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There are instances in which contractors can benefit from tax relief from sponsorships. As a limited company director, you can also claim personal and corporation tax relief by making charitable donations.
It is important to understand the rules surrounding payments as HMRC have a strict set of guidelines which must be followed.
Donations to charities can take the form of either personal contributions or through your company, which can be beneficial in tax terms depending on how your finances are organised.
If you donate to charity through your personal income, you will be entitled to personal tax relief if you choose to donate using gift aid. This means that the charity will be able to reclaim tax at the basic rate from HMRC which means that your net contribution will become gross.
Example: For every £80 you donate, the charity receives an additional £20 from the government, totalling £100 overall.
When you donate using the gift aid rules, HMRC rules dictate that you must certify that you have paid enough tax to cover the sum that the charity will reclaim from HMRC. If you have not paid enough tax, you will not be able to use gift aid for your donation.
If a contractor’s limited company makes a charitable donation from the business funds, these donations will be allowable expenses provided that they were made wholly and exclusively for the purpose of trade. The charity must be made aware that the company is making the donation and the funds should be paid directly from the business bank account.
In order to get corporation tax relief on any donations your business makes, you will need to ensure that the donation does not cause the business to make a loss for tax purposes, as donations cannot be used to carry tax losses backwards or forwards. You will also need to ensure that any director, their spouse or family members do not benefit from the donation beyond the guidelines below:
|Donation Value||Benefit Allowed|
|Up to £100||25% of the donation value|
|£101-£1,000||Up to £25|
|£1,001 and over||5% of the donation (up to a maximum of £2,500)|
There are certain donations which will not qualify for corporation tax relief, usually, because there are conditions attached which stipulate that there are to be repayments or purchases to be made from the recipient or other affiliated individual.
HMRC guidelines state that to be considered as an allowable expense, the cost of sponsorship must be incurred wholly and exclusively for the business. It is important to remember that sports sponsorship is not considered as a charity donation, rather a business expense and should, therefore, be a demonstrable return on investment.
HMRC will often consider that a sponsorship had a non-business purpose where any of the following applies:
•If the person being sponsored is a personal friend or relative of any of the directors or business proprietor
•If the activity sponsored is one in which the director or proprietor has a personal involvement which predates the sponsorship
•If the payment is requested by the recipient without any negotiation of the consideration
•No clear commercial benefit to the sponsorship, such as local businesses sponsoring events taking place in the other parts of the country
Generally, the tax savings will only differ by around 1%, so unless you are donating a significant amount, the tax efficiencies should be similar. One of our specialist accounts will be able to advise you as to the best way to donate in your circumstances.
If you want to give a charitable donation through your limited company or sponsor an individual or event, it’s important to understand how to account for the related expenditure correctly and ensure that you comply with HMRC’s guidelines.
The Nixon Williams team has over twenty years of experience helping small businesses, contractors and independent professionals with all of their financial needs. For more advice around, charity and sponsorship, please call our team on 01253 362 062.