Tax & image rights: a face for money

by Philip Gershuny and Fiona Bantock

01 Apr 2010

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Footballers have been in the news a great deal recently for all the wrong reasons. Now, it seems some of them may be forced to accept there is a right and a wrong way to conduct their (financial) affairs as HMRC continues its investigations into image rights arrangements in the football industry.

It is fairly common practice for top players to receive payment from their football club in return for image rights, which are usually held by the players’ offshore personal service companies. Such arrangements are reported to save both players and their clubs an estimated £100m a year in tax.

HMRC’s objection to arrangements of this nature is nothing new. Ten years ago, in the case of ‘Sports Club’ v HMRC, which was shrouded in anonymity, HMRC challenged similar image rights arrangements in place between Arsenal Football Club and two of its top players, Dennis Bergkamp and David Platt (or “Evelyn” and “Jocelyn” as they were referred to in the judgment). In this case HMRC argued the agreements in question had only been created to give an excuse for the payment of money to the players. After careful analysis of the facts, however, the Special Commissioners rejected this argument and held that the contracts in question were genuine commercial arrangements and not a smokescreen for additional pay.

While there have been no material changes in law since the decision in the Sports Club case, life has, nonetheless, moved on. In particular, society’s attitudes have changed as regards the level of tax paid by the super-rich, the current economic climate means the government is constantly looking for alternative ways to increase tax revenue. HMRC has, therefore, been investing additional resources into challenging what it perceives as tax-driven structures.

In this respect, the fact that image rights structures can be beneficially taxed in comparison to normal salary payments makes them more susceptible to attack than other commercial arrangements.

The potential for image rights contracts to result in tax evasion was recognised in the Financial Action Task Force’s July 2009 report on money laundering in football. One of the examples given is where a club pays a fee to acquire the image rights of a player with high football qualities but poor or minimal exposure, in circumstances where the fee bears no relation to the actual value of the image rights and the club has made very little commercial use of the rights.

This would suggest that the key point which HMRC is looking to challenge now is the value of the image rights in each individual case – that is, whether the payments are truly made in order to obtain the image rights or whether they are, in fact, disguised salary. When answering this question, it is likely that a court will ask similar questions to those in the Sports Club case. Just as the decision in Sports Club was heavily dependent on the facts, HMRC’s chances of success in any appeal will depend upon the facts of each individual case.

Given that the success of any appeal will be predicated on the facts, it seems unavoidable that the taxpayers in question will be subjected to expensive and time-consuming reviews.

Yet, as with the recent spate of residency cases, it is difficult to argue that such reviews represent a fundamental change in HMRC policy. In the words of Ward LJ in the recent judicial review case of Davies, James and Gaines-Cooper, they rather result from a “closer and more rigorous scrutiny and policing” by HMRC.

Let the taxpayer beware.

How ‘Evelyn’ and ‘Jocelyn’ escaped the taxman

The key issues which the Special Commissioners considered in coming to their decision in the ‘Sports Club’ v HMRC case that payments under the contracts did not constitute employment income included:

* whether the image rights agreements had a value – such value was dependent on the players’ value, not as footballers, but as recognisable personalities;

* whether the payments made under such agreements were excessive when co mpared with the players’ value for wider commercial exploitation;

* what evidence there was that the football club intended to exploit the players’ image rights;

* whether there was any other commercial reason why part of the players’ remuneration might have been paid under the image rights agreements, eg. a pay ceiling.

Facing the challenge

In the event that payments under an image rights contract do constitute employment income, HMRC has powers to recover:

* PAYE and primary and secondary class 1 NICs from the intermediary personal services company, including where such company is non-UK resident (although such recovery would be difficult in practice unless the non-resident company has assets located in the UK);

* PAYE and primary class 1 NICs from the UK resident footballer whose image rights are being dealt in;

* potentially PAYE and primary and secondary class 1 NICs from the football club (probably as a last resort if it fails to recover PAYE and NICs from the intermediary or the player).

Philip Gershuny is partner and Fiona Bantock is associate at Lovells

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