TaxPersonal TaxTaxing sport: an own goal

Taxing sport: an own goal

Taxing international sports stars when playing in the UK is costing the economy dearly

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

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

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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