It’ll end in penalties!

KEY POINTS

• Net pay arrangements help players overcome 50% tax.
• Structure image rights arrangements carefully.
• Use of unregistered pension schemes.
• Non-UK domiciled players’ earnings.
• Offshore structures for investments.

Whether it be the performance of the England team, the relative merits of 4-4-2 versus 4-3-1-2, or the spate of clubs going into administration, barely a day goes by without some new football-related headline.

What is clear is the increasing part tax has to play in those headlines and the challenges and opportunities this provides to those of us who number these high-profile individuals among our clients.

While Franz Beckenbauer may blame England’s World Cup exit on the number of foreign players in the Premiership, there is no doubt that such clients present real opportunities for tax-efficient structuring of their affairs.

A number of issues affect all players, wherever they might come from: e.g. agency fees, the 50% tax rate, and tax treatment of image rights payments.

There might be legitimate ways to mitigate these issues to some extent for all players, but it is true to say that there is more opportunity in this regard when the player is not UK domiciled.

Agency fees

The tax treatment of agency fees can be a grey area, particularly as Football Association (FA) practice regarding agents acting for both the club and the player has not been consistent in recent years.

The current version of the FA’s Football Agent Regulations allows, at section C, dual representation subject to disclosure of any conflicts of interest. What is clear is that if the agent is acting on behalf of the player, but the club pays the fees, that is a benefit in kind.

The difficulties come when the agent is acting for both parties but the full fee is reported on form P11D or paid by club and reclaimed from the player.

In those circumstances, it may be possible to argue for an element of relief but this will really depend upon the specific wording within the agency agreement. Our experience is that there is no consistency of treatment.

In addition, whatever is agreed between the parties (and reported on form AG1) must be properly reflected in the player’s contract. If not, and the club subsequently finds itself in administration, these payments are unlikely to be protected.

Where a player has separate image rights arrangements and an agent is involved in negotiations on his behalf in this regard, the agent's fees are legitimate expenses which can be deducted in calculating the taxable income from those sources.

It is not uncommon for there to be no formal agreement between the player and the agent in this regard which creates problems, not only for the purposes of income tax, but also VAT.

While the payments themselves may fall within the reverse charge legislation for VAT purposes, the player may still have an obligation to register for VAT and submit returns.

50% tax rate

The increase in the top rate of income tax to 50% for individuals with total taxable income in excess of £150,000, combined with the tapering of personal tax allowances and the loss of higher rate tax relief on pension contributions (subject to any future action by the Coalition Government), will have had an impact on most, if not all, of the UK’s Premiership players.

From the player’s perspective, while this increase in tax rate is unpalatable, the rise in popularity of the ‘net pay’ arrangement goes some way to sweetening the pill. Not so for the club whose wage bills increase disproportionately in order to take account of this liability.

Couple this with the reduced value of sterling as against the euro and the significantly lower rates of tax suffered by players abroad (the non-resident’s rate of tax paid by players in Spain is only 24%) and a problem ensues:

n the UK is a less attractive environment for foreign players;
n clubs might be reluctant to compete for the best talent if they have to compensate them for the higher rates of tax they will have to pay in the UK.

The 2009 summer transfer window saw a number of top players leaving the UK for pastures new and it remains to be seen if this trend will continue in the 2010 summer transfer period.

Taking the example of a player currently earning a salary of £1 million a year under a net pay agreement, the cost to the club in 2009/10 was roughly £1.91 million (including employee’s and employer’s National Insurance).

From 6 April 2010, the cost of this same deal rises to £2.3 million, an increase of 20% on the club’s, already significant, wage bill.

While this may be unattractive to the club, the balance of power in package negotiations rests with the player and the club must look to restore the balance by seeking to deliver the overall package to the player in a more tax efficient manner such that the net pay arrangement might be forgone.

Effective use of image rights

It is not the purpose of this article to explore in detail the mechanics of image rights arrangements (which are dealt with elsewhere), but no football-related article would be complete without some reference to these important, and often problematic, sources of income.

High-profile players are likely to receive payments for the use of their image from a number of sources. While HMRC may accept that payments for the use of image rights are separate from the activities which would normally form part of the playing contract, it is vital that these arrangements are structured correctly to guard against them being taxed as disguised emoluments.

It is no secret that HMRC are seeking to challenge the image rights arrangements put in place by all football clubs, when a large percentage of the total package is carved out as a payment for the use of the player’s image (irrespective of the actual profile of the player) but no action is being taken to commercially exploit the image.

This can present a problem for the player but also for the club whose corporation tax deduction may be called into question. The need to reflect accurately agreed arrangements in the contract is as valid here as it is with regard to agency fees in the light of the recent administrations.

It is important to distinguish between club-related image rights arrangements and those with external sponsors. HMRC regard activities of ‘self promotion’ as being those of a UK trade.

A trade managed from the UK is regarded as UK source income, irrespective of the domicile status of the player and the remittance of the income; HMRC will seek to tax all of the income in the UK even if some of it arises due to offshore activities.

Even UK players with no offshore activities might achieve some benefits from careful structuring of their sponsorship arrangements.

Planning for retirement

Pension provision might not be high on the list of priorities of many top flight players, but it has become more important given that the retirement age for a professional player rose from 35 to 55 with effect from 6 April 2010.

The overhaul in the regulation of UK pensions in 2006 and the subsequent amendments to the rules for registered pension schemes, together with the restrictive annual and lifetime contribution limits, have meant that unregistered schemes have remained attractive.

With the introduction of the 50% income tax rate this April and the restriction in relief for pension contributions for higher rate earners, unregistered schemes can offer tax efficient planning opportunities to defer (or save) UK tax.

An unregistered scheme can provide significant advantages for the player, e.g. no upfront tax charge, tax free roll-up of funds, and tax free access to funds by way of temporary loan.

Such arrangements can be advantageous to any player but might be of particular interest to those who intend to leave the UK at some point. Key benefits include:

• Employer contributions to the unregistered scheme are not taxable as remuneration in the hands of the employee.
• Employer contributions to the unregistered scheme are not subject to UK National Insurance.
• There are no restrictions on the range of assets in which an unrestricted scheme can invest. Investment could thus be made into residential and commercial property, providing greater flexibility than a normal pension plan.
• Unregistered schemes do not fall within the rules applicable to registered pension plans and therefore the employer can fund in excess of the annual and lifetime limits.
• The trustees of the unregistered scheme can make loans to the employee at commercial rates of interest so they can access the funds prior to retirement.
• There is no specific retirement age although pension income cannot be taken until age 55.
• There is no requirement to buy an annuity at the end of the life of the plan.
• It should be possible to structure the unregistered scheme so that it falls outside the periodic charge rules within the ‘relevant property regime’ for inheritance tax.
• The payment of a pension or pension commencement lump sum to a non-UK resident individual out of an offshore scheme should not be subject to UK tax.

There is no corporation tax deduction for the club until the funds are paid out in taxable form, but that is not necessarily an important consideration for many clubs in the current climate.

The ability to pay part of the overall package on terms which provide both a deferral of income tax and employee’s National Insurance, but also a deferral of employer's National Insurance, may be attractive to both the employee and the employer.

Non UK-domiciled players

Notwithstanding the possible impact of the 50% rate on the ability of UK clubs to attract the best of the world's football talent, there are still numerous non-UK domiciled individuals living in the UK and playing for UK clubs.

The issues outlined above apply equally to these players as well, but there is a specific regime for non-UK domiciled individuals in the UK. For income tax purposes, we are concerned with both residence and domicile.

Most footballers of non-UK origin will be classed as UK resident but not UK domiciled. Generally, if an individual is resident and domiciled in the UK, he is liable to income tax on his worldwide income.

However, special rules apply to the foreign income received by individuals who are resident in the UK, but are non-UK domiciled or are not ordinarily resident in the UK.

An individual is ordinarily resident in the UK if he has been resident for three tax years, or has taken up residence in the UK and his intentions are, or appear to be, to remain resident in the UK for the next three tax years.

Typically, players will sign a contract for three years, with a possible option to extend for one or more years. Depending upon the circumstances, it might be possible to argue that a player is not ordinarily resident until the beginning of the tax year in which he makes the decision to extend the contract for more than three years.

ITEPA 2003, s 26 provides that foreign earnings of an individual who is UK resident but not ordinarily resident, are not subject to UK employment income tax to the extent that they are not remitted to the UK, even if they are paid by a UK employer.

This means that club matches played outside the UK can be treated as falling within s 26 and, if the club pays the salary into an offshore bank account, it can be identified as unremitted.

Most players remain in the UK for periods not exceeding seven years, so are able to claim the remittance basis without having to pay the £30,000 charge (see Remittance basis box).

This provides an opportunity to structure their affairs to keep foreign source income offshore, not remit it to the UK, and thus outside the UK tax net.

Image rights for non-doms

Particular care is needed when non-UK domiciled players have an offshore element to their image rights or sponsorship arrangements with a genuine foreign source. If a suitable structure is in place and the income is not remitted to the UK, significant tax savings can be achieved.

Take the example of a non-UK domiciled player with a sponsorship contract with a well known sportswear manufacturer.

The contract is worth £1 million a year made up of a combination of base payments plus bonuses for appearances and results in connection with his national squad.

Working through the detail, 60% of the income can be said to relate to activities which can only be undertaken outside the UK.

With no planning, the player pays UK tax of £500,000 a year at current rates. With appropriate planning, the player pays UK tax of only £200,000, a saving of £300,000.

Holding investments

Non-UK domiciled players might also benefit from the use of an offshore structure to hold other investments, typically properties. In our experience, property is a popular investment choice for these young, cash rich individuals.

To the extent that they already hold properties as an investment and manage them as a business, incorporation of the business can provide significant tax advantages. Such a structure can also be an efficient way to acquire property, even residential property, when the player comes to the UK.

These are just a few of the ways in which the balance between player and club might be redressed to give the player the package he wants but not at a disproportionate cost to the club and might therefore allow the club to continue to target the talented players which make the UK Premiership what it is.

Remaining in the UK

While it is rare that players remain in the UK indefinitely, occasionally a player will decide to make his permanent home in the UK. The structures put in place to protect income will remain equally valid, but if they stay long enough (17 years), they may be treated as having a deemed UK domicile for the purposes of inheritance tax.

They may then wish to undertake planning to keep their offshore assets outside the UK inheritance tax net.

Working with footballers can be both fascinating and frustrating in equal measure. Given the potential levels of tax at stake they need good professional advice, even if they tend to be less likely than most to seek it.

Eric Williams (0121 232 5171) is national head of private client and Stephanie Heafford (0121 232 5145) is a senior tax manager who specialises in advising sports professionals. Both are in Grant Thornton UK LLP’s Birmingham office.

Issue: 4262 / Categories: Comment & Analysis , Income Tax