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Businesses encounter a range of expenses, and HM Revenue and Customs have attempted to ensure that they have guidelines to cover every eventuality, but the official rules can seem overly complex so we have created these easy guides to help you understand your position.

Charitable Donations

Donations to charities can take the form of either personal contributions or through your company, either of which can be beneficial in tax terms depending on how your finances are organised.

Personal Donations

If you donate to charity through your personal income, then 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 becomes a gross contribution as far as the charity is concerned. This effectively means that for every £80 that you donate, the charity receives an additional £20 from the government, totalling £100 in all.

When you donate using the ‘gift aid’ rules, you have to 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 to cover the amount due to be reclaimed, then you will not be able to use ‘gift aid’ for your donation.

Company Donations

If a company makes charitable donations from the business’s funds, then these sums are not subject to corporation tax provided they are wholly and exclusively for the purposes of the company. 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.

To ensure that you get corporation tax relief on any donations your business makes then you will need to ensure that the donation does not cause the business to make a loss for tax purposes, as ‘gift aid’ 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 set out below:

Donation ValueBenefit Allowed

£0 - £100                    Up to 25% of the donation value

£101 - £1,000             Up to £25

£1,001 - £10,000        Up to 5% of the donation value

Above £10,000           Up to £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.

Is it better to donate from the company or personally? 

It depends on your specific financial situation, but generally the tax savings will only differ by around 1 per cent, so unless you are donating a significant amount, the tax efficiencies will be similar. A specialist accountant will be able to advise you as to the best way to donate in your circumstances.

Annual Events

Annual company events such as Christmas parties, are considered an allowable expense for a business, so long as the event meets the following criteria:

The cost of the event must not exceed £150 per head, including VAT. Even if the total is just a fraction over the allowed amount, tax and National Insurance will be payable on the entire cost, not just the excess.

All staff must be invited to attend, even if there is only one person working for the business.

Staff may invite their partners, but only if all staff’s partners are invited and these invitees all count towards the £150 per head allowance.

Receipts must be kept for the cost of all associated expenditure.

General recommendations are for events such as this to be limited to one a year, which is usually a Christmas party, making it easy to keep to the £150 per head allowance an justify the expenditure. If you are not on the Flat Rate VAT scheme, VAT may only be reclaimed on the portion relating to employees i.e. the VAT relating to invited partners may not be reclaimed. 

More than one event can be held each year and provided that the total cost doesn’t exceed the £150 per head limit, there will be no taxable benefit incurred. If you do hold more than one event in any given year, then you may need to demonstrate to HMRC that these are legitimate annual events as opposed to ad hoc nights out for your employees.

Business Entertaining

Corporation tax relief is not available on business entertaining, so although you can claim the costs through your company, they will not be tax deductible in terms of calculating your business’s profits.

If you are an owner-manager, then the lack of corporation tax relief doesn’t necessarily mean that it is not worth paying for business entertaining through your company bank account in preference to meeting the costs personally. 

In order to justify the cost of entertaining as a business expense despite the lack of corporation tax relief, you will need to consider if the benefits received by the company will be worth the costs involved. An outlay of thousands of pounds on a corporate box at a sporting event which will only bring in hundreds of pounds worth of business is not a reasonable investment and may be considered by HMRC to be an expense occurred for personal gain. However, buying drinks for your co-workers on completion of a project for a client could lead to another contract in the future, so this would be legitimately considered business entertaining. 

Gifts to customers are not allowable as a business expense and would be treated as business expenses unless they meet the following criteria:

  • The item in question costs less than £50
  • The item must advertise your business in a conspicuous manner
  • The gift must not be food, drink, tobacco or vouchers

Sponsorship

To be considered an allowable expense, the costs of sponsorship must be incurred wholly and exclusively for the benefit of the business. Should you be the subject of an HMRC investigation, any indication that the expenditure was incurred in your own personal best interests will not be viewed favourably by HMRC. It is important to remember that sports sponsorship is not considered as a charity donation – it is a business expense, so there should be a demonstrable return on investment.

HMRC will often consider that a sponsorship has a non-business purpose where any of the following apply:

  • 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 pre-dates the sponsorship
  • If the payment is requested by the recipient without any negotiation or consideration
  • No clear commercial benefit to the sponsorship, such as local businesses sponsoring events taking place in other parts of the country

The ultimate test will be the purpose of the expenditure, as the success or otherwise of the sponsorship will not be the only deciding factor. However, if the sponsorship doesn’t have a significant positive impact on the business, then it is reasonable to expect that attempts will be made to try and make the arrangement more commercial viable in the future. Failure to do so could be considered as proof that the arrangement was not solely for the business’s benefit.

How can Nixon Williams help?

If you want to give charitably through your business, sponsor an individual or event or just treat your staff to a night out, then it is important to understand how to account for the related expenditure properly and ensure that you comply with HMRC’s guidelines. For advice on how to keep your expenditure in line with the regulations, it is important to appreciate how best to set up your donations or events as well as how to keep records in order to satisfy HMRC as to the legitimacy of your expenditure. 

With more than twenty years’ experience of helping small businesses, contractors and other independent professionals, Nixon Williams has the expertise to help you navigate through the complex rules surrounding entertaining, charity donations and sponsorship. We can save you time and money and ensure that you never have to worry about interpreting the complexities of tax for small businesses. For more details about our services, call us today on 01253 362062 or email jacqui.fairbrother@nixonwilliams.com