Business Entertainment And Sponsorship – What Is Allowable?

An issue which crops up regularly is whether the costs of sports, etc., sponsorship are tax-deductible. There have been some recent case law developments, which perhaps highlight the issues involved.

Litigation over sponsorship usually does not get past the First-tier Tribunal, but the Court of Appeal recently considered the issues in Interfish v HMRC [2014] EWCA Civ 876.

The question of whether revenue expenses for sponsorship are deductible must be determined according to the legislation in ITTIOA 2005, s 34, CTA 2009, s 54, i.e. as to whether the expenses are ‘incurred wholly and exclusively for the purposes of the trade’.

On the one hand, provided that the sole purpose of incurring any revenue expense is to benefit the trade, the cost is not disallowed if there is some incidental side benefit. In Bentleys Stokes & Lowless v Benson CA 1952, 33 TC 491, a firm of solicitors successfully claimed the cost of lunches with clients during which business was discussed. There was no statutory restriction on business entertainment at the time. 

On the other hand, in the well-known case of Mallalieu v Drummond [1983] STC 665, where a lady barrister claimed the cost of clothing worn only in court, the Courts decided that while her conscious motive in incurring the expenses was for professional purposes, there was inevitably also an objective of meeting her personal needs. There was thus a dual purpose and the ‘wholly and exclusively’ test could not be met. 

There have been a string of cases concerned with the dual purpose argument, often involving expenses which by their nature must have a personal element such as medical costs, nursing home fees, counselling fees, etc. Such cases have usually been decided in HMRC’s favour. However, the fact that an expense is incurred for more than one purpose does not preclude a deduction for an identifiable proportion of the expense which is for business purposes (ITTOIA 2005, s 34(2)), such as the business proportion of a sole trader’s motor expenses for a car that is also used privately.

Getting back to Interfish, the company had made payments totalling £1.2 million between 2003 and 2006 to Plymouth Albion Rugby Club, which it claimed relief for as advertising and marketing. The FTT decided that the payments were made for two purposes: (a) in order to improve the financial position of the club; and (b) to ensure that those involved in the club would look favourably upon Interfish in ways that would assist its trade. This finding was ultimately fatal to the company’s case, as the business purpose must be the sole purpose. It was noted that the amounts paid tended to fluctuate according to the financial needs of the club. 

A similar decision had been reached by the Special Commissioners in Executive Network (Consultants) Ltd v O’Connor [1996] SSCD 29 (Sp C 56). The company made sponsorship payments to the equestrian business of the wife of the company’s major shareholder director, ostensibly for advertising and promotion at equestrian events. Again, the Commissioners considered that there was also a purpose of supporting the wife’s business, and the payments were held to be non-allowable. 

On the positive side, the costs of motor rallying were allowed in McQueen v HMRC [2007] SSCD 457 (Sp C 601). Mr McQueen ran a coach business and was also a motor-rally competitor. His business paid about £50,000 over a three-year period towards the costs of his motor rallying activities. The rally cars were painted in his coach livery and there had been a substantial increase over the period in business turnover, though this could not be directly attributed to the rallying activities. Here the Commissioner accepted that although Mr McQueen enjoyed rallying his sole purpose in incurring the costs was for the purposes of his coach business. His private enjoyment was an incidental benefit which fell on the Bentleys etc., side of the dividing line. 

It has to be said though that McQueen was decided on its own facts and, speaking of dividing lines, as can be seen there are some rather fine ones to be drawn between:

Inevitably, HMRC will seek to disallow sponsorship and similar expenses as having a dual purpose where:

The topic of business entertainment and gifts rarely seems to crop up these days. However, HMRC see fit to devote a substantial section of the Business Income manual to the subject (from BIM45000 to BIM45090), and it may be useful here to briefly examine the key concepts. 

The legislation in ITTOIA 2005, s 45, CTA 2009, s 1298 contains the general rule that no deduction is allowed for providing entertainment (including hospitality of any kind) and gifts. The general rule also applies to sums paid to or on behalf of an employee and to amounts put at the employee’s disposal for the purpose of entertaining. This would include entertaining expenses reimbursed, and to sums paid to the employee as an entertaining allowance. 

ITTOIA 2005, s 46 and CTA 2009, s 1299 contain exceptions to the general rule as regards entertainment, and ITTOIA 2005, s 47 and CTA 2009, s 1300 contain exceptions for gifts. 

It will be generally understood that entertaining one’s own staff is allowable as long as the entertaining is not incidental to the entertaining of others. Similarly, there is little scope for confusion as regards the de minimis exception of £50 per annum for small gifts, e.g. calendars, pens etc., for advertising purposes (and not comprising food, drink, tobacco or vouchers). 

The provision of goods or services for payment, under a contractual obligation or which involves a ‘quid pro quo’ (i.e. something of equivalent value given in return), is not entertainment in any normal sense of the word. HMRC extend this concept to meals and accommodation provided to non-employees who are directly involved in the business (e.g. visiting traders, which is regarded as part of the overall price for their services) (BIM45045, BIM45046).

ITTOIA 2005, s 46(2) and CTA 2009, s 1299(2) contain an important exception for entertainment of a kind which it is the trader’s trade to provide, and which is provided ‘in the normal course of the trade either for payment or free of charge in order to advertise to the public generally’. HMRC give as an example an offer of two meals for the price of one in a restaurant (BIM45030), though whether that counts as entertaining in the first place is debateable. Also within the exception are items that, while not part of the ordinary trade, are part of the service which the customer expects. The example given here is the provision of free coffee by hairdressers. 

The HMRC guidance expands upon these basic concepts by reference to a variety of situations. 

If a business decision is made to sponsor an individual or organisation, it is important to be able to provide evidence in support of a claim for the costs. For example: