Sponsorship - a warning

A recent tax tribunal ruling may make sports sponsorship less financially attractive and harder to arrange, writes Nick Huber.

Sponsorship is usually categorised as advertising and promotion in company accounts. In addition, as long as the sponsorship payments do not also benefit the managing director’s personal hobby, or those of his family, it has been assumed that they should qualify for a deduction for tax.

But a supplementary hearing in the long running Interfish v HMRC [2012] UKFTT 599 (TC02275) sports sponsorship tax case reinforced the sensitivity in this area of the wholly and exclusively test.

Interfish is a successful seafood supplier based in Plymouth that donated over £1m to its local rugby club Plymouth Albion. 

The company gave cash to the club at different times, with the money being used to prop up the club financially and later to buy better players.

Interfish managing director Johannus Colam had shares in the club and was able to assert influence at board level. He told the first-tier tribunal that the payments to Plymouth Albion had benefited Interfish in various ways, and submitted a schedule of estimated benefits it received at the reconvened tribunal hearing.

The managing director said he made useful contacts through the sponsorship of Plymouth including a NatWest bank manager who served on the club's board and who subsequently loaned funds to Interfish, when other banks had already turned the company down. 

But the tribunal judge Nicolas Paines QC rejected Colam’s arguments and ruled that Interfish should not be allowed to deduct its sponsorship payments from its corporation tax bill. The company's intention to help the club buy players did not meet the requirement of “wholly and exclusively... for the purposes of the trade”.

Interfish’s sponsorship of Plymouth had a dual purpose to improve the club’s financial position as well to improve the taxpayer’s business, the tribunal ruled, but payments to have the company’s logo on players' shirts could have tax deductible. This advertising could have been obtained at the club’s published rates for about £10,000. 

In her 17 October AccountingWEB podcast, tax barrister Anna Fairpo contrasted the Interfish verdict with the McClaren case, where the Forumla 1 racing outfit won its appeal against HMRC's runing that its "spygate" penaltywas a business expense.

The cases illustrated the importantce of identifying elements of any sponsorship or sports expenditure that is or isn't wholly and exclusively for the purposes of trade, Fairpo explained. 

For Interfish, "Despite the further submissions, the tribunal has confirmed that the payments are non-deductible because of the dual purpose in making them," she continued. 

"One of the taxpayer's purposes was to improve the club's financial position, not solely for the purpose of the trade of the taxpayer.

"The business Interfish making the payment did have an additional purpose in mind, which was making the business look attractive to other businesses supporting the club, but this wasn't the sole reason," she added. 

Nichola Ross Martin has monitored the case since the original 2010 tribunal decision, which she described as "something of a shocker” for wannabe sponsors. 

“The [tribunal] judge seemed to think that it was necessary to try and cost out the benefits of sponsorship, whereas relationships are built up over time, and often over lunch and from that respect are intangible,” Ross Martin argued.