Philanthropy in business is always a good thing with many small and medium enterprises viewing charity donations and sponsorship as a way of giving back to the people and the areas in which they are based.
There are always benefits for the small business owner. For example, helping out charities and sports clubs helps to raise the profile of the business, providing marketing opportunities, as well as enhancing the reputation of the company. Often the benefits will outweigh the actual costs and the status of the company (and its owner) is elevated in the eyes of the local community.
There are however some financial paybacks that companies can claim back as tax incentives for their support of charities and other kinds of clubs.
Cash Donations for Charities and Sports Teams
As a business owner you are able to offset any cash donation that you give to a charity or a Community Amateur Sports Club (CASC) against your corporation tax. This means that you can deduct the total of moneys given before calculating your corporate tax obligations. For instance, if your gross annual profits are £50,000 and you have donated £10,000 to a local sports team for equipment, you will pay corporation tax on £40,000 and not on the total amount.
There are some specific rules that you must follow, for example the cash cannot be a ‘loan’ or given in exchange for company services. HMRC is also specific about the value of what can be received in return for cash donations. Freebies such as tickets for events are only allowed in exchange for the cash, as long as they fall below the value amounts set out below:
|Donation amount||Maximum value of benefit|
|Up to £100||25% of the donation|
|£101 – £1,000||£25|
|£1,001 and over||5% of the donation (up to a maximum of £2,500)|
It is important to point out that you will need evidence to prove that the donation has actually been made. With no receipt or acknowledgement, HMRC are likely to question any claims that are made in respect of corporate donations. Asking for a receipt can be a little awkward after the fact, so make sure you are clear in the first instance about the terms and conditions that you agree with the recipient.
Equipment Donations and Capital Allowances
Small Businesses can donate items such as furniture, IT equipment, or even vehicles to charity and use them as part of their capital allowance. If the items are brand new, then the company can claim the full cost of the item as purchased.
If the items are second hand and used, then you can claim the full market value back. The key is knowing how much the items would be worth on the open market and providing evidence to HMRC to prove that you would have been able to get that price had you chosen to sell them.
Land, Property and Share Donations
There are tax implications associated with charity donations of land, property, or shares that you may own. Firstly, when you donate assets, you are not making any profits from the transaction which makes you exempt from capital gains tax. Secondly you can deduct the value of the gift to a charity from your overall tax burden, resulting in a tax reduction for that particular year.
The rules are slightly different when it comes to sports clubs. You can donate or sell assets to a CASC without paying capital gains tax, although you won’t be able to offset the value of the land against your corporate tax burden. You should also be aware that shares in your own business are exempted under these rules.
Staff Volunteering and Charity Work
Many companies see benefits from allowing their staff to undertake charity or voluntary work as part of a ‘wellbeing’ strategy or as a way to give back to the community. Not every small business owner realises that there are certain situations in which that benefit in kind can translate into a benefit in tax for their business.
If a member of staff is seconded to a charity for part or all of the period of their contract, the business is able to deduct the cost of wages and business expenses from their taxable profits. This includes the costs associated with any employee who undertakes ‘volunteering’ activities during their working hours. Many companies now offer paid volunteering opportunities for their staff.
Sponsorship of Events, Teams, and Activities
Sponsorship can be viewed as a legitimate business expense while offering businesses the opportunity to help out their local charities.
HMRC carries guidance on what can be considered as business sponsorship. You need to be clear about the purpose and benefit of your sponsorship activity if you intend to claim any tax benefits. Sometimes the lines between donation and sponsorship get a little blurred so it is important to know the difference.
Ask yourself the following questions before you start and if the answer is ‘yes’ to all of them, you are likely to be able to offset the total cost against your corporation tax.
- Is your sponsorship being used to promote the business?
- Is the purpose of the sponsorship purely for business?
- Are the benefits purely for business purposes?
Sponsorship is considered to be just another form of marketing that can be used to benefit both your company and the event/activity/club that you are sponsoring.
Be wary when ‘sponsoring’ individuals or teams with whom you have a direct connection (family members in particular can be problematic in terms of tax). HMRC can reject this kind of sponsorship if they feel is not a legitimate use of corporate finances. We would always advise any business owner to take professional advice about what is and isn’t allowed.
Remember that given to charity is good for the soul and should never be seen as a simple business transaction. If you are looking to get something back, you should keep detailed records of all your activities and get agreements in writing between all the parties concerned about exactly what is expected in exchange.
The “small text” in tax law regarding corporate philanthropy is a little involved so it is best to tread carefully and get professional advice well before hand. Call us on 01473 744 700 or email us at firstname.lastname@example.org and we can advise you on this – as well as any other accountancy issues or requirements you may have .