How to make sure your LLP sponsorship costs receive tax relief

Marketing expenditure

For your expense to be tax deductible as a marketing expense, the cost must be incurred wholly and exclusively for the benefit of the trade. This will often involve the donee promoting and advertising the donor’s brand for a financial investment.

This point needs to be considered carefully: the expense will not be deductible for tax purposes if there’s a duality of purpose associated with the sponsorship. This could take a few different forms such as:

• If one of the business proprietors is receiving a personal benefit from the sponsorship.
• If one of the business proprietors is involved with the sponsored activity or business.
• If the sponsored individual or one of the individuals in the sponsored business has a close connection to one of the business proprietors.

A common example where this is the case is when a business owner sponsors their child’s sports team, rather than another organisation or event better placed to market their product or brand. Instances like this don’t always mean the expense is disallowed for tax purposes, but it’ll be a matter of whether the sponsorship was made wholly and exclusively for the benefit of the trade.

A commercial sponsorship will often include a negotiation, have an identifiable material benefit for the firm, and the donor will consider various different options before finalising a particular deal. You should therefore look at each transaction individually, in order to assess whether there’s a duality of purpose, particularly if large sums of money are involved.

Gift Aid Donation

Instead of paying for a marketing cost, your business could donate to charity. If the expense qualifies as a donation under Gift Aid, the donation will be disallowed in the LLP Tax Return, however relief is available in each respective member’s personal Tax Return. 

You can obtain relief by extending the amount on which each member is taxed at the basic rate (20%) by the gross amount of each member’s donation. For example, a gross donation of £1,000, including the basic rate tax the charity will claim, will extend the individual’s basic rate band of £37,700 currently in the 2020/21 tax year to £38,700. If the individual is a higher rate taxpayer, this will result in tax relief being obtained of £200, and if the individual is an additional rate taxpayer, relief of £250. 

Gift Aid donations will be particularly appealing to those members who have taxable profits between £100,000 and £125,140 in the 2021/22 tax year, where the member’s personal allowance will begin to be restricted. This is due to donations allowing the member to obtain tax relief at 60%, due to the clawback of their personal allowance as well as the higher rate tax relief.