Why Sponsor An Athlete ?

Multiple questions arise when we look at sponsorship. We have tried to depict all the relevant information for you below: 

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Sponsors 

 

When are sponsorship costs Tax deductible

 

In some cases sponsorship is a great way to advertise your businesses. It is also about tapping into the passion of your target audience and having a story to tell. But when is it an allowable expense for tax purposes and when is it justifiable to claim back the VAT on the expense?

 

Legitimate sponsorship expenses

 

To be an allowable expense the cost of sponsorship must be incurred wholly and exclusively for the purposes of the trade; this statement should also apply for any aspect of expenses within your business.

Many sports clubs or sporting venues will have sponsorship and advertising opportunities that will help out your business in front of an audience you might not otherwise have had access to.

When considering sponsorship you should ask yourself:

Does the sponsorship...

•   . Promote the business?

•   ...Is the purpose 'wholly and exclusively' business related

•   Is the benefit of the sponsorship 'wholly and exclusively' business related

If it meets the above conditions it may be a legitimate expense, so which costs relating to sponsorship can you claim as an expense? Items you can claim for (both in your VAT returns and end of year tax returns) include costs such as:

• Entry/ membership fees - providing your company is benefiting from paying the
  fee

•   Branded clothing and accessories - items which have the company branding on them

•   Branded assets - a cycle, a motorcycle or a car if you are sponsoring a racer

• Facility expenses directly related to the party being sponsored - these should
  be outside of normal business activity

Sponsorship expenses are subjective in HMRC's eyes, and there are several test cases where big sponsorship deals have been found by HMRC to fall outside the 'wholly and exclusively test - you have to be able to fully quantify exactly why it benefits the business. - if you're unable to do this you should disallow the expense.

 

Duality of purpose

 

If there is any element or implication of a non-business benefit, then the cost is not allowed.

•   If the sporting field that you are sponsoring is a director, partner or proprietor's regular hobby, that they actively take part in - HMRC may decide that you are
  'funding' a personal hobby

•   If the party being sponsored is a relative of the director, partner or proprietor -

• HMRC may decide that these spends are disguised earnings that you would have paid for anyway

 

Sponsoring a relative (in more detail)

 

We are often asked, if it's acceptable to sponsor a relative. Generally no, unless the circumstances are exceptional.

In some cases sponsoring a relative may be justified, for example if your son was an Olympian, and your business was in that particular sporting field - you may be able to justify the business benefit with the association.

That does not mean that your relative has to be performing at a professional level to be allowed, a novice sportsman may still be a good investment providing they are advertising you in an appropriate manner.

However, you need to imagine the party being sponsored is not a relative; would your business still benefit from a similar sponsorship arrangement?

 

HMRC Commerciality tests

 

There are a few reasons why HMRC may disallow an expense for sponsorship, so it is important to note what they might be looking for: The type of evidence that may show a lack of commerciality includes:

• Sponsoring a relative or close friend - although as mentioned above there can be some acceptable circumstances, they must be fully justified to be in the benefit of the business. If there is any doubt; disallow the cost.

•   Paying over the odds to the sponsored party - it should still be in the best interest of your business to save on costs and manage overheads so some consideration of the return on your investment should be evident, we would advise that a written sponsorship agreement be put in place setting out vour expectations of the
  sponsored party in return for your sponsorship

 

•   Not having considered the commercial effect of the activity sponsored - unless you were looking to launch in Wales - it might be outside your interest to sponsor someone in Wales. If your business is solely based in Scotland for example, or for you to provide sponsorship of £100,000 to a local darts team. The commercial effect should be considered, documented and reasonable.

•   Not considering any other option - have you considered or tried any other media for advertising?

 

Return On Investment

 

If you are going to invest your time and money in a sponsorship deal, then you will be doing it with the expectation of a return on your investment.

•   How will you measure that return on investment? If you spend £1 on sponsorship, will you get that £1 back plus a % return in profit?

•   What unique marketing proposition does your sponsored have to offer?

•   Is there a competitive advantage to be gained?

•   What outcome do you expect to achieve? Can it be measured? How often will you measure the return?

•   If money is tight, are there other options that could provide a better return for your money?

If you can't answer these questions, then the chances are that you will fail the HMRC

Commerciality test by not being able to prove there is a benefit to your business.

 

Sponsorship Agreement

 

Always make sure there is a written sponsorship agreement in place. This should detail the value of the sponsorship and the duration of the agreement. There should be a termination clause that allows you to cease sponsorship if you find that you are not getting the returns that you had intended. These may not always be financial, your objectives might include an increase of brand awareness, an increase in traffic to your website, or an increase in sales leads.

 

Accounting Treatment

 

The accounting treatment would be determined by the actual agreement relating to the sponsorship.

If the bike is being purchased and donated to the rider - it would be a P&L item.

If it is an asset to be retained as a company asset and loaned then it would be an asset held in the balance sheet and depreciated.

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Further queries / questions you may have.........

 

1. What Do You Need to Provide to the Sponsor?
A brand will approach you with a sponsorship opportunity for the purpose of promoting their products and services. This means you will be required to provide something of value to the sponsor. Your services may include:

* wearing their merchandise; 
* attending photoshoots;
* posting photos on social media; and
* attending certain events and conferences. 
* You might have to participate in a certain amount of promotional appearances in connection with the brand each year.

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2. How Much Will You Be Paid? 
To ensure that you benefit from the sponsorship arrangement, you should clearly establish what you will receive in return for promoting the brand. You should consider whether they will provide you with: money, clothing or specific services.
You should also determine how and when the brand will pay you. For instance, you could receive payment for: every game, one season or a fixed period. 
For example, your athlete sponsorship agreement may stipulate that the brand will provide you with clothing over one year, with a payment of $500,000 to be paid in a lump sum at the end of the contract term.

You must also consider the length of the agreement and whether it is ongoing or can be automatically renewed. 

Your payments may also depend upon your athletic results throughout the agreement period. The sponsorship agreement should outline this in an attached schedule. Additionally, you may receive bonuses depending on: awards received, goals scored or receiving first place in a competition. 
These are things you will have to negotiate with the other party before entering into a sponsorship agreement.

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3. Does Exclusivity Bind You? 
Your sponsor may prevent you from wearing competing sporting apparel brands. They might even want to restrict you from wearing brands in the same industry. 

For example, exclusivity could prohibit an athlete sponsored by Puma from wearing any goods produced by direct competitors, such as Nike, Reebok and Adidas. 

Alternatively, they may allow you to wear other sporting brands, except when you are competing in sporting events or competitions.

You should check your sponsorship agreement for an exclusivity clause and ensure that you understand the obligations it creates. Otherwise, you may unknowingly breach your contract by collaborating with another brand. This could tarnish your reputation and lead to serious legal issues.

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4. Can You Terminate the Agreement?
You should understand how you can terminate the agreement should the sponsor fail to meet their obligations. 

For instance, you want to ensure you have the right to terminate the agreement if the sponsor:

fails to pay you;
uses your name or image without permission; or
demands greater control over you.
On the other hand, you need to be aware that the sponsor can terminate the agreement if you fail to meet the conditions placed on you. There could be provisions for termination if you: 

behave in a way that brings their brand into disrepute;
fall below a certain amount of followers on social media; or
fail to meet a reasonable performance standard.
5. How Can You Represent Their Brand?
Your athlete sponsorship agreement will outline how you can use the brand’s intellectual property (IP). 

IP refers to someone’s legal rights over creative work that they have produced. This can include any kind of content, such as: photographs, graphics, designs, literary work and music.
The brand you are working with owns the IP to their name, logo, slogan and any other identifying marks of their brand. They may licence their brand to you so that you can use their branding. This might include guidelines that specify how you should position their logo in certain images that you post.

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6. What is the Dispute Resolution Procedure?
Fees and payments are a common cause of disputes in many commercial arrangements. Should an issue arise, it can be useful to have a provision outlining the dispute resolution procedure in your sponsorship agreement. This will assist you and the sponsor to attempt to come to a resolution before proceeding to further legal action.

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7. How Will You Be Engaged?
If you are receiving a reasonable amount of money from your sponsorship, you may want to consider setting up a business structure. The way tax affects different business structures will factor into your decision. It is important to first speak with your accountant about tax implications and determine what may be the best solution for you.