Alison Hone highlights some common pitfalls for charities entering a corporate sponsorship.

There has been some controversy of late over charities’ corporate partnerships, highlighting both the risks and benefits of arrangements with corporate sponsors. The Institute of Fundraising’s Code of Fundraising Practice has recently been updated and in this article we look at some of the key VAT and tax implications that arise on corporate sponsorships.

What is corporate sponsorship?

Sponsorship is a generic term which is widely used in the voluntary sector and can mean different things to different people. When used in the context of dealing with a corporate body, the question is whether or not the charity or its trading company is making a supply of goods or services, eg supplying advertising space or allowing the use of a logo in return for payment. Or, put another way, are the funds provided by the corporate a donation for which nothing is required in return? Or is this payment, either in full or part, for the supply of goods and/or services? This can sometimes be a difficult distinction to make.

As a general rule, however, wherever the use of the corporate’s logo is made, it is likely that HM Revenue & Customs (HMRC) will consider there to be a supply of advertising and seek VAT on the payment made and seek tax on the profit generated. 

Other typical benefits provided are free or discounted tickets, participating in the sponsor’s promotional or advertising activities, using the sponsor’s logo (or them using yours), providing entertainment or hospitality facilities, or allowing the sponsor exclusive rights.

A simple acknowledgement of the corporate without using their logo or brand is merely providing recognition and not advertising, so neither VAT nor tax is due on monies received.

Where there is a supply being made to the corporate sponsor, it is usually wise to structure the activities of the charity so that this income is received by a subsidiary trading company to avoid a corporation tax charge.

Contracts/agreements

It is important that where a contract/agreement/Memorandum of Understanding is in place, the VAT treatment of the payment made reflects the responsibilities and obligations required of each party.

This is particularly important where only an element of the sponsorship monies is to be treated as a payment for a supply by the charity, with the remainder being treated as a donation. The danger is that where no distinction is made between the payment and donation elements, HMRC will seek to treat the whole of the sponsorship monies as being subject to VAT and to direct tax.

It is therefore essential that where such a split is agreed with the corporate sponsor (ie, part donation, part payment for advertising) there are two agreements: a contract for the payment for services/goods (invariably this is with the trading subsidiary, for direct tax purposes), and an agreement with the charity for the donation element. The value of each element must be clearly quantified and set out in the agreements.

VAT position of the corporate sponsor

Where the corporate sponsor’s trading activity is exempt from VAT (finance, insurance and property sectors for example) it is likely that it will be unable to recover, either wholly or partly, VAT charged to it by the charity.

This being so, it is important to ensure that agreements reached for sponsorship monies are exclusive of VAT. For example, where a finance company agrees to pay £10 to the charity for every new customer it achieves from a campaign, it should be stated that the £10 is exclusive of VAT. If this is not done, the VAT cost will fall on the charity which will only receive £8.33 per new customer, with £1.66 being paid in VAT as output tax by the charity to HMRC.

This area is under fresh scrutiny and one of the key areas HMRC is likely to investigate on routine inspections.  Care needs to be taken when structuring these partnerships to ensure both VAT and tax consequences are taken into account.

Alison Hone is a director specialising in charity and not-for-profit VAT at Saffery Champness

Civil Society Media would like to thank Saffery Champness for their support with this article