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HMRC internal manual

Business Income Manual

Specific deductions: advertising: sponsorship: purpose

To be an allowable expense the cost of sponsorship must be incurred wholly and exclusively for the purposes of the trade. Commercial sponsorship is rarely limited to paying over funds to the sponsored activity. The sponsorship will be part of a targeted marketing scheme. When significant sums are involved, the payer will look to maximum exploitation of the sponsorship vehicle.

The following principles need to be taken into account in deciding whether the sponsorship was paid wholly and exclusively for the purposes of the trade.

  • To find out whether the payment was made for the purposes of the taxpayer’s trade it is necessary to discover the taxpayer’s object in making the payment.
  • The general rule is that establishing the object behind making the payment involves an inquiry into the taxpayer’s subjective intentions at the time of the payment.
  • The taxpayer’s subjective intentions are not limited to the conscious motives, which were in the taxpayer’s mind at the time of the payment.
  • The ‘purposes of the trade’ means ‘to serve the purposes of the trade’.
  • The ‘purposes of the trade’ are not the same as ‘the purposes of the taxpayer’.
  • The ‘purposes of the trade’ does not mean ‘for the benefit of the taxpayer’.
  • The purpose for making the payment is not the same as the effect of the payment.
  • A payment may be made exclusively for the purposes of the trade even though it also secures a private benefit. This will be the case if the securing of the private benefit was not the object of the payment but merely a consequential and incidental effect of the payment.
  • Some consequences are so inevitably and inextricably involved in the payment that unless merely incidental they must be taken to be a purpose for which the payment was made.

These principles are drawn from the judgment of Millett LJ in Vodafone Cellular & Others v Shaw [1997] 69TC376 at page 436G-437H. Further information on this case can be found at BIM38220.

Typically (but not exclusively) there may be a non-business purpose where:

  • the sponsored person is a relative or close friend of the business proprietor or controlling director, or
  • the business proprietor or controlling director has a personal involvement in the sponsored activity (such involvement often pre-existing the sponsorship).

The purpose or purposes of expenditure is ultimately a question of fact to be determined by the Tribunal. It is important to obtain and review the contemporary factual evidence.

The type of evidence to look for includes (but is not limited to):

  • details of negotiations, including correspondence and contracts;
  • how did they become aware of that particular event/person?
  • why was it decided to sponsor that particular event/person?
  • what alternatives were considered and why were they rejected?
  • a copy of the business plan that is usually prepared in commercial sponsorship cases;
  • copies of any material prepared by the person/entity seeking sponsorship;
  • details of how the sponsorship was intended to bring the name of the business or its products before the intended target audience (including how prominent are any adverts);
  • how is the sponsorship exploited in terms of point of sale publicity, the local media, or other available avenues?
  • the arrangements to assess and refine the effect of the sponsorship.

The internet is a useful additional source of information:

  • What is said about the sponsorship on the web-site of the business?
  • Is there any information on general sites about that sort of activity?
  • Is there evidence of previous involvement in the sport or activity?
  • What does the person/entity sponsored have to say about their sponsors?

A demonstrable lack of commerciality in the transaction may indicate a non-trade purpose. However, this requires more than simply poor commercial judgment. A sponsor may make a poor choice of vehicle for sponsorship, but that decision may still have been taken purely for business purposes. A bad decision made with purely commercial motives, is still a decision made for the purposes of the trade. Lord Reid made the point in Ransom v Higgs [1974] 50TC1 at page 82 that:

‘If a trader is actuated by none but commercial motives the Revenue cannot merely say that he has paid too much. He may have been foolish or he may have had what could be fairly regarded as a good commercial reason for paying too much.’

The type of evidence that may show a demonstrable lack of commerciality includes:

  • sponsoring a relative or close friend,
  • paying as much as the sponsored party wants without negotiation of consideration,
  • not appearing to have regard to the commercial effect of the activity sponsored, for example, a small local business operating solely in the Newcastle-upon-Tyne area sponsoring an event in Plymouth,
  • not considering any other option.

In particular where the parties are connected you should pay close attention to commerciality of the sponsorship.

The case of Executive Network (Consultants) Ltd v O’Connor [1996] SpC56 (see BIM37970), is an example of where the Special Commissioner found that sponsorship payments were not made wholly & exclusively for the purposes of the trade. The Special Commissioner found that the fact that the amount paid was determined by the amount that the sponsored party needed. This showed that the purpose of the payment was at least partly that of the sponsored party.

As the test is the purpose of the expenditure, the success (or otherwise) of the sponsorship (either in terms of generating commensurately more income or the success of the sponsored person/entity in their chosen field of endeavour) is not by itself a relevant factor. Where the sponsorship fails to generate commensurately more sales it is reasonable to expect, in a purely commercial arrangement, that steps will be taken to improve matters. Failure to identify and take the necessary measures may indicate that the arrangement is uncommercial.

Further evidence that may show a lack of commerciality includes:

  • no review of the effect on the trade of the sponsorship,
  • the review only considers the success of the sponsored party, not the effect on the trade.


The fact that a trader chooses to sponsor a novice does not, of itself, mean that they have not acted from a commercial motive. Novice sports persons do seek commercial sponsorship.

The trader may be able to demonstrate that they wanted their name and brand to be associated with a rising star and obtain publicity as a result. If this is their only purpose then the sponsorship is allowable. If the novice sports person is a relative or associate of the proprietor/director(s), then there may also be a non-business purpose to the sponsorship as in Executive Network (Consultants) Ltd v O’Connor. If so, the whole of the expenditure is disallowable.

For example, a trader may decide, for purely commercial reasons, to sponsor a novice athlete who had appealed for sponsorship in the local media after reaching the finals of a major tournament at an unusually early age. There is an agreement between the parties setting out how much the trader will be paying and what services the sports person will perform in return; including a requirement that their equipment will be prominently marked with the sponsor’s name. In addition they will appear at certain corporate events. The cost of the sponsorship is allowable (apart from any sums disallowable as capital or entertaining - see BIM42555).