4 1 The Position in the United Kingdom
The tax position in the United Kingdom of sportspersons resident and domiciled in the United Kingdom and employed by a club is as follows: The sportsperson must pay income tax on the payment made by the club to the sportsperson for his playing services which is employment income. The club must therefore account for income tax and is also responsible for the sportsperson’s National Insurance Contributions (NICs) under the UK PAYE system. Most sportspersons are taxed at the highest income tax rate of 50% (the rate has increased from 40% since 6 April 2010) and employer NICs add to the cost of the sportsperson’s salary package paid by the club. Unsurprisingly, schemes to avoid such taxes have become very tempting, but are mostly seen as artificial and a sham. The use of a service company between the sportsperson and the club is judged to be artificial because the sportsperson remains an employee. It is, however, also possible for a sportsperson to provide promotional services to his club and to third parties. The income generated through promotional services and the exploitation of the image rights of the sportsperson is not always connected with his employment by the club. An intermediary company may then be used for tax mitigation purposes. Image rights are, however, deemed to be capital assets for tax purposes.
4 1 1 Case Law
In the UK case of Sports Club, Evelyn and Jocelyn v Inspector of Taxes, Arsenal Football Club made payments to offshore companies in respect of the club’s commercial exploitation of the image rights of two of their players, Dennis Bergkamp and David Platt. Bergkamp had his own image rights company (incorporated in the Dutch Antilles in 1991) and had assigned his image rights to the company. The company sub-licensed the rights to an intermediary company which was owned by Bergkamp’s agent. The intermediary company sub-licensed the rights to his club and to Reebok. Platt also had an offshore image rights company which contracted with third parties. The company was wound up in 1995 and he set up a new image rights company in the UK with him and his wife as directors and shareholders. He subsequently assigned the right to exploit his image rights to that company.
Both players signed playing (employment) contracts with Arsenal Football Club in 1995. Arsenal also signed separate agreements with their image rights companies. The companies granted Arsenal the right to exploit the players’ image rights in return for an agreed fee. This fee was seen by the Inland Revenue as income from the players’ employment and subject to the normal deductions for income tax. They viewed the agreements as a smokescreen and took the view that the payments were rewards for the players acting as or becoming employees. Bergkamp, Platt and Arsenal appealed against this ruling to the Special Commissioners where the players argued that the exploitation of their image rights was separate from the playing services they provided to Arsenal and that the agreements had independent commercial value.
The Special Commissioners concluded that the payments were not emoluments of the players’ employment by Arsenal in terms of section 19 of the Income and Corporation Taxes Act 1988. These payments were classified as capital sums and therefore non-taxable as income. The tax office thus departed from the notion that image rights are not recognised in that they considered image rights to be capital assets. The Special Commissioners held that the image rights agreements had independent and separate value over and above the playing services agreements.
In a recent matter Her Majesty’s Revenue and Customs (HMRC) was of the view that there was no proper basis for the payment of the image rights sums and that they were, in effect, shams. In reality they were just part of the remuneration. Accordingly, the HMRC was entitled to claim PAYE and NIC on those sums. In the subsequent case of HMRC v Portsmouth City Football Club Limited, Mann J stated:
[t]hat a club is entitled to pay, and a player is entitled to receive, payments for his image rights, that is to say for use of his image in publicity and other material. Where those payments are properly made the club is not obliged to account for PAYE or NIC in respect of them. A club is also entitled to pay, and a player is entitled to agree, the payment of sums to a discretionary trust for his benefit or the benefit of his family. Where such payments are made PAYE and NIC are not paid when the payment is made; they are paid later when the moneys are applied for the benefit of the employee.
4 1 2 Intermediary Companies (IR 35)
New legislation was introduced on 6 April 2000 to prevent employees from using personal service companies to avoid liability for income tax and NIC. This is where a worker provides services through an intermediary and is treated as an employee of the client for tax purposes. The fees paid to the intermediary company is deemed to be salary paid to the worker and employment income tax and employee NICs are payable.
It is uncertain whether the IR 35/intermediaries legislation applies to an image right company. According to Lewis and Taylor one must determine whether “the promotional services were provided under a contract directly between the sportsperson and the club”. If that is determined, the sportsperson is regarded as an employee liable for income tax. It is, however, possible to avoid the application of IR 35 if the sportsperson can show that there is a genuine arrangement regarding his playing services and his promotional services. The first step is to use an image rights company in order to transfer the sportsperson’s image rights to such a company. The sportsperson would then enter into an agreement with the image rights company to perform promotional services. The image rights company would then enter into agreements with his club and other third parties for the exploitation of his image rights and promotional services. All earnings derived from these activities accrue to the image rights company. The income derived through this agreement is not regarded as income from the sportsperson’s employment. Employment income tax and NIC legislation does not apply and results in huge tax savings for both player and club.
The second important arrangement is the contract between the player and the club. This contract must only refer to playing services and not promotional services. The promotional services are provided for in a separate contract between the image rights company and the club as discussed above. If a finding can be made that the image rights company is indeed a sham, the sportsperson can be regarded as an employee under IR 35. However, the transfer of the image rights to the image rights company is a disposal of an asset and subject to a capital gains tax charge. The capital gains tax liability is based on fair market value, the length of the agreement and the celebrity status of the player. Once calculated, certain contingencies such as early retirement, risk of injury and loss of form resulting in varying income levels are applied. The player should avoid receiving a salary from the intermediary company, because that would make him liable for employment income tax and NICs. The company should rather pay the corporation tax due on profits each year (between 10% and 30%) and pay dividends to the player. The player (as a shareholder in the company) will then pay income tax at an effective rate of 25% on his dividend income.
4 1 3 Managed Service Companies
The Finance Act 2007 makes provision for the taxation of individuals whose services are provided through managed service companies. MSCs are managed by scheme providers who provide the services of an individual to a client. The individual is a shareholder and employee, but exercises no control over the company and is not responsible for any administration.
Scheme providers must be involved in the MSC and meet certain criteria: They must -
(1) benefit financially from the individual’s services to the company;
(2) influence the provision of those services;
(3) influence the way in which payments are made;
(4) influence the finances of the company; or
If these new rules on MSCs apply to image rights companies, the tax advantages as discussed above would no longer benefit sportspersons. Sportspersons must therefore make sure that their image rights companies do not constitute MSCs.
4 1 4 Non-UK Domiciled Sportspersons
Overseas sportspersons and teams are increasingly refusing to participate in sporting events in the UK due to its harsh tax regime which applies to sport. The recent increase in the income tax rate to 50% and
the HMRC’s view taken in the Agassi matter worsened the situation.
In Agassi v Robinson (Inspector of Taxes), the Court of Appeal extended the scope of UK income tax for overseas sportspersons participating in the UK. The court held that Agassi was liable to pay UK income tax on endorsement income paid by his sponsors (Nike and Head) to his personal image rights company. Foreign sportspersons face the same UK taxes which British nationals face and there are no tax incentives.
Sportspersons resident outside the UK pay tax on what they earn in the UK and a share of endorsement and sponsorship income, even if this income is earned through an offshore image rights company. The result is that many sportspersons paid more UK income tax than the actual prize money they may have won. Non-UK domiciled sportspersons are usually exempt from paying UK tax on income and capital gains arising abroad. Therefore, the fee paid by a foreign sportsperson’s club for the use of his image rights to an offshore company can be exempted from UK taxes.
4 2 The Position in South Africa
Sportspersons in South Africa contribute mainly to the fiscus in the form of normal tax levied in terms of the Income Tax Act. Provisions for the determination of the amount of tax payable by sportspersons are scattered throughout the Act and induced the South African Revenue Services (SARS) to publish a Draft guide on the taxation of professional sports clubs and players to present a consolidated view of the taxation of professional sports players in South Africa. However, this guide is not meant to be used as a legal reference and is not a binding general ruling.
Since 1 January 2001 the method of determining whether sportspersons are liable for normal tax in South Africa is residence-based and any sportsperson who qualifies as a “resident” is liable for normal tax on their worldwide “gross income” which includes all benefits (cash as well as payments in kind) received. In the case of image rights payments received from a club that uses the image of a sportsperson for commercial exploitation purposes, it can either be seen as remuneration for employee’s tax purposes or even possibly as intellectual property for purposes of royalties’ withholding tax. In ITC 1735 a leading golf professional entered into an agreement with Sun International who agreed to pay him US $100,000 in consideration for the right:
[t]o exploit the golfer’s intellectual property ... including the utilisation of his likeness, biographical material, his presence at promotional events and media conferences and repeat television/video utilisation of his participation in the Tournament ...
Goldblatt J held that the payment made was income in the ordinary sense of the word and could not be considered as of a capital nature. He further held that the payment in issue was not a royalty since the player’s name, likeness and biographical details are not creative effort and are accordingly of an entirely different nature to patents, designs or copyright. Image rights payments therefore form part of the sportsperson’s gross income and will be included in his taxable income.
The issue of double taxation must also be addressed when a local sportsperson earns foreign income. The sportsperson is liable to pay tax on the foreign income in the country where it was earned and as a taxpayer in South Africa. The problem with double taxation has been recognised by SARS and numerous double taxation agreements (DTA) with various countries have been concluded as a result. The main objective of a DTA is to avoid double taxation and section 6quat specifically provides for the claiming of foreign taxes paid by a
sportsperson as a credit against his South African tax liability. These agreements usually provide that one of the countries shall have full taxing rights in respect of the income.
The attention of SARS has forced sportspersons to seek specialist tax advice and undoubtedly resulted in a number of tax mitigation schemes. A popular scheme is to separate a sportsperson’s image rights from his playing services. The credit worthiness of such a scheme depends on the value placed on the player’s image and whether the sum paid for the image rights is a true and accurate reflection of his worth. The value attributable to image rights must be proportionate to the player’s on-field value. Therefore, the image rights payments must be a true reflection of the player’s profile, exposure and corresponding off the field value. The following scenarios illustrate the possible tax liability where image rights payments have been separated from payment for playing services in respect of payments made to the player (Table A), to an image rights company (Table B) and to an offshore company (Table C):
Table A: Salary and image rights payment to player
|
Salary
|
R’000
|
Image rights
|
R’000
|
|
Receipt
|
20
|
Receipt
|
80
|
|
Less 40% tax
|
(8)
|
Less 40% tax
|
(32)
|
|
Net income
|
12
|
Net income
|
48
|
Total net income = R60,000.00
Table B: Salary payment to player and image rights payment to image rights company
|
Salary (player)
|
R’000
|
Image rights (company)
|
R’000
|
|
Receipt
|
20
|
Receipt
|
80
|
|
Less 40% tax
|
(8)
|
Less 28% Company tax
|
(22.40)
|
|
Net income
|
12
|
Income
|
57.60
|
|
|
|
Less 15% Dividends tax
|
(8.64)
|
|
|
|
Net income
|
48.96
|
Total net income = R60,960.00
Table C: Salary payment to player and image rights payment to offshore image rights company
|
Salary (player)
|
R’000
|
Image rights (offshore company)
|
R’000
|
|
Receipt
|
20
|
Receipt
|
80
|
|
Less 40% tax
|
(8)
|
Less 10% Corporate tax
|
(8)
|
|
Net income
|
12
|
Income
|
72
|
|
|
|
Less 0% Dividends tax
|
(0.00)
|
|
|
|
Net income
|
72
|
Total net income = R84,000.00
It is clear from the above that tax mitigation schemes make a huge difference on the total net income of sportspersons and it is no surprise that these schemes are attracting the attention of the taxman.
