With high profile names and eye-popping salaries, the football sector has always been a ready target for HMRC. There have been a number of recent press articles suggesting HMRC may be broadening its interest in the sector. Which areas are attracting their attention?
Image rights are a recurring topic. The taxman has taken a particular interest in challenging cases where there is either little evidence of the image rights actually being exploited and/or that the portion of a player’s overall club income that is classified as image rights is considered too high to be commercially justifiable.
The point here is that, typically, footballers set up a UK company to receive their income from image rights, which is then taxed at a 19% corporate rate. This compares very favourably to income tax at 45% and a 2% national insurance charge (if the income was paid as salary).
It is our strong feeling that, along with enquiries into image rights structures, HMRC is starting to ask more questions about club payments of players’ agent fees. It is commonplace for the agent to have a dual representation agreement with both the club and the player. The agent fee is typically 5% of the player’s gross basic wage.
It has been accepted for some years that the agent is considered to have put in the same amount of effort when representing the club and the player.
As a result, of the overall 5% fee received, 2.5% represented work performed by the agent for the club and the remaining 2.5% fee for services provided to the player. The club almost always pays the entire 5% fee, which in effect, meant that the club (i.e. the employer) pays a bill on behalf of the player (i.e. the club’s employee).
To be tax compliant in these circumstances, the club must declare the 2.5% fee paid on behalf of the player (plus VAT) on the annual return of benefits and expenses (form P11D). The player is required to report the benefit on his self-assessment tax return and is assessed to 45% income tax on the value.
Example – an agent under a dual representation agreement raises a £100,000 plus VAT invoice to the club, which the club pays. That portion relating to the agent’s services to the player is £50,000 plus VAT, so £60,000 is entered on the player’s form P11D. Once the player files his self-assessment tax return, an income tax bill of £27,000 will result. The player has benefitted to the tune of £33,000 (being the difference between the agency fee he would otherwise have faced and the income tax liability).
We are seeing an increasing trend of HMRC enquiries seeking to challenge the equal split of the agent fee in dual representation situations. The taxman is usually looking for an audit trail of tasks performed by the agent for both parties in order to justify and support the equal split of the fee. For example, HMRC often requests that clubs supply copies of all emails that have been exchanged. However, given that much of the agent’s work is done verbally at meetings or on the phone means that often, there is little documentary evidence available.
The thrust of HMRC’s enquiries is presumably to argue that, in reality, the agent performed far more work for the player than the club and so the fee needs to be weighted more appropriately towards services performed for the player. This, in turn, will increase the amount of the agent fee paid by the club on the player’s behalf and the knock-on effect of higher P11D values and, therefore, income tax liabilities.
In mitigation, we would suggest agents, players, clubs and their respective advisors keep written records of the work undertaken, where this happened, for how long and, importantly, for which party the work was performed. The administrative burden will be tough but needs to be weighed against the increased likelihood of an HMRC enquiry.
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