With the start of a new football season upon us, HMRC’s update to their capital gains tax manual, to include commentary on the taxation of “image rights” is a timely reminder of contentious points to consider, from a CGT perspective, for those looking to assign and exploit “image rights”.
HMRC updated their manual inserting sections CG68405 – CG68440 covering their view on what constitutes an “image right” for tax purposes, guidance on whether it can be assigned or licenced to a third party, how it should be valued and the associated tax consequences.
The commentary published does not contain any real surprises however, the sections on asset identification, the links with goodwill and how this should be valued will be of interest to anyone involved with celebrity sportsmen and women and entertainers, who will usually assign their “image rights” to an “image rights” company (IRC) often for a gross payment. It is common for the IRC to exploit the individual’s “image rights” by licensing third parties to use an aspect of the individual’s image in return for royalty payments. The individual is often employed by the IRC and paid a salary and/or dividends. Income generated from “image rights” is taxed at the lower rates within the company or at 0% where the company is offshore.
This new section of the manual runs to eight pages and covers the following main aspects:
What is meant by an “image right” – confirming that under UK law there is no such thing as an “image right” as there is no legal process in the UK which protects the intellectual property rights (IPR) that identify an image or personality;
- Are “image rights” really goodwill? – unless there is identifiable IPR e.g. registered trade mark or copyright when an “image right” is assigned, the asset concerned must, in HMRC’s view be goodwill, which seems reasonable. The law of Passing off will protect the goodwill that a claimant has in his reputation. Following the case involving the racing driver Eddie Irvine (Irvine and others v Talksport ) where there is goodwill, misrepresentation and damage, the law of passing-off may be used in the UK to protect “image rights”
- Assignment of “image rights” – again, HMRC point out that in the absence of identifiable IPR the assignment is likely to be of goodwill. Goodwill is personal property and cannot generally be assigned separate from the business (“in gross”). In their view, an assignment in gross is invalid and the assignee acquires no rights from such a purported assignment. In essence HMRC take the view that a sportsman cannot simply park his “goodwill” i.e. their identity, in a separate company, but carry on doing what they do as individuals. The assignment must have more substance to it to justify any value. CG68420 makes the point that “ if a celebrity has prior to the assignment developed a business based on organised and planned exploitation of their image, for example by endorsements, personal appearances and maybe through contracts for sponsorship, copyright and so on, it is possible that such a business could have established goodwill of some value”
- Asset Identification and valuation – the first step is to identify the asset concerned and where this is goodwill to consider the value which is subject to HMRC scrutiny via Shares and Asset Valuation division. HMRC’s view is that values of goodwill tend to be inflated and may not reflect fully the following two points:
- Most or all of the goodwill is personal to the individual and is not capable of transfer;
- The value should reflect the fact that in order to conduct the business previously carried on by the celebrity, the transferee company must acquire the services of the celebrity which may have a cost equivalent to most, if not all, of the company’s income;
- Image rights in foreign jurisdictions – the manuals recognise that jurisdictions outside the UK treat “image rights” as property rights rather than personal rights bringing these within UK CGT. CG68435 provides some examples of treatment in other jurisdictions. Where “image rights” protected by a non-UK jurisdiction are assigned to an IRC the manuals suggest that it might be appropriate to identify the asset in that jurisdiction as image rights and not goodwill. Commentary is also provided in CG68440 on the disposal of non-UK “image rights” where the main issue is whether such rights are non-UK situs assets. The disposal of such rights by non-UK domiciled individuals to an offshore company is not within the charge to CGT, unless there is a remittance. This argument will be based on the facts of the case.
For those involved with the exploitation of “image rights”, HMRC’s commentary, despite its legal overtones provide a useful insight into HMRC’s mind-set in relation to the assignment of “image rights” where a lump sum payment is contemplated.
The commentary is not comprehensive and only covers CGT.CG68405 points out that a charge to income tax takes priority over a charge to CGT. Aspects such as disguised remuneration, the settlement provisions, transfer of income streams and sales of occupational income should also be considered where lump sum payments are made on assignment. Where the IRC is situated abroad there are the rules on transfer of assets abroad to also consider.
If you require any further information in relation to this manual update or on the assignment of “image rights” please ring the TaxDesk on 0845 4900 509 and ask for either Martin Mann or Paula Tallon.