As accountants we learn the various concepts that ensure that accounts are correctly presented & we learn tax legislation that helps us to keep our clients compliant. Then something comes out of the blue which seems odd, but appears to be common. A case in point is sponsorship on clothing in non VAT registered sports clubs.

In reality what should happen is that the clubs buy clothing & sell sponsorship. There is an expense & there is income. But then a helpful sponsor volunteers to pay the clothing cost direct & so claim the VAT. But think about the implications:

1. The accounts of the club could become misrepresented, with income from sponsorship being offset against the costs of clothing.
2. As a result of (1) the sports club could be running at above the VAT threshold without realising.
3. The organisation reclaiming the VAT has effectively purchased the sponsored clothing, eventhough they may not have been invoiced.
4. Given the above the sponsoring organisation should then make a gift of the clothing to the club, where VAT will need to be declared . . . thereby closing the loop. However, it may not do so. Therefore, it may be under-declaring its VAT.

When something seems too good to be true, it often is!