and what is not depends on the circumstances, there’s no single formula.

To reclaim the VAT there must be a clear business purpose for spending the money on sponsorship. Paying for kit with your firm’s name and logo on the front is sufficient if it will be seen by the public. However, as there’s also a private purpose, i.e., to benefit your son, you must limit the amount you reclaim to a fair and reasonable proportion.