A local business offers your charity money. Before you accept, one question decides most of what follows: what does the business get back? If the answer is nothing beyond a thank you, HMRC will normally treat the payment as a donation. If your charity gives something in return – advertising, use of your logo, access to your supporters – the payment may be trading income, and it may carry VAT. What you agree, and whether you write it down before the money moves, decides which.
If sponsorship is part of a wider look at where your income comes from, you can talk it through on a free call about your marketing and fundraising strategy.
What counts as sponsorship, and when is it a donation instead?
HMRC sets out its position in its guidance on trading and business activities. Where a charity provides no goods or services in return for the payment, sponsorship money normally has the character of a donation in the charity’s hands. The business publicising its support of you does not change that on its own. What changes it is your charity publicising the link as well.
That is where the line sits, and it is finer than it sounds. HMRC distinguishes between acknowledging a sponsor and advertising for one. An acknowledgement is fine. An advertisement makes the payment trading income. HMRC treats a reference to a sponsor as an advertisement if it involves large and prominent display of the sponsor’s logo, large and prominent display of their corporate colours, or any description of their products and services.
The illustration HMRC gives is useful. A company name and logo tucked into the corner of a project report is an acknowledgement. The same name and logo displayed substantially and widely throughout the report may be advertising, and the payment behind it may then be trading income.
Several other things push a payment towards trading income:
- Use of your mailing list, which raises data protection questions of its own before it raises tax ones.
- Use of your logo by the business.
- Your charity endorsing the sponsor’s products or services.
- Links from your website to the sponsor’s sales pages.
- Exclusive rights to sell goods or services on your premises.
None of these is prohibited. Each simply changes what the money is.
Why that difference matters for tax and VAT
For direct tax, sponsorship that counts as trading income is non-charitable trading, and profits from non-charitable trading are taxable unless an exemption applies. The one most small charities rely on is the small trading exemption, and it works off your total income. Every charity gets at least £8,000 of non-charitable trading turnover. Above that, the allowance is a quarter of your total income, capped at £80,000. So a charity with income under £32,000 has the £8,000 floor, a charity on £120,000 has £30,000 to work with, and anything over £320,000 of income is held at the £80,000 ceiling.
The limit is cumulative. It covers all your non-charitable trading together, not sponsorship alone, so the branded mugs, the Christmas cards and the sponsored programme report share the same headroom. A sponsorship deal that looks comfortably inside the allowance on its own can still push you over it once everything else is counted.
The limit is cumulative. It covers all your non-charitable trading together, not sponsorship alone, so the branded mugs, the Christmas cards and the sponsored programme report share the same headroom. A charity with £120,000 of income has £30,000 to work with across everything.
VAT runs on a different test, and this catches people out. If your charity is obliged to provide the sponsor with a significant benefit in return, you are making a taxable supply. A simple acknowledgement of support is not. But granting a business the right to use your name and logo is a taxable supply regardless of how small or discreet the logo turns out to be; it is the granting of the right that counts, not the prominence.
Sponsorship is usually the point where a small charity discovers its income has been recorded loosely for years. If you want a second pair of eyes on an offer that is currently on the table, or on the way income is classified across the whole charity, a free Charity Consultation is the quickest way to get a view.
One thing sponsorship never is: a Gift Aid claim for your charity. Gift Aid repayments are for gifts from individual taxpayers, subject to HMRC’s limits on what the donor can receive in return. When a company gives to a charity, the relief runs the other way: the company deducts the donation from its own profits for corporation tax, and there is nothing for you to reclaim. This catches people out because HMRC calls that arrangement company Gift Aid, which sounds like the scheme you already use and is not. Worth noting too that a sole trader or partner giving from personal money is an individual for these purposes, so that gift can be Gift Aided – it is the company structure that rules it out, not the fact that someone runs a business. If your records show reclaimable Gift Aid against a corporate payment, that is a claim you cannot support, and it belongs with the other Gift Aid mistakes that surface in HMRC compliance checks.
What to check about the business before you say yes
Trustees have to decide that the arrangement is in the charity’s interests, which means knowing who you are associating with. Look at what the company does, who owns it, and whether it has anything in its recent history that would embarrass you if a supporter found it in ten minutes.
The harder question is what happens later. A sponsor whose reputation collapses in year two of a three-year deal becomes your problem, and the time to agree how you would exit is before you need to. Put a termination route in writing, and make sure it works both ways.
Also settle scope early. Sponsors often ask for more than was agreed once the relationship warms up: a stall at an event, a speaker slot, a mention in a newsletter, the supporter list. Each addition may move the payment further into trading territory, and each one is easier to decline if the original agreement says what is included.
What the written agreement needs to cover
At minimum: who the parties are, how much is being paid and when, exactly what your charity provides in return, what it does not provide, who signs off any use of your logo or theirs, how long the arrangement runs, how either side ends it, and how complaints are handled.
There is a tax reason to do this properly rather than by email. Where a commercial participator agreement is in place before the payment is made, HMRC has said the tax treatment of that payment is determined by the wording of the agreement. Without one, the treatment is worked out afterwards on the facts, by someone who was not in the room.
When the business is fundraising on your behalf
A different set of rules applies when the company promotes its own goods or services on the basis that some of the proceeds come to you. “10p from every coffee this month goes to the local hospice” is not sponsorship. It makes the business a commercial participator, defined in section 58 of the Charities Act 1992.
That triggers legal requirements. A written agreement must be in place before the promotion begins, not after. The Charitable Institutions (Fund-Raising) Regulations 1994 set out what it has to contain, including a description of the contribution the business will make and the circumstances in which it will be made, how much you will receive and how that figure is calculated, and the term and termination arrangements. In England and Wales, section 59 of the Charities Act 1992 adds more: review procedures, how the business will protect vulnerable people from undue pressure, and how you will monitor that it is keeping to the agreement.
The company also has to make a solicitation statement telling customers how your charity benefits. Getting that wrong is a compliance failure that shows up in public, on packaging or at a till. The Code of Fundraising Practice sets the standards for these partnerships in full.
Who approves it, and what the board needs to see
Sponsorship is a trustee decision, and the minute should show the decision and the reasoning, not just the outcome. If a trustee has any connection to the business, that needs declaring, and they should take no part in the decision.
Two recording questions follow. First, is the money restricted or unrestricted? A sponsor funding a named programme has almost certainly restricted it, and the distinction between restricted, unrestricted and designated funds decides what you can lawfully do with it. Second, if the support arrives as goods, services or staff time rather than cash, that is in-kind support, and it has its own valuation and reporting rules.
Sponsorship that fits your purposes and your reputation is worth having. Sponsorship agreed verbally, recorded as a donation, and reclassified two years later by an accountant is a different kind of income altogether.
This article is general information for UK charities, not advice on any specific arrangement. Sponsorship that involves significant sums, VAT registration, or an ongoing commercial relationship should be checked with a charity-friendly accountant or solicitor before you sign. An hour with someone qualified is rarely wasted on questions like this.
If you want the fundraising strategy underneath this settled first – what you are raising money for, which sources you should be building, and what a business would actually be sponsoring – that is what a one-off marketing and fundraising project is for.
