Ballad of a Thin Wedge

An article from the Artlaw archive about sponsorship and the Arts.

You have many contacts
Among the lumberjacks
To get you facts
When someone attacks your imagination
But nobody has any respect
Anyway they already expect you
To just give a cheque
To tax-deductible charity organisations* *

Dear Mr Jones,
In reply to your recent letter about sponsorship of the arts, the following may help to clarify the situation.

Companies can use arts sponsorship for reducing their profits before taxation. Is this true?
Yes. In essence, companies which generate income from trading are liable to pay tax on their profits. Profits are calculated by deducting expenditure from income. The company's accounts are audited to show income and legitimate tax-deductible expenditure, which might include line items for salaries, rent, rates, heating, lighting, stationery and so on, plus advertising, publicity, public relations and marketing.

It is in the latter area (promotion) that sponsorship becomes attractive: to spend millions of pounds promoting beer on radio and TV, hoardings, magazines and so on, is a legitimate expense; likewise if the product is also promoted on beer mats, racing cars, footballers' shirts, and breakfast cereal packaging. This equally applies to the promotion of the name of the company as it does to the promotion of its products, goods or services. Accordingly, companies find attractive the idea of sponsoring the County Cricket Championship and cup competitions, an individual sportsman or personality, a team - or even an arts organisation. But only so long as the publicity thereby purchased reasonably justifies the expenditure made. For example, it may be perfectly reasonable to spend £1 million on TV advertising; but very questionable to spend the same amount on an unknown painter whose works have never been see in public, and are never likely to be, even through the use of that money.

How far the expense on sponsorship will be allowed to form part of the tax-deductible expenditure, thus reducing profits before tax, is a question of reasonableness and degree in all the circumstances; and, more fundamentally, of convincing the Inland Revenue of this so that the expenditure is allowed to reduce profits before tax.

In the arts, therefore, as in any other field of public intercourse, such sponsorship can become a fruitful source of support. The following random examples illustrate how the visual arts have benefited. Lufthansa, Pearson PLC, Sir Terence Conran and the Scottish Arts Council sponsored the Scottish Sculpture Trust's sixtieth birthday exhibition honouring Paolozzi. The Dean and Chapter of Durham Cathedral, Hatfield College and Northern Arts sponsored the artist-in-residence scheme and exhibition a Durham Cathedral. Then there is the John Moore's (anyone for mail order?) and the Tolly Cobbold (anyone for beer?); plus the sponsorship of the recent show of sculpture at the Hayward Gallery which, it appears, would not have been free of charge without assistance from United Technologies.

How is sponsorship differentiated from donations?
The theory is that sponsorship is a donation with strings attached, i.e. a gift conditional upon its being used to promote the sponsor, its products, goods or services; a donation is an outright gift with no strings attached other than the gift be used for the purposes intended. Moreover, the simple donation is not necessarily a tax-deductible expense, since it cannot be said by the sponsor to have been made in the furtherance of the objects of the company and, thereby, to have a legitimate trading expense. Companies are usually persuaded to make such donations out of kindness/friendship/kinship/conscience, but not usually as a means of furthering its business.

In practice, however, the distinction becomes blurred because companies frequently donate monies with conditions which might allow them to argue (at a later stage) that the expenditure was a legitimate trading expense. Thus, the gift is probably a donation, but possibly might be a business expense. This fudging of the issue normally occurs where (in the company's judgement) relatively small amounts are involved, so that if the Inland Revenue refuse to allow it as a trading expense for tax purposes, it will have little effect on the company's tax liability. Such donations can often be spotted when the requirement to give the sponsor a public profile is merely nominal or ambiguous.

Further blurring of the distinction occurs when companies donate what is often called sponsorship in 'kind', i.e. the donation is not of cash, but of goods, services or products, without requiring payment from the donee. For example, a company might give a typewriter, video equipment, printing services, furniture, computer hardware or software or use of time, lighting equipment, a vehicle, building services or premises. The advantages to the donor can be: the gift may be sub-standard, arguably of no real market value (to the company), and so might be written off their books as a tax-deductible trading expense (i.e. a 'reject') - in which case public credit for the donation may well not be required; and/or the gift may be of the highest standard for promotional purposes, with public credit as a prerequisite - in which case the expenditure may well be allowed as a legitimate trading expense for promotional purposes.

To confuse the issue even more, sponsorship in 'kind' is often called a donation, even though it is not intended to be a tax-deductible trading expense; a donation of 'cash' is often called sponsorship, even though not intended to be a trading expense; and sponsorship in 'cash' is sometimes (though now less frequently) called a donation, even though it is intended to be a trading expense for tax purposes.

From the point of view of the company sponsor, is it more beneficial under the present tax laws to give donations to the arts or provide sponsorship?

From what has been explored so far, the answer to this should be clear: true 'sponsorship' is more beneficial to the corporate donor than true 'donations'.

But the next practical question must be, how to clarify what is in the minds of those negotiating. Companies and their representatives are often as uncertain of their nomenclature as those in the arts community looking for finance. Some companies are only interested in cash, others in kind, some in donations, others in sponsorship. (And some, as we will explore below, only in charities.) Company representatives will use their own language to describe their intent; the vital issue is clarification. Initial approaches to potential sponsors should be so constructed as to present the substance of the need in unambiguous terms. The following checklist of items is best considered, discussed and prepared before any initial approach is made, so that the arts representatives have a clear self-image and an agreed understanding of their needs. After initial, informal discussions with the would-be sponsor (the aim being to elicit some of the answers to the unknown items on the checklist), any written proposal put forward should at least deal with the items listed; and should be presented in a package both appropriate to the arts organisation and attractive to the company. The minimum checklist is as follows:

  1. Constitution
    Whether the arts organisation is an unincorporated association of individuals (e.g. a club), with or without a written constitution/rules; a company registered with liability limited by shares or by guarantee of its directors; a formal or informal trust; what its aims and powers are.
  2. Personnel
    Who the management committee/board of directors/trustees are; the full-time/part-time/voluntary personnel; and patrons/supporters/friends/contacts; whether there is a membership, how many and the parameters of the constituency.
  3. Finances
    How income is derived; how expenditure is budgeted and made; what the profitless has been/is likely to be; with balance sheets, audited accounts, future budgets, as available.
  4. Programmes
    What the organisation's activities have been/are/will be, and how they relate to the finances; which programmes earn income and which do not; how surplus revenue occurs; where any shortfall lies and why. Plus statistics, if available.
  5. Need
    Why cash/kind in the form of sponsorship/donations are needed; whether for a specific project (growth), to cover a shortfall (maintaining operations), or to balance the budget (prevent closure).
  6. Raison d'être
    Why and how the sponsorship/donation will help, tying together the unmet need to the anticipated provision. For example, we need a word-processor/printing facilities/bursary/premises/cash in order to carry on/grow/stop closure; and from you, for the following reason.
  7. Choice of sponsor
    Why this particular sponsor, above all others, has been chosen. Diplomacy is the order of the day; initial negotiations should reveal one or more of the following:
    • sponsor is looking for publicity in the sponsee's field
    • sponsor has a conscience about the business's reputation in the eyes of the public at large or the arts public in particular, and wants to be seen to care
    • sponsor is kind/friendly/a fellow traveller
    • sponsor is very rich
    • sponsor is excited by sponsee's work and wants some involvement
    • sponsor's business directly relates to sponsee's work, and there is mutual advantage to be gained from relationship
    • sponsor is competing with other sponsors in the same field and wants to be seen to do better.
  8. Advantages to the sponsor
    Imagination (and research into the company) is the order of the day. For example:
    • tax
    • publicity/pr./advertising/marketing and general promotion of the company and/or its products/goods/services
    • the fulfilment of their internal/public policy obligations
    • to be seen to be interested in/care about/give support to an area of activity the public might be impressed/pleased to know about
    • the fulfilment of any external obligations as, say, trustees of a fund.

Donations to charities?
Your letter did not specifically query the relationship between charities and sponsorship, but this area does need clarification in this context. Under the present law, a covenant of a sum of money to a charity can have tax advantages - for the recipient. For example, if I promise by written deed of covenant to pay £X per year for at least four years to Y charity, the Y receives £X from me and the right to claim from the Inland Revenue the income tax (at the standard rate) I have already paid on the £X. Similar arrangements are available for donations received from a company out of its taxed profits, whereby the charity can claim back from the Inland Revenue the tax already paid on the donation by the company.

This method of donating funds does not reduce the company (or individual) donor's tax bill (because the money has to be paid out of profits/income already taxed), but is a method of securing funds which companies (and individuals) find attractive. This is usually because they find great satisfaction that the Inland Revenue does not keep the tax they have already paid on the donation; that the tax paid goes to a charity of their own choice; and that the charitable object of their own choice has, thereby, been assisted by themselves and by the public (which loses the tax). It is important to distinguish this scheme (which incidentally causes many arts organisations to seek to achieve charitable status), from an apparently similar (though radically different) scheme operating in the USA. The difference is frequently unclear or misunderstood and, because a great deal of financial activity in this country involves the use of American dollars and/or is the result of USA-based organisations operating here, many people here wrongly believe that the American scheme applies here; it doesn't. In the States, unlike this country, they have a creature known as a 'tax-deductible charity organisation'.

Tax-deductible charity organisation?
In the States, companies wishing to sponsor a charitable organisation can be allowed to expend some of their revenues, within certain limits, so as to reduce their tax bills. But only so long as the money is spent on a recognised charity organisation. It sounds deceptively like our arrangements for charitable covenants (described above) but, remember, our scheme does not allow the donors to reduce their tax bills; on the contrary, it enables the recipient to claim back the tax already paid by the donor. What's more, the American scheme looks deceptively like our tax-deductible expenditure scheme (also described, at the outset) but, the difference is that in this country expenditure is allowed to reduce profits before tax so long as it was a trading expense; whereas, in the States, the expenditure reduces the tax bill so long as it was given to a recognised charity organisation.

Of course, companies in this country may also donate to charitable organisations (by way of covenant, as described above) as well as sponsoring and claiming tax-deductible expenditure; and, indeed, American companies are able to sponsor as well as donate to charity - but in America both schemes offer tax benefits to the company. In our case, only sponsorship offers tax benefits to the company.

Donations by trustees?
It would be foolish, in this exploration, to leave out of account companies whose directors find themselves trustees of funds. This is an area which often creates confusion for would-be sponsees. Some companies, usually through their directors, hold monies as trustees; not to do with as they wish, but to use solely for purposes specifically laid down by those who created the trust. Such trustees may hold funds, for example, to help the aged, the sick, the young, the homeless, the disabled and so on; the trust may require them to give assistance to the arts generally, to specific artistic fields or projects, to certain creators, administrators, or only to certain groups or in geographical locations. Frequently, such trustees look for the potential beneficiaries in such a way as to mislead those looking for sponsorship/help into believing that corporate sponsorship is being canvassed - as opposed to the finding of a specific beneficiary for the trust. Thus, such trustees may appear to be managing directors of companies, a board of directors, a consortium of individuals/companies, or a partnership. This creature may use such language as 'business sponsorship', 'donations', 'gifts', 'investment', 'help', 'advice and assistance', 'joint venture/project', 'association' and the like, in order both to attract potential beneficiaries and also to spot the wrong 'un. All of this is done without divulging the specific terms of the trust or even the fact that they are trustees, so that the public is denied all knowledge of the details of the trust, the aim being to prevent the promulgation of projects fabricated to fit the objects of the trust and not arising out of genuine need.

This whole area probably causes more confusion than anything else discussed so far in the sponsorship field. And it is exacerbated by the increasingly prevalent practice of companies who create a trust-cum-sponsorship fund specifically intended to help worthy causes - conscience money, perhaps - which is administered, increasingly often, by the advertising/publicity/marketing department (for want of a better executive). Such moneys are often, therefore, neither trust funds/sponsorship expenditure/gifts, but are simply seen as part of the overall advertising budget to be applied as the company's internal policies or executive discretions dictate, depending always on all the circumstance of the project in question and the company's attitude at the time. There is to be found a veritable cornucopia or Pandora's box, as the case may be.

ABSA?
The Association for Business Sponsorship of the Arts was established to provide businesses with sound information about the sponsorship possibilities existing within the arts community, so that they might choose - a scheme/project/group/event/organisation appropriate to the company's desires to assist. ABSA is therefore an association of businesses interested in becoming sponsors of the arts; and not, as is commonly thought, an association for the arts which looks for business sponsorship (though that may well be the outcome). ABSA has had considerable success in recent years in channelling business sponsorship towards the arts community, and can be contacted for further information at their new address: 2 Chester Street, London, SWI 7BB. Telephone: 01-235 9781.

The Arts Minister?
Lord Gowrie has recently introduced a sponsorship scheme which releases funds to match those already secured for the sponsorship of arts projects. ACGB and the Crafts Council have also pursued policies of releasing funds to match those already secured for the sponsorship of works of art and craft in public places.

I do hope that my writing at length on these issues has been of some assistance to you in this very complex area;

Because something is happening here
But you don't know what is is
Do you. Mister Jones?**

Yours sincerely,
Henry Lydiate.

**© M. Witmark & Sons 1965
© Henry Lydiate 1984.

This article is from the Artlaw Archive of Henry Lydiate's columns published in Art Monthly since 1976, and may contain out of date material.
The article is for information only, and not for the purpose of providing legal advice.
Readers should consult a solicitor for legal advice on specific matters. Artists can get free online legal information from Artquest.