Taxation of Image Rights

The government announced within Budget 2017 that HMRC will be issuing guidelines on the taxation of image rights payments. HMRC have since announced the setting up of a “football compliance project” to review image rights payments by football clubs. With very little additional information this has created some uncertainty within football which may have an impact on the summer transfer window.

The taxation of image rights has received a great deal of press attention in recent months. A number of sports stars are frequently paid for the use of their image with the vast majority incorporating a company into which the rights to collect payments from the exploitation of their image is transferred. Such payments may then be subject to corporation tax at a current rate of 19% rather than income tax at rates up to 45%. In addition, where the sports star is also not domiciled in the UK, it is possible to receive payments into an offshore company and thereby avoid UK tax altogether.

These arrangements drew the attention of the House of Commons Public Accounts Committee (PAC). In December 2016, HMRC chief executive Jon Thompson stated to the PAC that the government should review the way in which tax was paid on image rights payments. Also in December 2016 a number of newspapers across Europe commenced publication of articles relating to documents contained within the so called “football leaks” papers. This was a leak of some 18.6m documents consisting of copies of contracts, subsidiary agreements, emails, etc. similar to the Panama Papers but related to the football industry. The football leaks documentation included what was described by one UK newspaper as a “blueprint” for tax schemes involving two players in the English Premier League. The documents suggest that the use of a UK company, together with “ingenious tax arrangements”, can halve the amount of tax that would otherwise arise on a player’s earnings from image rights exploitation.

Payments to image rights companies were challenged by HMRC in 2011. After lengthy negotiating it was believed that agreement had been reached with HMRC in 2015 that allowed clubs to treat up to 20% of the salaries paid to players as a payment for the use of their image rights. This agreement is reported to run to the end of the current football season. However, when asked about these arrangements, HMRC have denied agreeing a deal with the clubs and have stated that they are currently investigating more than 100 players over their use of “tax avoidance schemes” including image rights companies.

As a result of the perceived agreement with HMRC the number of players setting up companies has increased by around 80% in the past two years with more than 180 players in the English Premier League now appearing to have companies that may receive income from the exploitation of image rights. A little over 100 of those companies are reported to hold a total of £60m and are reported to have avoided at least £21m in tax.

The football leaks documents highlighted the use of image rights companies and led Meg Hillier, the Labour MP and chairperson of the PAC, to say “I am frankly amazed that HMRC can seemingly rubber-stamp such a practice which, on the face of it, seems solely designed to minimise tax. Although this is legal it is certainly not in the spirit of the law”. In turn this has led to an announcement in the Budget 2017 documentation that “HMRC will publish guidelines for employers who make payments for image rights to their employees to improve clarity of the existing rules”.

Subsequent to the Budget announcement a government response to questions raised by the PAC included confirmation that HMRC will be commencing a “football compliance project”. This will include visits by “technical experts” to all Premier League, Championship and Scottish Premier League clubs over the next three years.

It remains to be seen what form the HMRC guidelines will take but it has been suggested that a restriction to third party sponsorship may be included. This would prevent football clubs from making image rights payments to a player without full tax as part of a remuneration package. Any new guidelines would, however, need to be issued before the summer transfer window opens or the uncertainty will surely affect some transfer activity. A number of high profile footballers are linked with summer moves to the UK and the reason they are not happy with their current clubs in Europe is known to be due to restrictions on payments for image rights.

It is clear that HMRC, bowing to pressure from the government, press and public, will review image rights structures with greater scrutiny in the future. Football clubs and others who pay for image rights will welcome the certainty going forward but may be concerned about the treatment of payments currently being made. It would therefore be advisable to review any current image rights structures to identify any concerns and make corrections in advance of the HMRC visits.

For further information please contact the TaxDesk on 0845 4900 509 and ask for Kevin Offer.