In charity accounting, the distinction between corporate sponsorship and a donation is fundamental, and it has direct implications for how you classify income, whether you charge VAT, and how you report in your Statement of Financial Activities.

Corporate sponsorship refers to a payment or contribution from a business in exchange for some benefit or association with your charity’s activities. The keyword here is “exchange.”

The sponsor receives something of value: perhaps their logo displayed at your event, recognition as a named partner, publicity in your marketing materials or complimentary tickets.

By contrast, a donation is freely given with no significant expectation of return. A simple acknowledgement, such as listing a donor’s name in an annual report or on a thank-you plaque, doesn’t constitute a benefit to trigger different accounting treatment.

Corporate Sponsorship vs Donation: Why This Matters for Your Accounts

The distinction affects three critical areas:

• Income classification: Donations appear under “Donations and Legacies” in your SoFA. Sponsorship, where benefits are provided, typically falls under “Income from Other Trading Activities” or occasionally “Income from Charitable Activities,” if directly related to your mission.
• VAT liability: A true donation sits outside the scope of VAT. Sponsorship where the sponsor receives advertising or promotional benefits is a taxable supply, meaning you’ll generally need to charge 20% VAT, (if registered).
• Tax treatment: While donations to charities are tax-free, trading income from sponsorship could potentially create taxable profits if it falls outside the small-scale trading exemption, (currently the lower of £8,000 or 25% of total income, capped at £80,000). Structuring through a trading subsidiary may be appropriate where sponsorship income is substantial or recurring.

Many sponsorship arrangements contain elements of both donation and exchange. For instance, a company might contribute £50,000 to support your annual conference, receiving logo placement and VIP tables in return. In such cases, you must separate the components.

The fair value of the benefits you’re providing, (the “service” element) should be accounted for as trading income. Any excess amount given purely from generosity can be treated as a donation.

Without a clear separation in your agreement, HMRC may deem the entire payment as a taxable supply rather than partly a gift. This makes written agreements essential, ideally specifying which portion, (if any) is a pure donation and which portion represents payment for sponsorship benefits.

Types of Corporate Sponsorship and Their Treatment

Not all sponsorships are created equal. The form they take and the conditions attached, determine how you should account for them. Here are the main categories that trustees encounter:

Unrestricted vs Restricted Sponsorship

Unrestricted sponsorship flows into your general funds. The sponsor hasn’t specified how you must use it, leaving trustees free to allocate it based on strategic priorities.

For example, a business sponsors your charity gala but places no conditions on how you spend the proceeds. This income is recorded as unrestricted funds.

Restricted sponsorship comes with strings attached. The sponsor earmarks their contribution for a specific project, programme or purpose, such as “this £10,000 must support your youth mental-health service.”

You have a legal duty to honour these restrictions. The income must be recorded within a restricted fund category in your accounts, with expenditure tracked against it and any unspent balance carried forward as a restricted reserve.

Your Trustees’ Annual Report should explain major restricted sponsorships and demonstrate how you’ve used the funds in accordance with donor intent.

Cash Sponsorship vs In-Kind Support

Corporate support doesn’t always arrive as cash. Companies frequently provide in-kind sponsorship: donated goods, services or facilities. Examples include:

• A venue waiving its rental fee for your fundraising event.
• A technology company donating laptops for your programmes.
• A law firm providing pro bono legal advice.
• A printing company producing your marketing materials free of charge.

The Charities SORP (FRS 102) requires that donated goods, facilities and services be recognised as income at fair value when received, (provided you can measure the value reliably). This means recording what it would have cost to obtain those items on the open-market.

You’ll record the donation value as income, (typically under “Donations and Legacies” or “Donated goods and services”) and simultaneously record an equivalent expense or asset, ensuring your accounts reflect the full resources consumed by your activities, even though no cash changed hands.

It’s worth noting that general volunteer time is not given a monetary value in financial statements, (though you should describe volunteer contributions in your narrative report).

However, if volunteers are providing a professional service your charity would otherwise pay for, such as an architect designing a building pro-bono, that should be recognised at fair value.

Read our detailed guide on how to value and account for in-kind donations.

Naming Rights Sponsorship

Naming rights arrangements require careful analysis. When a corporate gift comes with naming rights, such as a company paying to have a facility or project named after them, you need to determine whether this represents:

• Recognition of generosity, (essentially a donation with an honour): If a company makes a major donation and you choose to recognise them by naming a building after them, with no formal service obligation, you can treat this as donation income. HMRC generally considers naming a building or role after a donor as an insignificant benefit.
• Commercial sponsorship, (a service you’re providing): If the naming is part of a sponsorship contract, (the company is explicitly paying for that public exposure over a defined period) then you’re providing a benefit. The income should be recognised over the period of the naming agreement, rather than all upfront.

For example, if a sponsor pays £30,000 for your helpline to be called “The XYZ Helpline” for three years, you might initially record this as deferred income and release £10,000 to revenue each year as the benefit is provided. This matches income recognition to the period of your obligation.

Performance-Based Sponsorship

Many sponsorship deals involve deliverables or conditions. The sponsor’s payment depends on you achieving milestones, delivering an event or meeting specific outcomes. These arrangements constitute performance-related conditions.

Under SORP, you should not recognise income until you’ve met the conditions. Any money received upfront must be held as deferred income, (a liability on your balance sheet) until you fulfil your obligations.

Practical examples:

• A company commits £20,000 to sponsor your upcoming annual conference. If the conference is scheduled after your financial year-end, that £20,000 remains as deferred income at year-end and is only recognised as income in the year the event takes place.
• A corporate partner agrees to contribute based on outcomes, such as £10 per referral generated through a joint campaign. You only recognise income when those outcomes are achieved and measured.

This approach ensures your accounts don’t overstate income in one period, while leaving nothing recorded in subsequent periods when you’re still delivering on your commitments.

Income Recognition Rules Under SORP (FRS 102)

Accounting for sponsorship income in compliance with SORP means following the standard income recognition criteria which apply to all charity income. Understanding these principles helps trustees ensure accurate, timely recording of sponsorship funds.

The Three Golden Rules

SORP requires that all three of these criteria be met before you can recognise income:

Entitlement

Your charity must have control over the rights to the income. Any performance-related conditions must be met or the funding must be receivable unconditionally.

For donations, entitlement usually arises when you receive a firm promise or payment. For sponsorship contracts, entitlement might only arise as you deliver the agreed benefit, such as hosting the sponsored event.

Probable receipt

It must be more likely than not that you’ll actually receive the income. With signed sponsorship agreements or received cash, this criterion is typically satisfied. If a sponsor’s financial situation is precarious, you might delay recognition until receipt.

Reliable measurement

You must be able to measure the amount reliably. For cash sponsorships, you know the amount from the contract. For in-kind contributions, you need a fair value estimate.

If you genuinely cannot value an in-kind gift reliably, SORP allows you to delay recognition, (for example, donated items for resale can be recognised when sold if upfront valuation is impractical).

Where Sponsorship Appears in Your Accounts

The classification depends on the sponsorship’s nature:

“Donations and Legacies”: Use this category if the sponsorship is essentially a donation, (no significant benefits provided to the sponsor).

“Income from Other Trading Activities”: Most sponsorships involving advertising, logo usage or promotional benefits fall here. SORP explicitly lists sponsorship under other trading activities, which covers fundraising income streams. This category also includes fundraising events, charity shop sales and corporate partnerships.

“Income from Charitable Activities”: Use this only if the sponsorship directly relates to delivering a charitable service that advances your mission and the sponsor is effectively a beneficiary or participant.

Navigate Sponsorship Accounting with Expert Support

Corporate sponsorship represents a valuable income stream for UK charities but success depends on proper classification, timely income recognition, accurate valuation and careful VAT management.

Our team specializes in SORP-compliant accounting, VAT guidance and financial reporting, designed specifically for UK charities.

Whether you’re securing your first major corporate sponsor or managing an established portfolio of partnerships, we provide the expertise to ensure your accounting is accurate, compliant and audit-ready.

Book a free discovery call to discuss how we can support your charity’s financial management.