A sporting chance

  • Author : Tamara Hasson
  • Date : April 2011
ABOUT THE AUTHOR: Tamara Hasson TEP is an Associate in the Private Client Department GR64 at Lyons Davidson Solicitors

Olympic fever is beginning to grow in the UK as the planning for the Games in London 2012 starts to move from architect’s images to recognisable and exciting reality. Londoners who have groaned about the disruption to the tube lines and the cost at times of real economic austerity are beginning to see a light at the end of the tunnel.

The Olympic dream is also radiating out from London as many of the events, such as the football, the three-day event and the sailing, are taking place around the country. There is anticipation that there will be a national upsurge in the ‘feel-good’ factor, which in these difficult times may be much needed.

Football fans, however, don’t have to wait until 2012 for home-based sporting excitement with the Champions League final taking place at Wembley this year, which may make up for some of the disappointment regarding the 2018 World Cup bid.

There is a real enthusiasm in the UK for bringing in big sporting events and one of the many justifications for the expense this incurs is that the income generated by hosting international events, such as the Ryder Cup in 2010, outweighs that expense by a long way.

But is this excitement reciprocated? Or do the sporting stars of other nations view a competition in the UK as punitively expensive and hard to justify? Have HM Revenue and Customs (HMRC) created a hostile environment for international sport stars, which is in danger of destroying the sports calendar?

Aggressive interpretation

In 2006 the House of Lords decided to allow an appeal by HMRC in Agassi v Robinson (Her Majesty’s Inspector of Taxes) [2006] UKHL23.

The dispute was between the tennis player Andre Agassi, who was not and never had been UK domiciled, and HMRC. The case revolved around the interpretation of ss 555 to 558 of the Income and Corporation Taxes Act 1988 (‘the 1988 Act’) and the Income Tax (Entertainers and Sportsmen) Regulations 1987 (SI 1987/530) (‘the 1987 Regulations’).

The 1987 Regulations made provision for the taxation of entertainers and sportsmen who were not resident in the United Kingdom in respect of their profits or gains arising from commercial activity carried out by them within the United Kingdom.

HMRC successfully argued that this would also include a proportion of the earnings Agassi made from two endorsement contracts. The endorsement contracts were between Agassi Enterprises Inc, which was owned and controlled by Agassi himself, and Nike Inc and Head Sport AG.

None of these companies was resident in the United Kingdom in the relevant tax year, nor did either Nike or Head carry out any trade in the UK, whether through a branch or agency or a permanent establishment. Their payments to Agassi Inc were not made in the UK.

Nevertheless, their Lordships (Lord Walker of Gestingthorpe dissenting) agreed that the payments were, however, payments that had a connection of a ‘prescribed kind’ (see Regulation 3 of the 1987 Regulations) with a ‘relevant activity’ (see Regulation 6) performed by Mr Agassi in the UK, and were therefore subject to income tax.

Since then, much has been written about the ‘chilling effect’ this may have on the attendance by big international names at UK sporting events.

HMRC had initially calculated the proportion of endorsements subject to income tax by relating it to the number of days spent in the UK. So if a sportsman competed in two two week tournaments in the UK in any tax year, the proportion of his endorsements subject to UK income tax would be 28/365.

However, HMRC argue that this is now incorrect. Their position is that it is the act of competing that leads to the endorsement income and therefore the proportion of endorsement income subject to UK income tax should relate to the number of competitions entered within the UK.

For most top sportsmen and women this will have a significant effect. Marathon runners typically compete two or three times a year. If one of those competitions were the London Marathon, then the proportion of endorsement income taxable would be one-half or one-third. This is despite spending less than two weeks in the UK within that year.

Chilling effect

Not surprisingly, HMRC’s increasingly aggressive interpretation of statute is dissuading some sports stars from competing here. Athlete Usain Bolt declined to compete at Crystal Palace last year because of the punitive tax bill it would have incurred.

Bolt is estimated to receive GBP6.6 million in endorsement income. He would probably compete in ten athletics meetings a year, meaning that one-tenth of that income (GBP660,000) would be subject to income tax, giving him an estimated tax bill (allowing for some deductions for living expenses while here, etc.) of GBP300,000.

Bearing in mind the prize money at Crystal Palace last year was less than GBP10,000 per event and Bolt’s appearance fee would have been in the region of GBP100,000 (less tax), it’s easy to understand Bolt’s decision.

It is also worth putting this into context; the UK is currently the only nation in Europe that taxes endorsement income and its position is putting it at odds with the sporting bodies that decide where tournaments will be held.

Exceptions can be made on a case-by-case basis. There is a blanket income-tax exemption for all overseas athletes competing in the Olympics in 2012; the London Organising Committee is also exempt from corporation tax; and the International Olympic Committee is exempt from income and capital gains tax as well.

Unfortunately, Wembley was ruled out of hosting last year’s Champions League final after failing to provide assurances that the players taking part would not be taxed on their salaries. This year, the budget included an exemption for players in the 2011 Champions League final, which is why it has been able to go ahead.

The strict confidentiality requirements surrounding the World Cup bids mean that we do not know whether an exemption would have been granted to the players, but it is a requirement of FIFA that host countries give them a comprehensive tax exemption for their earnings in relation to the World Cup.

Brazil, who is hosting the 2014 World Cup, has announced that FIFA and its partners will be exempt from any taxes on goods and services related to the tournament for five years from January 2011 until the end of 2015.

It is therefore inevitable that a bid that did not grant wide tax exemptions would be unlikely to succeed.

Widening the goalposts

It is not just visiting players and sportspeople who are feeling the heat from HMRC. There are also moves afoot to tighten up on the current methods being used by Premier League footballers to lighten their tax load and avoid the 50 per cent income tax rate.

High-profile players such as Wayne Rooney and Rio Ferdinand make substantial income tax savings by setting up separate companies that own their image rights. The club then signs a contract with the player and a separate contract with the company for the royalties paid from merchandising and image rights.

The company pays corporation tax at 28 per cent and the player is able to take loans from the company on which they pay 2 per cent tax on the loan sum as a benefit in kind.

The resulting tax saving overall of 20 per cent is a significant sum to any taxpayer, but with footballers’ earnings often exceeding GBP200,000 a week, the sum saved from HMRC is very substantial indeed.

It is therefore not surprising that HMRC have confirmed that they are looking at directors’ loans from players’ companies and indeed are reported to have demanded that Premiership football clubs pay GBP100 million on behalf of their players.

This move seems to have more public support than a heavy tax on visitors. The off-pitch exploits of top-flight footballers and other sportsmen are regularly reported on the front page of the tabloids and in the social media in various forms, and when those stories are run alongside reports of cuts in public funding, job losses and rising inflation, the result is an uneasiness about the amounts of money being paid to young players.

There is also a sense that with such high incomes being earned by young players, they should accept their social responsibility to pay back in to the system.

Losing out

Sport is very important to the UK; it is a big business and a substantial source of revenue for the government. There is a public sense that it is right that the highest paid should contribute the most.

Nonetheless, when the burden on sportspeople becomes so great that they choose to compete less in the UK – or not at all – then the UK public will lose out. The result will be that the UK won’t see the big names at the smaller warm-up tournaments and UK players will lose that opportunity to play against – and learn from – the best opposition in front of a home crowd.

If the UK wants to remain a big player in the sporting arena, it may need to improve its welcome.


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