Controversial Tax Avoidance Schemes: The Wayne Rooney Case

By Athena Constantinou, Managing Director, APC Sports Consulting Limited, Nicosia, Cyprus

According to media reports, Wayne Rooney faces a £6 million tax bill due to the UK Tax Authority, Her Majesty’s Revenue and Customs (HMRC), after investing £12.5 million in a controversial tax avoidance scheme that went bust.

This particular scheme was a film funding scheme and relied on the widespread belief that films lose money in their early days, thus enabling investors to set off losses from the particular investment with any other taxable income.

These types of schemes are basically tax deferral ones, through which losses, generated in the early days, are utilised immediately by investors and the tax saved is paid back over a 10-year plus period.

What started initially as an incentive introduced by the British Government to boost British cinema, ended up being a completely artificial arrangement, abused for tax deferral purposes.  As a result, HMRC took measures against these arrangements, resulting in huge tax liabilities for those utilising such schemes.

The Rooney case makes it clear that tax optimisation and tax deferral schemes need to have a sound commercial basis, to justify them before any tax authorities.

Gone are the days when tax structures were designed purely for diverting profits to low/zero tax jurisdictions; or where tax deferral schemes were regularly used as a tax planning tool.

Nowadays, with transparency being the name of the game and with tax authorities on the lookout for taxing so-called ‘aggressive tax avoidance schemes’, it seems that only structures, which make business and commercial sense, can be considered acceptable by tax authorities all over the world.

The Rooney case also shows that the need for financial literacy amongst athletes is more imperative than ever.  Career athletes often do not have the same level of financial awareness as people who follow more conventional career paths.

The unique financial challenges from life as a professional athlete, combined with the lack of financial education, usually lead to poor financial decisions, which, unfortunately, may have adverse consequences, such as putting trust in the wrong people (especially agents); choosing bad investments; and opting for ambivalent tax optimisation schemes.

Professional athletes should, therefore, remember that their advisors, generally speaking, just serve the purpose of informing them about all their available options, with the financial decisions ultimately their own!

Athletes should devote some time and do their homework on recommended investments and tax optimization structures; they should put themselves in a position to evaluate the basis of the recommended investment and tax sheltering opportunities, starting with, as previously stated, whether such opportunities make business sense or not.

On the other hand, financial and tax advisors should be willing to spend the necessary time on educating their athlete clients on the basics of whatever investment or tax structure they propose to them; along with what could be the worst-case scenario if the particular investment or tax structure does not go as planned, financially and taxwise. To avoid unpleasant surprises. See the sports financial literacy academy programme, designed to assist professional athletes in planning and achieving their financial future and independence, which are offered by APC Sports Consulting, at ‘www.apc-sfla.com.’

Of course, in the end, it is the athletes who end up being liable, even if they are truly not aware of the risks inherent in tax sheltering through investments or schemes, in which they participate.

Athletes need to be aware, particularly, that promises of huge investment returns or huge tax savings are often a warning sign of a potentially risky scheme, which could end up in losing them money and/or subjecting them to unexpected high tax bills.

It is often said that there is no such thing as a “free lunch” and this is something that high net worth individuals, especially professionals athletes, should always remember when planning and arranging their tax affairs!

 

Athena Constantinou may be contacted by e-mail at ‘athena@apc-sport.com’