Tax implications of sponsoring your child's racing career
This is an article written by James Taylor, Tax Manager at Saffery Champness LLP. It’s important to us here at Racing Mentor that you’re getting accurate information on a variety of subjects that will affect you as a driver. This is the second in a series of articles on UK tax for racing drivers.
In my first article for Racing Mentor, I covered the basic tax implications for a racing driver who is starting to receive prize money and sponsorship income. During the early stages of a driver’s career, it is a common occurrence for parents, grandparents, and other family members to contribute to the racing fund and, usually, this process does not have any tax implications. However, there are a few points to consider that I have discussed below.
Inheritance Tax and Gifts
Inheritance tax is usually only paid when an individual dies and leaves their ‘estate’ to anybody other than their spouse or charity. However, certain lifetime gifts can trigger a ‘potentially exempt transfer’, also known as a PET.
Gifts of £3,000 per year are exempt but any amounts over this limit gifted to fund a child’s hobby or amateur career could be considered a PET by HMRC. Should the donor then die within seven years of the gift, the PET will become a chargeable transfer and an inheritance tax charge could become payable.
If gifts are made out of the donor’s ‘surplus income’ and they can maintain their usual standard of living without these funds, the gifts can be considered an exempt transfer. Detailed records should be kept and the gifts must be made at regular intervals (e.g. monthly).
Gifts to under-18s to help with living costs are also exempt.
Income Tax
If payments are made to a racing driver from their family in return for advertising or some other form of benefit, this will be treated as sponsorship income and will form part of the driver’s chargeable income for income tax purposes. See the previous article, linked above, for more information on how to handle this.
If they complete accounts or file a tax return, this income should be reported accordingly. It is unlikely that there will be any expenses to deduct against any such income, as the agreement will usually be quite informal between family members.
However, if any contracts are drawn up or commissions/fees are payable by the driver, the associated costs could be deducted. Other driving expenses such as entry fees, running costs, travel and accommodation, and certain fees and subscriptions will also be deductible against taxable profits.
Tax Deductions for the Payer
If a family member pays sponsorship money to a driver from their self-employed business or company, these payments may be deductible for tax in their own tax calculations as ‘advertising’ so long as a number of specific conditions are met, as follows:
The main purpose of the payment must be wholly and exclusively for the benefit of the business. Any benefit to either family member must be merely incidental to the main business purpose.
The sponsorship payment cannot be excessive compared to that which an unrelated third party might have invested.
The amounts paid cannot be excessive compared to other advertising costs of the business.
There should be evidence that the business obtains advertising exposure and that this has a positive impact on the financial results.
HMRC are very likely to challenge any such claims on the basis that they are usually made out of the natural love and affection for the close family member, and HMRC will review each claim based on the specific facts of that individual case.
It is the taxpayer’s obligation to ensure that all proof and records are kept in relation to these payments.
In a 2016 Court Case The Crown and Cushion Hotel (Chipping Norton) Ltd v HMRC [2016] UKFTT 765 (TC), HMRC challenged the corporation tax deduction of a hotelier sponsoring his granddaughter during the early stages of her racing career.
The tribunal concluded that the taxpayer’s deduction was allowable because the grandfather was able to provide significant evidence to prove that the company’s motive for incurring the expenditure was purely for the benefit of promoting the hotel business.
The tribunal agreed that any benefit to the granddaughter was an inevitable consequence. The grandfather was also able to prove that the sponsorship of the driver had a positive impact on the business by providing financial results before and after the sponsorship payments were made.
The takeaway message is that it is possible to make sponsorship payments to close family members to support their driving careers. However, careful consideration should be taken if hoping to benefit from a tax deduction and detailed records should always be kept.
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