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HMRC internal manual

VAT Input Tax

HM Revenue & Customs
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Specific issues: test for sporting and recreational activities


Does the proprietor, partner or director actively take part in the sport?

It is the taking part that makes HMRC ask whether the sport is being pursued for the purpose of the business or as a hobby.

If the proprietor, partner or director cannot take part because of injury or business commitments is another (independent) person employed to drive?

The activity is probably a personal hobby if there is not. It may help the business to show that the activity is being pursued for business purposes if there is a substitute driver.

Does a member of the proprietor, partner or director’s family actively take part in the sport?

Many parents or close relatives pay for children’s sporting activities through their businesses. This is usually not for genuine business reasons.

Is there a connection between the sport and the business?

This is an important factor. For example, there is a close connection where a rally driver runs a garage which sells and repairs rally cars. The driver may well increase their business because of their rallying activities. The activity is therefore more likely to be for a business purpose. However, if the rally driver runs a sweet shop the same business benefits are unlikely to be gained.

Where does the sporting activity take place?

If it is all over the UK or takes place abroad, as is often the case in car racing or power boat racing, members of the public may not be able to purchase the goods and services which are advertised. For example, a small independent retailer is unlikely to increase trade if their shop is many miles from the racing venue.

Is there extra advertising at the racing venue or in programmes?

Extra advertising will reinforce the argument that the proprietor, partner or director takes part in the sport for business reasons. The advertising should identify the business, the product, and how to make contact with the business.

This could take the form of:

  • a picture of the car or boat appearing on the business stationery; or
  • business gifts such as T-shirts which bear similar motifs.

Reference to the sports activity in a co-ordinated way using a variety of advertising or promotional outlets strengthens the argument that the costs are put to business use.

Does the business name appear on the sporting vehicle, transporter or clothing?

The ruling bodies for some sports do not allow adverts. This makes it hard for a business to argue that taking part in the sport advertises the business.

However, this alone is not sufficient to disallow a claim. There may be quite a lot of supplementary advertising. What the advertising says is important. For example, “J Jones & Co” does not say what the business is or how to contact it.

In some cases the advert is a small sticker put on a helmet or a motor vehicle. To work the advert must be capable of being read at a distance and should not become obscured during the course of the activity.

For companies and partnerships is there a record of a decision to use sporting facilities for advertising?

Some businesses keep records of all decisions reached. If this is the practice a record of a decision to advertise through sport will tend to strengthen the business purpose argument.

HMRC may look at the minutes with extra care where a controlling director or partner seems to have a mainly recreational interest in the activity. In some cases minutes have been produced after HMRC has queried a claim to input tax and when a company felt that minutes might support the business claim.

Can the business produce any evidence of research into the benefits to be gained from the advertising?

Evidence of an objective decision would support the business purpose argument if an independent consultant had advised the business to pursue the sport. The fact that it was recommended by an unconnected third party would also lend support to the argument. Lack of any such research or advice weakens the argument.

Are the benefits of the advertising monitored?

If the advertising is genuinely for business purposes but it does not increase sales it would probably be dropped in favour of another form of advertising. Tribunals have accepted that measuring the success of advertising is difficult but some effort should have been made. Sometimes a business will show HMRC letters from customers saying they made their first business contact at a race meeting or similar event. We have to regard such letters with a degree of caution as it is very difficult to confirm the content.

Is the car or boat an asset of the company?

It may be possible to claim input tax on running and repair costs even if an item is not an asset of the business. It may be that the business has control over the use of the items or can show that it bears the relevant costs (or part of them) for the purpose of its business activity.

What other forms of advertising are there?

Depending on what it does, a lack of advertising might mean a business gets all its new work or sales through recommendations from satisfied customers. You should expect to see some monitoring to see if the sports activity is more effective when a business thinks that advertising in the local press or Yellow Pages has not worked for it.

Has HMRC given a ruling for direct tax purposes?

VAT cannot be claimed simply because the particular expense has been allowed for direct tax purposes. VAT decisions must be based on VAT law. VAT can only be deducted as input tax if it is referable to the making, or intended making, of taxable supplies.

Direct tax law is concerned with income and profits. For direct tax purposes HMRC do not normally accept claims that sporting or recreational expenditure has been incurred for the purposes of a trading activity.

Where, however, it is argued that HMRC have exceptionally allowed such expenditure to be so regarded you should ask the business to produce the relevant evidence. HMRC will take this into account when deciding whether to accept a claim to input tax.

A business may believe that HMRC has accepted the position in respect of direct tax when we have not given a considered decision. Instead we have merely not formally challenged the accounts in which the sporting expenditure appeared.

Could the business cope with an expansion of trade?

A small business may not be able to expand to deal with an increased demand. HMRC will ask for more information if a business argues that the intention of the advertising or promotion is to:

  • increase sales rather than maintain market share; and
  • keep the business name in the public eye.