Taxing sport: an own goal

by Pete Hackleton

29 May 2008

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Christiano Ronaldo
Christiano Ronaldo

Taxation has hit the back pages of UK newspapers with headlines such as ‘Wembley misses out on 2010’, when the new Wembley stadium missed out on hosting the Champions League final. The reason for this was UEFA’s reluctance to award the final to a country in which overseas players are at risk of suffering local income taxes.

The government’s approach to player taxation on such events has in recent years been inconsistent and lacked the flexibility to accommodate the demands of international governing bodies of sport.

Taxing sports people

Under the UK tax system, non-resident sportspeople (employed and self-employed) are subject to the basic rate of UK income tax on earnings due to their ‘performance’ in the UK. Double tax treaties between the UK and other countries usually exempt individuals from tax-ation if they are only in the UK for a short time.

However, under special rules for ‘foreign entertainers and sportspeople’ overseas athletes are subject to UK taxation

Similarly, other countries have double tax treaties and legislation which ensures ‘foreign entertainers and sportspeople’ are subject to income tax in the country where the ‘performance’ is carried out. Both the UK and other countries have problems collecting the tax from players, however. In relation to one-off tournaments, many countries keen to host the Champions League final provided UEFA with a guarantee that the players would be exempt from taxation in that country.

But the government was unwilling to provide such exemptions. Further, the calculation of the sums sportspeople ‘earn’ in the UK is a grey area. The length of a given player’s ‘season’ can be debated ­ if a player earns £5m per season but the season is only six months, and the player competes for a week in the UK, how much should be subject to UK tax, 1/52 or 1/26 of total salary?

If a team won the Champions League in the UK, HM Revenue & Customs could attempt to tax the entire win bonus; however, if the team hadn’t won through various rounds (in different countries), the bonus would not have been earned. The UK charge can also extend to a proportion of endorsement income foll-owing the ruling in the Agassi case.

UEFA’s concerns

Most footballers plying their trade in countries that have traditionally supplied Champions League finalists (Spain, Italy, Germany, Port-ugal) are subject to taxation on their worldwide income in those countries. As a consequence, suffering income tax at the basic rate in the UK should not create an additional income tax liability as tax credit should be available to offset against domestic tax liabilities. But the administration involved in filing relevant claims (when often no incremental taxation is collected on a pan-European basis) puts the UK at a competitive disadvantage in biddings for major events. Also, sportspeople are often unaware of the double tax relief available and miss out on the credit they are entitled to.

Sporting chance

This particular story appears to have a happy ending, as government said a one-off exemption would be granted for the 2011 Champions League final. But is this the end? And how wide will this exemption prove to be?

The government has often referred to its ambition to make the next decade the ‘decade of sport’. As well as the 2012 Olympics, the UK is optimistic of holding World Cup events in football, cricket and rugby.

Increasingly international governing bodies of sport are asking for guarantees from potential host nations to ensure overseas sportspeople will not suffer tax at such events. Unless a realistic and rational approach is taken, the UK will continue to lose out to countries with a more proactive and flexible approach.

The Treasury should look at the wider picture and the benefits for the economy of hosting such an event. It is time for legislation to be introduced which grants tax exemptions to secure prestigious international events.

The agassi case: advantage taxman

There has been general concern around the taxation of sportspeople in the UK among international sports governing bodies following a House of Lords ruling in the Agassi case (May 2006).

This means that UK tax authorities are now entitled to attempt to tax a proportion of athletes’ endorsement income ‘earned’ in the UK.

The Agassi case centred on tennis star Andre Agassi’s global sponsorship deals with Nike and Head. Under the terms of these deals, Agassi (through his US resident image rights company) received an agreed amount per annum, with bonuses based upon his performance at certain tournaments.

HMRC successfully argued that a proportion of the global sponsorship income was earned during time spent in the UK competing at The Queen’s Club and Wimbledon tournaments, and was therefore taxable in the UK.

Further, the performance elements of the sponsorship contract were also taxable in the UK.

Agassi was therefore taxed on a percentage of his global endorsement income received from non-resident sponsors. This was despite the income accruing not to him personally but to his overseas personal service company, which in itself was outside the UK tax net.

Following the House of Lords decision, HMRC has the right to try to subject overseas sportspeople to tax on a proportion of their global endorsement income, and all income in relation to appearances on behalf of sponsors in the UK.

While HMRC’s arguments in relation to endorsement work where the performance of duties ­ such as filming an advert ­ are carried out in the UK may be reasonable, it appears irrational to seek to tax an athlete on a percentage of a global endorsement contract purely because in the performance of duties, the athlete needs to appear in certain events in the UK.

There is no objection to well-paid sports stars suffering UK taxation on prize money earned in
the UK.

However, losing international events due to uncertainty over the tax position of athletes in relation to endorsement income is unacceptable and ultimately costly to the UK economy.

Pete Hackleton is a senior tax manager in Deloitte’s Sports Business Group

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