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. 

Charitable donations

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.

Personal donations

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. 

Company donations

If a contractor’s limited company makes a charitable donation from the business funds, these sums are not subject to corporation tax provided that they are used wholly and exclusively for the purpose 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. 

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 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 below:

Donation value Benefit 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. 

Sponsorship for contractors

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

Is it better to donate from the company or personally?

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. 

Expensing annual events and parties

Annual company events such as Christmas parties are considered an allowable expense for a limited company, as 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 and 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. Although you can claim the costs through your limited company, they will not be tax deductible in terms of calculating your business’ profits.

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.

Gifts to customers are not allowable as an 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

How can Nixon Williams help?

If you want to give a charitable donation through your limited company, sponsor an individual or event, or even treat your employees to a night out, it is 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 finance needs. If you need any further advice regarding entertaining, charity and sponsorship, please call our team on 01253 843180 or email newbusiness@nixonwilliams.com.

 

See more of our guides to expenses