Deductibility of sponsorship costs

In April this year, Inland Revenue published its Interpretation Statement IS 26/10: Income tax implications of providing sponsorship. This statement considers how tax law applies to the deductibility of sponsorship expenditure, where a business supports an organisation, event, person or cause with the intention of promoting or advertising its business.

As set out in the interpretation statement, sponsorship can be in the form of money, products or services. For this sponsorship to be deductible, there must be a sufficient connection between the expenditure and the sponsor’s (taxpayer’s) business or income-earning process. In satisfying this requirement, the taxpayer must be able to show that the expenditure was intended for the purpose of promoting or advertising the business. Factors that may show this intention include:

  • The terms of the sponsorship arrangement specifically requires promotion or branding of the business.

  • The sponsorship aligns with the business’s marketing strategy to reach a potential market.

  • The relationship between the business and the market the sponsorship will reach; for example market exposure at an event directly related to the type of products sold by the business.

  • Any evidence that the expenditure resulted in increased sales or income.

There are situations, however, where although the required connection between sponsorship expenditure and the income-earning process can be made, that a deduction will not be allowed, or will be limited. Circumstances in which this might apply, include those outlined below.

Capital expenditure

Sponsorship expenditure that is capital in nature, as it results in a business having an identifiable asset or enduring advantage, would not be deductible. For example, a van purchased by a business for its own use, which it allows a sports club to use in the weekends will not be deductible; although a deduction for depreciation may apply. If a business were to reimburse a sports club for a van purchased by the club, on the understanding that the business’s logo is prominently displayed on the van, this would then be deductible; as the business is not getting an asset or enduring advantage.

Private expenditure

Where expenditure includes the intention to obtain an element of private or domestic benefit, alongside the purpose of promoting the business, the amount relating to each purpose would need to be determined, with only the portion relating to promoting the business deducted. However, if the private or domestic benefit was unintended, being incidental to the main purpose of promoting the business, expenditure would be fully deductible.

Entertainment expenditure

The deductibility of sponsorship expenditure may also be reduced in cases where the entertainment expenditure limitation rule applies. For example, entertainment that is sponsored primarily to promote a business’s goods or services to a selection of current or potential clients, to which the public does not have the same access, the entertainment expenditure rules would apply. This would limit the expenditure deduction to 50% of what would otherwise be allowed. Examples include: corporate boxes, holiday accommodation, pleasure craft and the provision of food and drinks.

Other forms of sponsorship

  • The interpretation statement also provides guidance on the tax implications where sponsorship, intended for promotional purposes, takes the form of something other than money. In brief these include:

  • The supply of goods that are trading stock, such as a supermarket providing items for a school fundraising sausage sizzle. Here the value of the goods is generally deductible through the trading stock rules.

  • Provision of services, for example, a cricket coach providing free coaching sessions to a cricket club. The expenses associated with providing this service (e.g. fuel costs and materials) would be deductible.

  • Sponsoring employees, either monetarily or through goods or services, for example, at an event relevant to the business. On this point the interpretation statement sets out some of the considerations around employment income and fringe benefit that need to be navigated, before the deductibility of the associated costs is determined.

Although interpretation statements are not binding on Inland Revenue, they can generally be relied upon in determining tax affairs. However, as the circumstances surrounding a sponsorship arrangement can in fact be more complex than first meets the eye, it is advisable to contact your accounting professional for guidance on getting this right.