The number of players based in the UK setting up companies to exploit image rights has increased by around 80% since 2015 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. It was generally understood by football clubs and their advisers that an 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 although HMRC have always, at least officially, denied any agreement had been reached.
The use of image rights companies was highlighted in the football leaks papers and led Meg Hillier, the Labour MP and chairperson of the House of Commons Public Accounts Committee, 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”. This increasing pressure on HMRC to challenge such structures led to an announcement in the March 2017 Budget statement that HMRC would “publish guidelines for employers who make payments of image rights to their employees to improve the clarity of the existing rules”.
Image Rights in Practice
In July 2017 the Entertainment, Sports and Media Group of the ICAEW published a document “Image rights – a whole new ball game”. This noted that, when negotiating salary payments, a club commonly agrees to pay a proportion of the salary to a player’s image rights company. The only issue raised within the document was the problem of valuing the image rights on transfer to the company which, the author commented, was “subjective”.
HMRC’s acceptance that image rights are separate from normal salary payments after the decision in the case of Sports Club plc and others v CIR  STC 443 was noted and that the agreement with the 20% cap was a temporary arrangement for the 2016/17 season. What is not addressed in the ICAEW document, however, is the question of whether the payments made are actually for the exploitation of image rights or the employment of the player. Is, therefore, a simple split of a salary within the 20%/80% agreement as previously applied by the questioner sufficient.
Within paragraph 39 of the decision in the Rangers case the court set out the principle that employment income paid from an employer to a third party is still taxable as employment income. HMRC’s view is that this principle applies to a wide range of “disguised remuneration tax avoidance schemes no matter what type of third party is used”. HMRC have stated in Spotlight 41, published on 29th September 2017, that they intend to use the decision to take action against a number of schemes. Whilst that guidance does not refer to image rights structures it could be argued that payments made to an image rights company negotiated as part of the salary of a player may be challenged on these grounds.
The awaited HMRC guidance on image rights payments was published on 16th August 2017. The guidance identifies that payments for the use of an individual’s image rights can be taxed in one of three ways.
• Payments made to a self-employed individual are taxable as professional income.
• Payments to employees for the duties of an individual’s employment must be taxed as earnings subject to tax deductions at source and not as payments for the use of image rights.
• Image rights payments made to a UK company will give rise to a liability to UK corporation tax on profits. Income received by the individual from that company will be taxable in accordance with the type of income received (i.e. dividends, salary, etc.).
The guidance does not go into further detail but refers the reader to the HMRC Employment Income Manual for further information.
HMRC Employment Income Manual
At the same time as publishing the guidance on the tax payments for use of image rights HMRC also published additional guidance within their Employment Income Manual at EIM00731.
Firstly, HMRC define “image rights” as likely to consist of a bundle of different rights. It is noted that image rights contracts are popular with sportspersons but are likely to allow for the exploitation of an individual’s public appearances, copyrights, trademarks, etc. as well as an individual’s name, likeness, etc. Different payments may, therefore, require different tax treatments.
HMRC then go on to consider payments to an individual’s image rights company (IRC). In HMRC’s view it is not correct to regard the transfer of a registered trademark, such as a person’s name, caricature, etc., as a transfer of “image rights”. It is noted that an individual may agree to perform services in connection with the “image rights” which are exploited by the IRC resulting in the payment of royalties or license fees. Whilst the decision in the Sports Club case referred to above has been used as justification for this treatment HMRC note the decision was handed down by the Special Commissioners. As this decision was not appealed the case did not proceed to the courts. HMRC therefore regard the decision as “informative rather than having created precedent”. It is clear, therefore, that the Sports Club case cannot be relied upon and that other factors need to be considered before HMRC will accept an IRC is effective for tax purposes.
The Sports Club case is considered in more detail within the HMRC manual which concludes that, whilst accepting the decision, HMRC consider that it is based on the specific facts and should not be regarded as a precedent to justify the arrangements of other taxpayers. HMRC will consider whether the payments to an IRC should be regarded as income arising from an employment and are now likely to include reference to the decision in the Rangers case where appropriate.
HMRC also consider that, where a payment to an IRC cannot be treated as employment income, there may be an obligation to deduct tax at source. Royalties and other income arising from intellectual property which has a source in the UK is liable to UK income tax under Part 5 of ITTOIA 2005. HMRC believe some of the intellectual property rights that are assigned to an IRC will meet the definition of intellectual property within s.579(2) ITTOIA 2005. The payer may then be placed under an obligation to deduct tax from any payment made under Part 15 of the Income Tax Act 2007. Consideration of the individual circumstances is therefore required to determine whether tax should be withheld.
In addition, s.906 of the Income Tax Act 2007 places an obligation to deduct tax on the payer of a payment for the use of intellectual property to a non-UK resident. The definition of intellectual property for these purposes was expanded by Finance Act 2016 (with effect from 28th June 2016) to cover a wide range of payments and follows that contained in the OECD model tax treaty. In particular, HMRC will consider the commentary to Article 12 when determining whether a payment gives rise to an obligation to deduct tax at source. If the payment is from the UK to a country with which the UK has a tax treaty then the obligation to deduct tax may be reduced or eliminated. The availability of relief under a treaty will, however, be denied if the parties are connected and the payment is made under tax avoidance arrangements. Anti-abuse provisions within a treaty must also be considered.
HMRC will seek to apply tax to each element of a payment for image rights in accordance with UK tax law.
HMRC are currently visiting football clubs to review payments to players including those for image rights. Where they believe a payment appears to have been made without the appropriate tax charge being applied then it can be expected that an enquiry will arise.
Firstly, when looking at whether a payment constitutes employment income, there must be an employment relationship such as between a club and a player. Agreements between a player and a third party should not, therefore, give rise to employment income although HMRC may still seek to collect tax from the payer if they believe the payments constitute a royalty or challenge any arrangements where the payment is connected with an activity that could constitute an employment arrangement.
HMRC consider that a player is employed by a club to be a member of a team. Remuneration under a contract of employment will therefore arise from the performance of the duties of the employment which may include promotional and other services as well as playing for the club. These duties may be split between two (or more) contracts but may still form one employment. HMRC will therefore look to establish the commercial justification for distinguishing between payments for performance of the duties of the employment and payments for promotional services through an IRC.
Agreements for promotional services are generally negotiated to run alongside a contract of employment. Renegotiation of the employment contract may also result in a renegotiation of any image rights agreement leading to the conclusion that the total payments are considered to be an overall package. A similar argument was made in the Rangers case but HMRC do accept that there may be circumstances where there is a distinct commercial reality to each element. Those entering into contracts covering image rights payments should therefore ensure that the arrangements are commercial. In particular, HMRC consider the employer (i.e. the club) to have proper regard to the commercial revenues expected to be achieved from the exploitation of any image right. For example, a simple payment of 20% of the total remuneration will not reflect the reality for a fringe player. The previous practice of making a payment of up to 20% of remuneration is clearly no longer possible.
Some examples of the records that a club may consider keeping are set out in the HMRC Employment Income Manual at EIM00739 but the list is not exhaustive. The list includes evidence of the consideration of the commercial activities to be performed, business plan, individual negotiations, independent advice, etc. What is sufficient will, however, depend upon each individual case.
It should also be borne in mind that a club and/or advisors may be subject to a criminal penalty under Schedule 16 Finance (No.2) Act 2017 if it is reasonable to conclude that they should have known the arrangements they were entering into could be used to avoid tax.
In conclusion I would recommend that a club or player in the UK or a player considering a move to the UK should be advised to review any image rights arrangements they have in place to ensure they are on a commercial basis taking into account of HMRC’s current guidance.