How to claim clarity and sponsorship expenses via your ltd company

There’s a lot to be said for making a charitable donation or sponsoring a local event or individual through your limited company.

But how are such outgoings treated for tax purposes?

Naturally, a donation or sponsorship can help and support the organisation or person in question.

Your company may also benefit from associating itself with a worthwhile cause (even if this is simply an accidental by-product!)

However, before you arrange a bank transfer or sign any cheques, make sure you understand how to account for this expenditure so that you get all the tax relief you’re entitled to while at the same time complying with HMRC rules.

In this article, Michael McCullion, Managing Director of BI Accountancy, explains how charitable donations and sponsorship arrangements made through a limited company are treated for tax purposes, and what relief may be available.

Benefits of making a personal donation

Before considering donating to a charity through your limited company, consider whether the cause is appropriate and whether the sums involved aren’t too large; you may want to make a personal donation instead.

You could donate as an individual and claim some tax relief by using Gift Aid. This allows the charity to reclaim basic-rate tax, meaning your net donation becomes gross.

Just remember to make sure you’ve paid enough tax to cover any sum the charity claims back from HMRC; otherwise, you’ll have to pay HMRC the difference.

Donating via your company

A limited company does not use Gift Aid. Instead, qualifying charitable donations are deducted when calculating the company’s taxable profits for Corporation Tax purposes.

There are several ways you can donate through your limited company. These include:

• Money, typically in the form of a cheque (some companies use a giant cheque and pose for a photograph with the charity to be sent to local media outlets for PR purposes) or bank transfer.
• Trading stock or equipment your company produces, or you buy to donate to the charitable organisation.
• By making a gift of land, property or shares in another company.
• Through sponsorship (see below) of a single event or for a season via regular payments.

How to account for donations

If you donate money to a charity, you can normally deduct the value of a qualifying charitable donation from your company’s profits and pay less Corporation Tax.

However, you can only claim tax relief if your donation has none of the following conditions attached:

• The donation is in effect a loan that the charity will have to repay to your company.
• The cash donation is in return for a pledge from the charity to purchase property from your company or from anyone associated with the company.
• The donation is in the form of a dividend or distribution of company profits.

In addition, any benefit the company receives in return for the donated money must be within HMRC’s limits:

• For donations up to £100, the maximum benefit is 25% of the donation.
• For donations between £101 and £1,000, the maximum benefit is £25.
• For donations over £1,000, the maximum benefit is 5% of the donation, subject to an overall maximum benefit of £2,500.

There are further rules where the benefits received exceed these limits, so check HMRC’s guidance on company charitable donations if this applies.

Qualifying charitable donations can reduce the company’s taxable profits to zero, but they cannot create or increase a trading loss.

Donations of trading stock or equipment

If you decide to donate trading stock (items you make or sell) to a charity, special tax rules apply and relief may be available.

The VAT treatment also depends on what is donated and what the charity does with it. In particular, different rules can apply where goods are donated for a charity to sell, hire out or export.

You can read the current rules in HMRC’s guidance on donating goods and equipment.

Relief may also be available where your company gives qualifying equipment to a charity, although the precise treatment depends on the asset and circumstances.

Sponsorship

Sponsorship is different from making a charitable donation because your company usually receives something in return for its financial support.

To qualify as a business expense, the sponsorship should provide a genuine commercial benefit to your company and meet the normal rules for deducting business expenditure.

This can include using the charity’s logo on your company’s branding or printed material and/or the charity publicly endorsing or supporting your goods or services.

In effect, genuine sponsorship is treated more like advertising or marketing expenditure than a charitable gift.

HMRC applies conditions to sponsorship and what qualifies as a legitimate business expense.

See HMRC’s guidance for more information.

Before you make a large donation to a charity or sponsor a local organisation, we recommend you speak to your accountant first to take full advantage of any tax relief.

Return to our complete guide to limited company expenses.