Sponsorship & the Tax man

[FilW]

If the unthinkable happens and I convince some local business' that there are marketing opportunities to be had from sponsoring a guy that never finishes a race, how do they account for their generous contribution.
I assume they will need some form of invoice to try and sneak past their accountant, but who from and what should it detail.
If the invoice comes from me will it count as "earned" income and would I therefore be liable for tax on it?
If I get them to pay the entry for example would they get an invoice from the organising club and would the tax man see it as an allowable marketing expense.
The chances of sponsorship are slim but I'd like to be prepared for any questions.
Does anyone have any experience of this?

Cheers.

[Draven]

I'm looking into the very same question for myself, not easy to find out either.
I'll let you know if I find anything out. In the mean time I'm sure one of the racers here will have the low down.

[Peter Horsman]

Morning.

1. I suspect that the HMRC (the Inland Revenue as was) will regard you as being self-employed, being in the business of supplying advertising etc services. You should produce an invoice for your sponsor setting out what you are supplying, for what period and so on.

2. Any receipts you are lucky enough to get will count as income of your business, but I doubt you will be showing any profits (and therefore taxable) because, if you share my experience of racing, you will have an absolute pile of expenses to set off against it. But keep a record of those expenses.

There then may occur the whole question of to what extent you are racing for enjoyment or to keep the sponsors happy. Any expenses not incurred wholly and exclusively for your business will not be deductible (theoretically at all) from your receipts. In practice, I suspect that you will not find difficulty here, but you will be most unlikely to be allowed to claim your losses against your other taxable income as you might with losses on perhaps more genuine trades.

3. If your sponsorship income is more than c£60k (!), then VAT starts to raise its ugly head, but that really would be wishful thinking......

[NWFF 37]

3. If your sponsorship income is more than c£60k (!), then VAT starts to raise its ugly head, but that really would be wishful thinking......[/QUOTE]


True, but you can always then claim the vat back, fuel, tyres, hotel, food etc, youd be surprised how much it all adds up to!! but you would have to have a business bank account and be vat registered which isnt really a problem, as already stated, your business would be selling advertising space.

[Peter Horsman]

I agree with that (assuming that the sponsor can reclaim his input VAT on expenses) - in fact of course one can voluntarily register for VAT any business making taxable supplies irrespective of the level of turnover. You would not have to have a (separate) bank account. But the issue might then be to what extent HMRC agree that you truly are making taxable supplies if you are making huge VAT reclaims every month/quarter. That might be an issue I would personally wish to avoid.

[Al Weyman]

best thing surely is to let your sponsor pay directly for parts, petrol, entry fees etc and get the invoices made out to him so he can reclaim the vat etc. You would then be out of the picture with the taxman (legally) unless you are talking mega money here.

[FilW]

Originally Posted by Al Weyman

best thing surely is to let your sponsor pay directly for parts, petrol, entry fees etc and get the invoices made out to him so he can reclaim the vat etc. You would then be out of the picture with the taxman (legally) unless you are talking mega money here.

I think the sponsor would still have to justify the expense as "allowable"
Fuel and parts is fairly easy to justify but an invoice or 3 from the 750MC for entry fees might be harder to get past our friends at the revenue.

If I raised an invoice for "Advertising" I would then have a started a "business" then I would have to justify myself to the tax man. I could see some raised eyebrows at this.

I am self employed and already know from experience that the taxman doesn't like unexplained income.

Is there anything to be read about it anywhere

[davyboy]

You could set up a company which would operate the racing activities. This would be in receipt of the sponsorship [its sales] and any expenses incurred in carrying out the racing activities would be its costs. Assuming nobody's employed [particularly not the driver], then surely the company will be liable for corporation tax on whatever profits it makes. I'm sure in most cases, the profit would be zero or below.

It doesn't cost a great deal to set up and run a limited company and provided turnover is below GBP60K, the dreaded VATman's not involved either. Its always best to distance yourself and your own personal tax situation from your racing [if you're lucky enough to get thousands in sponsorship]. If you accept the sponsorship cash yourself, it must be classified as additional income and reported to HM Customs and Revenue.

[Peter Horsman]

My advice is definately not to set yourself up as a limited company, There are far too many taxable issues which could go sour. All the benefits in kind legislation (since you or an associated person would be an actual or a shadow director), overdrawn current accounts, how to extract car from company once it is in there (you could find yourself paying tax on any increase in value of the car even tho' it is (broadly) exempt. It's a minefield. And then there's the administration, dealing with Companies House, Annual Returns, corporation tax returns, issue of employment-related securities returns etc etc.

Nope. It's a simple personal profit and loss account for me!

BTW, if your sponsor pays your costs that in practice should be ok because whilst theoretically it is your income, there will be equal and opposite expenses to set off against it. Just keep the records, though. The sponsor should be ok so long as he can demonstrate that the reason why he incurred the expenditure was for (I assume) advertising reasons. Just because his 'bill' doesn't have advertising on it should not be an issue.

[davyboy]

Originally Posted by Peter Horsman

My advice is definately not to set yourself up as a limited company, There are far too many taxable issues which could go sour. All the benefits in kind legislation (since you or an associated person would be an actual or a shadow director), overdrawn current accounts, how to extract car from company once it is in there (you could find yourself paying tax on any increase in value of the car even tho' it is (broadly) exempt. It's a minefield. And then there's the administration, dealing with Companies House, Annual Returns, corporation tax returns, issue of employment-related securities returns etc etc.
Nope. It's a simple personal profit and loss account for me!

Have you done it already ? I'm running several limited companies right now, have been for a number of years and its really very straightforward. There's a lot more you can do when you separate yourself from the activity.

o You do not need to do anything with employees [i.e. returns, benefits in kind etc...] as there won't be any... unless you're planning to set up a team of some sort.
o An accountant will be able to prepare a simplified set of accounts and deal with your corporate tax return, companies house annual return etc... for around GBP250-GBP300 per year.
o The car need not be owned by the company [unless you want it to specifically] and in most cases it will depreciate rather than appreciate so will definitely not attract capital gains tax.

Originally Posted by Peter Horsman

BTW, if your sponsor pays your costs that in practice should be ok because whilst theoretically it is your income, there will be equal and opposite expenses to set off against it. Just keep the records, though. The sponsor should be ok so long as he can demonstrate that the reason why he incurred the expenditure was for (I assume) advertising reasons. Just because his 'bill' doesn't have advertising on it should not be an issue.

Its far more professional and effective to take a proposal to a sponsor based on what they will gain from backing you financially and have them pay you a lump sum, or set of lump sums which they can book as advertising and marketing in their own P+L. Sending them invoices on a piecemeal basis for sets of tyres, suspension arms, wing end-plates etc... all of which their accountants/auditors will be unable to properly classify, is not really a practical thing to do. Also, what happens if you're lucky enough to have several sponsors... who pays what.

Sorry Peter... I don't wanna sound antagonistic... I'm just trying to help people get around a clear tax issue while being able to maintain a professional and complication-free relationship with their sponsor.

[Redracer77]

I think Davyboy is correct. I have a few sponsors and they just paid the team direct last year. This year I have set up a team and also a team bank account. As long as you don't make a profit you should not have any trouble. If you made a profit and paid yourself either a wage or a dividend then you would have to pay tax. Having a racing account keeps everything out in the open and clear if the tax man does come a knocking

[Tracey]

I am currently doing a Tax Technician's course, and I know we have discussed something simillar as the course tutor receives payments for running a website as a hobby. I will ask him about this scenario in class next week, and let you know the outcome - hopefully it will be good news!

[Just Do It!]

I don't know about the laws for you geezers, but down here in New Zealand, there are numerous ways to do it.

You can put all your tools and race cars and trailers/transporters into a holding company - that is, a company that owns fixed assets. That way you can claim depreciation when assets are sold out of it and VAT/GST on purchases that go into it.

You would set up another company that was the operating company, with its own bank account, and this would be the day-to-day trading entity that would invoice for sponsorship, hospitality, ride days, etc that a motorsport entity may offer to sponsors, friends, supporters, and fans.
It also allows you to claim expenses - business cards, mobile phone, all racing consumables, accommodation, fuel for haulage vehicle, and a whole raft of expenses.
Usually this company will never make a profit and as such you will be able claim back VAT/GST on expenses as they will usually exceed income, thus allowing you to spend VAT on racing itself. Cunning indeed.

Find a good accountant, and perhaps it may be worth ringing a couple of bigger teams in your area and asking who their accountant is. A few pounds of advice could bring many pounds in savings and additional racing budget.

[FilW]

In my case the sums are quite small so I just want to keep it simple. I think the easiest way (assuming I can find any sponsors) is to get them to pay direct for certain things, perhaps to an agreed value, like fuel or parts that can have a non specific invoice making it easier for them to slip it past their accountant.

Now all I have to do is find some sponsors, that should be easy......

[Al Weyman]

Easiest way FilW, ask them to pay you in cash!

[davyboy]

Originally Posted by Al Weyman

Easiest way FilW, ask them to pay you in cash!

Al, if its a substantial amount of cash, then the sponsor will need to record it as something other than 'petty cash' and the tax man may come a knocking on you if/when he examines your sponsors accounts. The damn treasury have covered pretty much every loophole unfortunately... still you can relax in the knowledge and comfort of what wonderful things they do with your tax payments....NOT !

[Al Weyman]

I was joking honest, as someone who gave up the fruitless quest for sponsorship many years ago. I just promote my own little company these days.

[Peter Horsman]

The key is to keep it simple and proportionate. If it's to be serious sponsorship, then clearly a proper proposal involving lump sums is correct. But the point I was clearly making is that I don't think that Al W will be heading for trouble if he keeps his records. I would think that RedRacer has the right idea. Keep well clear of companies and keep a record of income and expenses. Just Do It seems to have an ideal system for Williams!

I don't know about Tax Technicians (well, I do actually and they are good - I sit on their Council), but I do know a bit about tax. I head up the tax practice of a City practice.......

[Tracey]

I asked my lecturer about this subject. His response was any sponsorship income contributes towards your costs, and probably won't exceed your total expenses. If your racing is just a hobby, and therefore is an activity not undertaken with a view to a profit, there is no tax liability.

He did suggest that you contact Her Majesty's Revenue and Customs and get this in writing however.

Hope this helps.

[Peter Mallett]

We used to do it thus:

All entries woukld be paid by the sponsor directly.

Fuel, tyres etc. would be bought as and when required by the sponsor.
All I did was provide the car and decals.

But as has been said, if you are lucky enough then open a separate account and keep all receipts and records.

[Al Weyman]

Thats what I was getting at Peter, seems logical to me and why can't the sponsor claim for the entry fees on his advertising budget, I see no problem with that.

[Craig NOVA]

Originally Posted by Peter Horsman

Morning.

1. I suspect that the HMRC (the Inland Revenue as was) will regard you as being self-employed, being in the business of supplying advertising etc services. You should produce an invoice for your sponsor setting out what you are supplying, for what period and so on.

2. Any receipts you are lucky enough to get will count as income of your business, but I doubt you will be showing any profits (and therefore taxable) because, if you share my experience of racing, you will have an absolute pile of expenses to set off against it. But keep a record of those expenses.

There then may occur the whole question of to what extent you are racing for enjoyment or to keep the sponsors happy. Any expenses not incurred wholly and exclusively for your business will not be deductible (theoretically at all) from your receipts. In practice, I suspect that you will not find difficulty here, but you will be most unlikely to be allowed to claim your losses against your other taxable income as you might with losses on perhaps more genuine trades.

3. If your sponsorship income is more than c£60k (!), then VAT starts to raise its ugly head, but that really would be wishful thinking......

I know a number of people who have registered as self employed, and made masive losses on providing advertising through sponsorship of racing cars/bikes -these losses have then been ofset against other earned income and a resulting tax refund!! Nice of Mr Tax man to contribute to the racing budget!

[Al Weyman]

Then what hapens when said Taxman asks them to substansiate their losses and also asks the simple question, how do they survive day to day, how do they pay there rent or mortgage for example or do they go on the dole to ligitimise that? As someone who has been selfemployed for nearly 40 years I think they will open a hornets nest if they ever get investigated.

May get away with it once short term but I would wait for a very heavy weight to fall from above in the not too distant future. Also as the taxman's money comes from us tax payers I don't really like the idea of paying for someone else's hobby as I have enough trouble paying for my own! :-)

[davyboy]

Originally Posted by Al Weyman

Then what hapens when said Taxman asks them to substansiate their losses and also asks the simple question, how do they survive day to day, how do they pay there rent or mortgage for example or do they go on the dole to ligitimise that? As someone who has been selfemployed for nearly 40 years I think they will open a hornets nest if they ever get investigated.

May get away with it once short term but I would wait for a very heavy weight to fall from above in the not too distant future. Also as the taxman's money comes from us tax payers I don't really like the idea of paying for someone else's hobby as I have enough trouble paying for my own! :-)

Al you're completely right. This won't wash at all with the taxman and for the safety of these people doing it... I would recommend that they stop asap. If HMRC investigates [and they do], at best these people will have a hefty bill to pay [with interest] and at worst they could be charged with deception.

[Peter Horsman]

In order to claim 'sideways relief' against other income, the loss-making business must be carried on a commercial basis and with a view to the realisation of profits. Onus of proof (as usual) is on the taxpayer. Claims made which knowingly do not pass this test are fraudulent.