Les visiteurs

KEY POINTS

• The applicable legislation, guidance and definitions.
• The requirement to deduct tax in respect of the deemed trade.
• The mechanics of the collection and recovery of tax.
• Circumstances when a reduced level of tax may be withheld.
• Double tax and VAT aspects.

Where a performer appears in a country other than his country of residence he is usually liable to tax in the country in which the performance takes place.

The UK rules for the withholding of income tax at source on payments to what used to be called non-resident artistes and athletes were introduced with effect from 1 May 1987, when the Income Tax (Entertainers and Sportsmen) Regulations SI 1987 No 530 came into force.

All references in this article to Regulations (Reg) refer to this statutory instrument. The original legislation, introduced by FA 1986, s 44 and Sch 11 was consolidated into TA 1988, s 555 to s 558 and is now contained in ITA 2007, s 966 to s 970 and CTA 2009, s 1309.

The rules apply to payments in cash or kind made in connection with the performance of relevant activities in the UK by non-resident entertainers and sportsmen.

Payments to third parties providing their services may also be within the tax deduction scheme. The person making the relevant payments is required (under SI 1987/430 Reg 4(2)) to deduct an amount equivalent to the basic rate of income tax for the year of assessment in which the payment is made and account for it to HMRC’s Foreign Entertainers’ Unit (FEU).

A reduced rate of deduction may apply if a special arrangement is negotiated with HMRC (Reg 5). The entertainer or sportsman (‘the performer’) is deemed to be carrying on a separate trade or profession in the UK, the profits or gains from which are subject to UK tax.

The withholding arrangements are on account of the ultimate UK tax liability which may be greater or less than the amount of tax withheld, resulting in an overpayment or underpayment of tax.

The ultimate liability may be zero where a double taxation agreement exempts from UK tax entertainers appearing as part of a state-funded cultural exchange with a country which specifically excludes such activities from their usual article denying double taxation relief to performers appearing in the UK.

The withholding tax provisions apply where an individual who is an entertainer or sportsman performs a relevant activity in the UK and the individual is not resident in the UK in the year of assessment in which the activity is performed (ITA 2007, s 966).

The tax deduction rules apply even where the payer had no taxable presence in the UK, following Agassi v Robinson [2006] STC 1056.

The tax may be collected from the performer if collection from the payer is not possible. FA 2006, s 68 specifically excludes participants in the 2012 Olympic Games and Paralympic Games from the visiting entertainers and sportsmen rules.

Definitions

An entertainer or sportsman is defined as an individual who gives performances alone or with others in his character as an entertainer or sportsman in any kind of entertainment or sport which includes any activity of a physical kind performed by such an individual which is, or may be, made available to the public or any section of the public whether for payment or not under Reg 2(1).

Non-exhaustive guidance from HMRC is contained in booklet FEU 50, A Guide to Paying Foreign Entertainers.

Paragraph A6 includes as examples athletes, golfers, cricketers, footballers, tennis players, boxers, snooker players, darts players, motor racing drivers, jockeys, ice skaters, contestants in chess tournaments, pop stars, musicians, conductors, dancers, actors, TV and radio personalities and variety artistes, appearing alone or with others. It does not, at present, apply to models.

Relevant activity includes any appearance promoting any commercial occasion or event including advertising and endorsement of goods and services and participation in sound recordings, films, videos, radio, television and other similar transmissions, alive or recorded (Reg 6(2) and FEU 50, para A4).

Charity performances where the non-resident entertainer or sportsman claims only reasonable reimbursement of his travelling and living expenses while in the UK will normally qualify for a nil deduction special arrangement with the FEU.

Whether a performer is non-resident is determined under UK domestic rules of residence, as nearly all double taxation agreements are disapplied for performers in respect of their professional income, and double taxation treaty tiebreakers would not apply.

The scheme extends to payments with a prescribed connection under Reg 3(2), which derive either directly or indirectly from the performance or relevant activity.

It is possible that some income is not covered by the ‘entertainers and sportsmen’ paragraph in the treaty and, for example, merchandising royalties could be treaty protected.

Tax is deducted at the basic rate in force at the time of payment, unless it is a transfer of an asset as a payment in kind, irrespective of when the performance actually took place.

A payment includes a loan, a transfer of assets including transfers by way of loan, and transfers of a right to a service such as an airline ticket provided for a performer. Income already subject to tax at source, such as worldwide royalties or salaries taxed under PAYE, is excluded from the scheme.

Ancillary expenses

Payments made to UK residents for the provision of services ancillary to a performance, which is an arm’s length amount, would not be within the scheme.

This would normally cover arrangements such as venue hire, security, damages, carpentry, stage hands, public address equipment, lighting, equipment hire, advertising, ticket printing, hire of chairs, barriers and marquees, etc. (FEU 50, para A8).

Royalties from sound recordings are specifically excluded under Reg 3(3)(c) which includes non-returnable advances on future sales.

The payer deducting tax from a performer or third party in connection with relevant activities must provide the recipient with a tax deduction certificate in the prescribed form (FEU 2), and makes a return of such payments and deductions on form FEU 1.

Non-treaty protected venue merchandising is included, as are royalties under a ‘name and likeness’ licence agreement which, in the UK and in the absence of image rights as a specific class of intellectual property, are normally a mixture of copyright, trade mark, and protection against passing off.

Where tour support is given to entertainers, it may take the form of a recuperable, non-returnable advance out of product royalties, and therefore be outside the scheme, but a non-recuperable grant would be subject to withholding tax or brought within a special arrangement.

Where tour support from a recording company is left out of account under the scheme, it may be necessary to disallow a corresponding portion of tour expenses.

Withholding tax

In the absence of a special arrangement, tax must be deducted at the basic rate on the full amount of the payment or the grossed up amount of the value of an asset transferred, under ITA 2007, s 967 and Regs 4(2) and 17, and form FEU 1 submitted to the FEU.

There is a de minimis provision in Reg 4(3) (see FEU 50, para A8), where payments will be £1,000 or less during a tax year and it is not necessary to deduct withholding tax in such cases.

Payments to the performer and persons associated or connected with him are included in determining whether the de minimis limit applies.

Payments made in a foreign currency are converted into sterling at the exchange rate prevailing at the time of payment and this determines the amount of tax for which the payer is accountable (FEU 50, para B2).

If a payment is received under deduction of tax by an intermediary, such as a management company, which has received a payment from the promoter less tax, it in turn must deduct tax from the amount due to be paid to the performer and may claim credit for the tax suffered against the tax payable.

Any excess of tax deducted over tax due may be set against the management company’s own corporation tax liability on its profits and if it has overpaid tax, it may reclaim the overpayment Reg 7 (see FEU 50, paras B10, B11).

Under the visiting entertainers and sportsmen régime, the performer is deemed to carry on a separate trade in the UK and may claim a deduction for all expenses incurred wholly and exclusively in earning the profits of the deemed trade, which is a separate trade from any trade, profession or vocation actually carried on by him.

The income includes both amounts paid before deducting withholding tax and the grossed up equivalent of the cost of any assets transferred to him.

The accounts of the deemed trade are included in the normal way with a just and reasonable apportionment of income and expenses as may be necessary.

If the performer is employed by the payer, he would be subject to taxation of his employment income in the normal way and tax would be deducted under the normal PAYE system and not under the visiting entertainers and sportsmen scheme.

Apportionments are made in accordance with Reg 8. If the performer carried on an actual worldwide trade or profession in addition to the UK deemed trade, Reg 15 allows losses arising in the deemed trade to be set against that of the worldwide trade or vice versa, although a loss cannot be carried back as a terminal loss except where the worldwide trade is permanently discontinued, and the relief for losses in the first four years of trading only applies during the first four years of the worldwide trade, in which case both the actual and deemed trade are treated as one for loss relief purposes.

Pre-trading expenses relating to the deemed trade, or a just and reasonable apportionment thereof, may be deducted as a trading expense of the deemed trade.

The withholding of tax and repayment where appropriate is given in accordance with ITA 2007, s 968 and the regulations made under s 967.

HMRC are specifically allowed to disclose confidential information to payers under ITA 2007, s 970, where this is necessary to enable them to calculate the withholding tax correctly.

Third parties

Payments that are made to a third party rather than the performer, which are connected with his services in the UK, are subject to the withholding tax scheme if the recipient is under the control of the entertainer (Reg 7).

These provisions also apply to non-resident companies and trustees where the performer is a settlor.

Reg 7 is very widely drafted and includes any person who receives any connected payment or connected transfer, directly or indirectly, where there is in force a contract or arrangement under which it is reasonable to suppose that the performer, or a person connected or associated with him, may become entitled to receive amounts not substantially less than the profits or gains arising from the connected payment or transfer.

Where a payment is made to a third party within these provisions, it is subject to deduction of tax by the payer as if the payment were made direct to the performer in the course of his deemed UK trade, the profits of which are computed on this basis.

A just and reasonable proportion of expenses incurred by the third party and others may be deducted as if they were incurred directly by the performer.

Any amounts paid to the third party which are already taxable as employment income of the performer, arising in the UK, are ignored in calculating the profits of the deemed trade under Reg 12 (FEU 50, para A3).

Collection and recovery of tax

Tax is calculated by requiring the payer to self-assess the tax withheld in accordance with Regs 9 to 14 in the same way as tax is accounted for in respect of interest and charges under the CT61 procedure. The payer has to complete form FEU 1, which is sent to the FEU.

Returns are made in respect of return periods for the quarters ended 30 June, 30 September, 31 December and 5 April in each tax year and nil returns are required when no tax is payable because the special arrangement is in force. The return must be made within 14 days after the end of each period (Reg 9(3)).

The name of the performer where payments are made to a third party is included. The returns must include the payer’s reimbursement of the payee’s expenses or amounts paid on his behalf.

Where a special arrangement has authorised a nil deduction of tax or deduction at a reduced rate, the FEU 4 authorisation number must be shown.

The payer is required to give a certificate of deduction of tax to the payee showing the gross amount of the payment or the value transferred and the amount of the tax paid on form FEU 2, which has to include the FEU 4 authorisation number, if known, the payee’s and performer’s name, address or stage name, the period covered by the services and a description of them.

The date and gross amount paid, the tax deducted and the agent’s name and address if paid to an agent. The FEU 2 must be signed by the payer and is in three parts.

Part 1 is sent with form FEU 1 to HMRC, part 2 is kept by the payer and part 3 is given to the payee. Where the payment is less than £1,000 or the reduced withholding tax has been agreed with the FEU, form FEU 2 is not needed.

Connected payments

Any person who makes a connected payment or transfer may also be required to provide information similar to that required of the payer under Reg 9(4).

If tax is not paid on or before a due date, HMRC may raise an assessment under Reg 10 and tax is due within 14 days of the making of the payment or 14 days of the end of the return period, if earlier.

Reg 11 allows the assessment to be raised either for a tax year or for a return period. The tax paid is treated as a payment on account of the entertainer’s own tax liability or that of a company employing the entertainer for providing his services, as appropriate.

This enables double taxation relief to be claimed in the entertainer’s country of residence or that of the employing company in accordance with the local rules, all of which should enhance the chance of obtaining a double taxation credit for the UK tax suffered.

Where two or more countries operate the special rules for visiting entertainers and sportsman, it is not uncommon for a mismatch to arise where income is deemed to be that of the performer but the tax is actually paid by an intermediary.

Where a payment is made to a company which is within the charge to corporation tax, but is treated as income of the performer under ITTOIA 2005, s 13(5), it is excluded from the company’s income for corporation tax purposes under CTA 2009, s 1309 and the regulations.

Reduced tax arrangements

It is not uncommon for a promoter to pay a performer an all-inclusive fee out of which the performer must provide his own equipment, including perhaps elaborate light shows, sound effects, backing groups, local backing groups, accompanists, production engineers or other service providers, which would be impossible to fund if the promoter withheld income tax at the basic rate from the performance fee.

It is therefore provided in Regs 4 and 5 for a reduced or nil rate of withholding tax by arrangement with the FEU. A performer or recipient of the producer’s payment must make an application in writing to the FEU not later than 30 days before the payment or transfer of assets is due (FEU 50, para B6).

The arrangement must be put in writing by the person making the payment or transfer to the performer or the recipient of the connected payment or transfer.

The arrangement may take the form of a reduced percentage of the gross amount to be withheld or for a lump sum withholding based on the anticipated profit and could be nil if the performance was unlikely to show a surplus for the performer.

The FEU endeavours to secure that the level of withholding under the arrangement produces the same ultimate tax paid as the performer would suffer as the ultimate tax liability in respect of the performance.

The application for the reduced withholding tax arrangement is accompanied by the appropriate information including the dates of arrival in and departure from the UK, whether the performer is likely to return to the UK in the same fiscal year, the projected income with details of the dates and venues at which performances will take place and itemised budget for the expenses likely to be incurred and copies of the contracts covering the performances.

Where the expenses relate to performances in other countries, the basis of apportionment for the UK performances has to be shown.

The expenses will normally include general subsistence expenses, commissions and manager’s and agent’s fees, travelling expenses in the UK and to and from the performer’s home country.

All expenses wholly and exclusively incurred by the performer or on his behalf, which would be deductible in arriving at the profits of the UK separate trade, and included in calculating his UK tax liability in due course, will be estimated so far as possible in arriving at the tax to be withheld out of the reduced withholding agreement.

Application for a reduced withholding tax agreement will be made on form FEU 8, in accordance with FEU 50, paragraph B7.

Global arrangements

Organisers of major sporting events usually enter into a global arrangement with the FEU under which expenses of a certain amount are agreed for each participant, usually a daily allowance, and the balance is subject to withholding at the basic rate.

It is not normally practical to submit individual reduced tax withholding claims for each player during the year because prize money will depend on performance and sponsorship or endorsement fees may depend on year-end ranking bonuses, not known at the time of the UK activities.

Full accounts for the UK taxable income would be submitted following the year end and any under-deduction or over-deduction paid or repaid. Tax relief would normally be given in the entertainer’s country of residence for the UK tax finally paid by, or on behalf of, the performer, where he is taxable on his worldwide income in his country of residence.

The reduced withholding agreement will result in a nil or reduced deduction form FEU 4 being issued to the promoter which will be used by the promoter to deduct the tax agreed to be appropriate.

The form identifies the performer, the venues of performances and their anticipated dates. If the payments to be made to the performer exceed a specified sum, the form may specify a different rate of deduction. It is possible to make arrangements to pay the UK tax liability in advance or secure payment by way of a bank guarantee.

Where there is a payment chain, for example where the venue owner subcontracts to a promoter, who contracts with the performer’s company, which subcontracts with other performers, the withholding tax rules apply to every person in the chain who must deduct tax at the basic rate unless he is in possession of a form FEU 4 authorising deduction at a nil or reduced rate.

A promoter may make a ‘middleman’ application under FEU 50, para B11, authorising the venue proprietors to make payments gross in respect of box office receipts to the promoter, who will deduct tax at the basic rate, or a reduced rate if the artiste has made a reduced rate application and a FEU 4 has been issued.

FEU have produced a list of approved promoters/agents and merchandisers to whom payment may be made gross on quoting the published FEU reference number.

The FEU also operate a simplified tax system for payments made to specified payees for classical music artistes.

Where tax has been over-deducted a repayment claim may be made under Reg 13 within four years from the end of the tax year in which the connected payment or transfer was made.

Following the year end, a tax return is submitted on form FEU 12 and if tax has been overpaid a repayment can be claimed on form FEU 5. In addition to HMRC’s normal information gathering powers, it may, by notice in writing, require any person who makes payments or transfers to or on behalf of visiting entertainers or sportsmen, to give specified details, under Reg 9(4).

The usual penalty provisions apply.

Double taxation and VAT

Most double taxation agreements specifically exclude treaty relief performances by an entertainer or sportsman in the UK from taxation for performances in the UK, but treaty provisions do differ and some treaties specifically exclude payments to performances under official cultural exchange arrangements.

Some countries do not treat payments for rehearsals as performance income. Some treaties may exclude payments to companies associated with performers.

A performer or a company employing him for entertainment or sporting services may be liable to VAT in the territory where the services are carried out if above the VAT threshold (£70,000 from 1 April 2010) under VATA 1994, Sch 1 para 1 and SI 1992 No 3121, Art 15(a). VAT at the standard rate should be charged on such services and credit taken for VAT on goods and services received.

It may be possible to avoid registration provided that the recipient of his services, e.g. the promoter, is UK VAT registered, under the tax shift provisions of VATA 1994, Sch 5 para 9, and recover VAT on inputs under VATA 1994, s 39 and SI 1995 No 2518, Regs 173 to 197.

Conclusion

Where a non-resident performer is due to appear in the UK, an approach should normally be made to the FEU at the earliest possible date to determine whether a reduced withholding arrangement is appropriate.

The scheme appears to work satisfactorily in most cases.

Nigel Eastaway is lead author of Intellectual Property Law and Taxation, published by Sweet & Maxwell and Tax Planning for Recording Stars and Visiting Entertainers and Sportsmen, published by Moores Rowland. He is a partner in the private client services division of BDO LLP.

Photo courtesy of Getty.com

Issue: 4261 / Categories: Comment & Analysis , Agassi , FEU , foreign entertainers unit , Business , Income Tax , VAT