FUNDRAISING PARTNERSHIPS AND SPONSORSHIPS

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1 FUNDRAISING PARTNERSHIPS AND SPONSORSHIPS Corporate donors support charities in many ways sometimes it is pure altruism and at others there is clearly an element of marketing with the corporate donors expecting to get some form of publicity or other benefit in return for their support. For example, cause related marketing or other benefits to the corporate sponsor. This is perfectly acceptable as long as both parties understand the expectations and also understand that there may be tax ramifications. In practice many innovative means of raising funds can have unplanned tax implications if the arrangements are not properly structured and planned. When considering the matters raised in this section it is important to appreciate that there are two aspects to consider: 1. the tax position of the corporate organisation 2. the tax position of the charity Payments by a business to a charity will only be tax effective if they are made as a Gift Aid payment or they are seen as a genuine business expense that is allowable as a tax deductible. In the section on Gift Aid and companies it was clarified that where the donor receives benefits that fall outside the benefit rules the donation will not qualify for Gift Aid. This means that to qualify as a taxable deduction for the donor the payment should be of the nature that they can be treated as a business expense. Tax law prevents taxpayers deducting expenditure in computing their profits unless the expenditure is incurred wholly and exclusively for the purposes of the trade, profession or vocation. This will usually mean that there should be some real business benefit to the sponsor and the payment must have a genuine commercial objective, for example advertising and publicity for the sponsor or a specific brand or product of the sponsor. This can be achieved by the sponsor's name or logo appearing on promotional material (posters and flyers) or programmes, or through media publicity. Sponsorship payments would normally meet these tests and would usually be allowable in arriving at the profits of a trade or profession except where they are: capital expenditure, expenditure not made wholly and exclusively for business purposes, or expenditure which is specifically disallowed (such as any entertaining expenditure) However, payments relating to advertising or providing publicity services by the charity to the sponsor will usually not be treated as a donation and could be taxable in the hands of the charity. In essence, if a charity in return for some form of support or sponsorship offers publicity for the corporate organisation, then it is quite likely that it could be considered that the charity is trading with the consequent tax implications for the charity. Usually, this means that there will also be VAT chargeable. HMRC s view is that if the payments are made in exchange for something, such as advertising of the sponsor by the charity, the payment is often no longer treated as a 1 of 9

2 pure donation. In some cases what the charity is providing in exchange is purely a mere acknowledgement, in which case the payment can be treated as a donation. This may not be altogether simple and clear. A corporate sponsor might make a very large payment and indeed receive some form of advertising benefit. Even though it may be argued that the benefit is not commensurate with the payment made, case law provides that it is not possible to retrospectively apportion the payment between the elements relating to the advertising service provided and a pure donation. Unless there is a specific price for the benefit (which will bear VAT) and the balance of the payment being totally discretionary (a gift, which will not bear VAT), VAT and direct tax could be due on the whole payment The VAT treatment of sponsorships is different to the direct tax treatment (see section in this document on VAT treatment of sponsorships) Is the payment a donation or a payment for goods or services? When looking at a transaction of this sort the Revenue will examine the substance of the transaction and may conclude that the charity may be selling advertising services. HMRC looks carefully at this and have stated that references to a sponsor which amount to advertisements will cause the payments to be treated as trading income. HMRC will regard a reference to a sponsor as an advertisement if it incorporates any of the following: large and prominent displays of the sponsor's logo, large and prominent displays the sponsor's corporate colours, or a description of the sponsor's products or services. HMRC have explained that just because a sponsor derives good publicity or public relations benefits from payments to charity, does not automatically mean that payments by the sponsor are trading income in the hands of the charity. The key principle is that if the charity does not provide goods or services in return for payment, sponsorship payments will normally have the character of charitable donations rather than trading income in the charity's hands. The fact that the business sponsor takes steps to publicise or exploit the affinity with the charity will not change the treatment of the payments in the hands of the charity, unless the charity also publicises the affinity itself. Similarly, if a charity provides the sponsor with goods or services in exchange for the payment it may be deemed to be trading with attendant tax consequences. Some of the examples provided by the HMRC may seem to be fairly innocuous they include use of the charity's mailing list use of the charity's logo endorsement of the sponsor's products or services links to the sponsor s sales website from the charity s own website exclusive rights to sell goods or services on the charity's premises Use of charity brand or logo Joint ventures can also lead to the taxation of intellectual property, in particular the use of a charity s name and/or logo. The marketing by charities of their name and 2 of 9

3 logo to commercial organisation that then advertise their support for the charity could constitute a trading activity leading to taxable income. It could also be interpreted as a supply of a trademark or sale of copyright. It is unlikely that a provision of a name or logo for a single fundraising event would give rise to tax liability. On the other hand if there is a form of contract governing the use of the charity s name and its provision of promotional services to commercial organisation, then the income may be assessable as trading income and would not be exempt. The rules are not altogether straightforward and HMRC has explained that where the logo came into existence prior to 1 April 2002 a one off payment (received without any deduction of tax) is charged to tax as miscellaneous income and no exemption is available apart from the small trading exemption. There is also tax exemptions for income which meet the criteria of an annual payment and this will apply where a commercial organisation make annual payments solely for the use of a charity's logo. Such arrangements need to be structured carefully to ensure they meet the definition of an annual payment. The organisation making the annual payment has to deduct tax at the basic rate from the payment and the charity can reclaim the tax. However, where the payer is a UK company, payment can be made without the deduction of income tax. The payment must be: applied solely for charitable purposes made under a legal obligation recurring (each year) treated as a pure donation in the hands of the charity For charitable companies, where the logo came into existence on 1 April 2002 or later, A logo is treated as an 'intangible fixed asset'. Non-trading gains on intangible fixed assets received by charitable companies are exempted from tax under as long as the gains are applied charitably. The VAT position is somewhat different and the grant of a right to a business sponsor to use the charity s logo is treated as a supply of taxable services for VAT purposes. (see section below on the VAT implications of sponsorships.) HMRC have clarified that the granting of the right for a sponsor s logo or name to appear in a charity s publication or on their website is a supply of services for VAT purposes. The same principles apply when a charity grants the right to a business sponsor to use the charity s logo. This may seem at odds with the concept discussed earlier that where the charity remains passive and does not provide goods and services in exchange for a payment the payment will usually be treated as a donation. HMRC point out that it is the granting of the right to use the logo that triggers the taxable event for VAT purposes rather than any activity (or lack of it) undertaken by the charity or the size and/or prominence of the logo. 3 of 9

4 Sponsoring a primary purpose trade In tax terms trading involves the provision of goods or services to customers on a commercial basis. Simply because the provision of goods or services for a fee is carried out by a charity or is one-off or occasional does not mean that it will not be treated as trading for tax purposes. The fact that the profits of a trade are to be used for charitable purposes does not mean that there is no trade that could be liable to tax. Some trades are exercised in the course of the carrying out of the primary purposes or charitable objects of the charity. For example: a theatre charity selling tickets for a stage production a charity for a the support of young artists selling their artworks an arts charity charging a fee for attendance at exhibitions an awards ceremony which is seen to be a primary purpose activity where the audience pay to buy a ticket In some cases a sponsor might wish to support such a trade and the question is whether sponsorship receipts from sponsorships of such trades are taxable in the hands of the charity. Prior to the Finance Act 2006 HMRC guidance explained that if the sponsorship payments are no longer treated as a pure donation then they may be treated as: The income of a stand alone trade; Part of the income of a wider trade; and Some other kind of income. If the income was treated as income of a stand alone trade then it was viewed separately from the charity s other income. However, where a payment is viewed as part of a wider trade then the income will be treated as part of the income of that wider trade and the tax position will follow. Therefore, under the old guidance if the corporate donation was essentially for a primary purpose trade such as supporting exhibitions or conferences that further the objects of the charity then the donation was unlikely to be taxable even where the donor received a benefit. This was an important aspect and HMRC s guidance cited the example of a business sponsoring a stage production by a charitable theatre. They explained that the sponsorship payment will be regarded as part of the income of a trade of putting on the stage production, and the income will be exempted from tax along with the other income arising from the primary purpose trade. There appears to have been a change in HMRC s views and their latest guidance published in November 2006 states: Once it has been determined that sponsorship payments are trading income in the charity's hands the next step is to consider whether the sponsorship arrangement falls into the primary purpose or non-primary purpose parts of the charity s trade. 4 of 9

5 It is recognised that where a sponsor s funding is tied to a particular event or project, it may not be practical to confine the charity s response to a mere acknowledgement. However, any arrangement in which the charity's response is on such a scale that it appears to be a main purpose of the donation may be challenged. In such a case, HMRC will want to consider the possibility of non-primary purpose trading by the charity and whether there has been a breach of the donor s benefits limits. HMRC provide two examples that illustrate how they interpret the rules. Example 1 A charitable theatre group s production is sponsored by a local business X. X s logo is placed discreetly within the event programme. An executive of X appears on stage on the final night and is thanked. One sign of moderate size is positioned prominently in the hall stating that the event is sponsored by X. In this case it could not reasonably be argued that a main purpose of the production is advertising X, and there would be no loss of direct tax reliefs for charity or donor. Example 2 An arts organisation s broadcast national awards ceremony is sponsored by a nationally well-known brand Y. The event is named The Y Awards, which brings Y s name up on television frequently in trailers and programme breaks. Y s logo features prominently in the programme. An executive of Y appears on stage and thus on television and is thanked. There are many prominent signs advertising Y in the venue. In this case it could reasonably be argued that a main purpose of the event is advertising Y, and there is the possibility of a loss of direct tax reliefs for charity and donor. This new guidance is significantly more restrictive than the old rules and charities will find themselves having to take care not to expose themselves to tax liabilities. The last sentence in example 2 is worth considering closely and it seems that the concern is that the event is not really being carried out to further the objects of the charity but is seen to be an event to publicise the donor and raise sponsorship income. Use of a trading subsidiary In some cases a charity will use a wholly owned trading company as a vehicle to carry out income generation activities such as the receipt of commercial sponsorship which would be subject to tax if channelled through the subsidiary. Therefore, a commercial sponsor may be asked to make a payment to the trading subsidiary of the charity which will then Gift Aid its profits to the charity. The VAT implications Care must also be taken in considering the VAT treatment of the provision of a charity s name and logo or the provision of publicity to the sponsor in the way discussed above. The HMRC guidance on sponsorship explains Where you receive sponsorship or some other form of support you will normally be making taxable 5 of 9

6 supplies if, in return, you are obliged to provide the sponsor with a significant benefit They have provided some examples and have said that significant benefit might include any of the following: naming an event after the sponsor; displaying the sponsor's company logo or trading name; participating in the sponsor s promotional or advertising activities; allowing the sponsor to use your name or logo; giving free or reduced price tickets; allowing access to special events such as premieres or gala evenings; providing entertainment or hospitality facilities; or giving the sponsor exclusive or priority booking rights. They explain that this list is not exhaustive and there are many other situations in which your sponsor may be receiving tangible benefits. What matters is that the agreement or understanding you have with your sponsor requires you to do something in return. They go on to say You may receive financial or other support in the form of donations or gifts. Provided they are freely given and secure nothing in return for the donor they are outside the scope of VAT. A taxable supply is not created where you provide an insignificant benefit such as a minor acknowledgement of the source of the support. The examples they provide include any of the following: giving a flag or sticker; naming the donor in a list of supporters in a programme or on a notice; naming a building or university chair after the donor; or putting the donor's name on the back of a seat in a theatre. However care must be taken when using the argument that the organisation has not done anything to create a VAT supply. HMRC have explained that the granting of the right for a sponsor s logo or name to appear in a charity s publication or on their website is a supply of services for VAT purposes. It is the granting of the right that triggers the taxable event for VAT purposes rather than any activity (or lack of it) undertaken by the charity or the size and/or prominence of the logo. The same principles apply when a charity grants the right to a business sponsor to use the charity s logo. For the charity this area is fraught with the difficulties of interpretation and HMRC s guidance published in November 2006 appears to be taking a more robust view. It states: Where a sponsor receives any benefits in return for a sponsorship payment all of the payment for the sponsorship is consideration for a taxable business supply for VAT purposes. However it is recognised that there will be situations where the benefit amounts to no more than a mere acknowledgement of support, given gratuitously by the charity to the sponsor and is not directly linked to the payment made by the sponsor. Where this is the case the payments are considered to be a donation and therefore outside the scope of VAT. 6 of 9

7 The guidance then provides examples as noted above. As a consequence charities often include a clause in their sponsorship agreements stating that if VAT was deemed to be chargeable it will be in addition to the net amounts that the corporate may be paying. Events clearly organised and promoted primarily to raise money for the benefit of the charity are exempt from direct tax and VAT if certain conditions apply. (In essence, not more that 15 events of the same kind at the same location can be run in a year). Sponsorship income received from a sponsor will not be VAT-able or liable to direct tax ( this is covered by extra statutory concession ESCC4) if it is received to sponsor an exempt fundraising event. (see section on fundraising events) Sometimes charging VAT can work to the charity s advantage as it may increase the VAT the charity is able to recover on its own costs. In most cases the VAT charged to the commercial organisation will not be an additional cost as the organisation should be able to recover it. However some organisations such as banks may not be able to recover the VAT. Segregating the business sponsorship from the donation Many charities have dealt with this by separating the donation from any payment for the benefit. Thus minimising the element subject to tax. This is possible if the donation payment is entirely separate from the sponsorship payment. It must be clear that any benefits that the sponsor receives are not conditional on the making of the donation or gift. This option must be used with care. Under VAT law apportionment of single payments in this way is only allowed for supplies of goods or services. Therefore since a donation is not consideration for a supply for VAT purposes a single payment that is designed to be both a payment for a business sponsorship and a donation cannot be apportioned. In such a case VAT will be due on the whole of the payment. The payments can only be apportioned when there is a clearly identifiable consideration for a supply for VAT purposes and a separate clearly identifiable donation. This means that is should be clear from the outset exactly what the intention is. Where there is a donation and separate payment for a benefit it is usually advisable for a written agreement that specifies the separate elements. HMRC explain that if a donation is given in addition to the sponsorship payment this may be excluded from the taxable amount, provided that it is clear from any agreement that the donation is entirely separate from the sponsorship or the use of a logo and is freely given. If the donation is freely given but on condition that a further benefit is provided, it is further consideration for a taxable supply for VAT purposes. In certain circumstances charity law requires a written agreement between the commercial organisation and the charity. (See guidance re agreements below). It is generally good practice to have a funding or sponsorship agreement even where it is not required by law as this can be evidence of the intention of both parties. If, before payment is made by the business sponsor, an agreement is in place, the tax treatment of the payment will be determined by the wording of the agreement. If HMRC believe that the agreement is not being adhered they will base their tax treatment of the payments on the particular facts of the case. 7 of 9

8 Funding and sponsorship agreements In addition to the tax aspects there are important charity law issues to consider and in their published guidance the Charity Commission has stated Commercial partnerships exist between charities and companies for mutual benefit. In a commercial partnership a company uses a charity s name in association with its own in order to generate a specific financial or other benefit, part of which is given to, or applied for the benefit of the charity. As an asset, the name of a charity can be used to further the overall interests of the organisation; commercial participation is a valid way of achieving this. They go on to say Every charity has a duty to ensure that it protects its name and reputation when it gets involved in commercial partnerships. The law does go some way to embracing and protecting charities, but trustees and charity staff should remain vigilant and give full regard to recommended good practice and professional codes of conduct. Charities should recognise that their name is a valuable asset and that, in a commercial partnership, association with a charity can generate substantial benefits for the company. Accordingly, charities need to take steps to protect, and where appropriate take professional advice on valuing their name. In addition, Part II of the Charities Act 1992 lays down requirements that must be followed when a charity enters into arrangements with professional fundraisers and commercial participators. This is highlighted in the many inquiry reports published by the Charity Commission. In most cases these relate to inadequate explanation of the relationship between the charity and the commercial organisation. Section 58 of the Charities Act explains that a commercial participator is: any person who carries on for gain a business which is not a fund-raising business but who in the course of that business engages in any promotional venture (ie any advertising or sales campaign or any other venture undertaken for promotional purposes) in the course of which it is represented that contributions are to be given to or applied for the benefit of a charity. For example, if a supermarket sells products and states that a certain element will go to a charity it is acting as a commercial participator. Where a commercial participator makes any representation that contributions are to be given for the benefit of a charitable institution, in circumstances such as this, there is a legal requirement that the representation shall contain a statement clearly indicating, the name of the institution concerned, and what sums by way of donations in connection with the sale of goods are to be given to the charity. 8 of 9

9 There is also a requirement for a written agreement between the charity and commercial participator and there are specific issues that must be covered by such an agreement. In conclusion, this area is one where there are many opportunities and also pitfalls. It is therefore important to plan early and understand the substance and the legal form of the arrangements. Many of these arrangements are set up by fundraisers who do not have much knowledge of the tax rules and it is important that those that do, for example individuals from the finance department are involved at an early stage. Pesh Framjee Updated March 2007 Pesh Framjee, is Head of the Unit serving Non Profit Organisations at Deloitte & Touche LLP, the lead provider of audit and related services to charities in the UK. He is Special Advisor to the Charity Finance Directors Group. He is also a member of the Charity Commission s SORP Review Committee. This paper is written in general terms and is not intended to be comprehensive. No responsibility attaches to the author or the firm and before taking any decisions on the basis of the suggestions and indications given in this paper you should consult your professional advisers. Deloitte provides guidance notes, free seminars and other material of relevance to non profit organisation. To access this and to be put on our mailing list see 9 of 9