United Kingdom: Tax planning for incoming professional team sports players by Janice Lloyd , John Weekes and Stephen Woodhouse

United Kingdom:

Tax planning for incoming professional team sports players

 

by Janice Lloyd[1], John Weekes[2] and Stephen Woodhouse[3]

 

Introduction

 

Unlike many other jurisdictions, the UK does not have any specific provisions or reliefs related to incoming sportsmen[4] and sportsmen are taxed under the UK residence rules that apply to all individuals. This article provides an overview of these tax rules and the social security regime in the United Kingdom (UK) and how the UK residence rules apply to professional team sports players who come to the UK to carry on their sporting activities. It discusses the various types of income they receive and the conditions on which these are subject to UK tax.

 

It briefly comments on the UK tax treatment of nonresident professional team sports players and discusses some of the approaches currently being taken by the UK tax authorities in determining the UK liabilities that arise on the income they earn.
Finally, we have set out some tax planning areas which can be introduced to reduce the tax liabilities for sports players coming to the UK and the action taken by the UK tax authorities in challenging these.

 

Personal income tax – general principles

 

Individuals pay UK income tax[5] according to whether they are “resident”, “ordinarily resident” or “domiciled” in the UK. It is possible to be one or more of these and the individual’s income that is subject to UK tax will depend on which combination of these factors apply.

 

The terms “resident” and “ordinarily resident” are not defined in the UK Taxes Act[6] so the guidance set out below is based on rulings given by the Courts identifying the main factors to be taken into account when assessing an individual’s position. It is important to note that time spent in the UK is only one indication of an individual’s UK tax status and it is possible to spend far fewer days in the UK and have other factors, such as the purpose of the visit, the patterns of the visits and the individual’s connections to the UK which can render them UK tax resident or ordinarily resident.

 

Resident

 

–    As above, a number of factors can render an individual UK tax resident but where an individual spends 183 days or more in the UK during a tax year (which runs from 6 April to the following 5 April), they will be resident for that year for tax purposes and there are no exceptions to this.[7]

 

–    Where an individual comes to live in the UK permanently or to remain for two years or more they are resident for tax purposes from the date of arrival (even if the individual is here for less than 183 days in the first tax year).[8]

 

–    An individual is also treated as resident in the UK for tax purposes where they spend an average of 91 days or more in a tax year – worked out over a maximum of four consecutive tax years.[9]

 

Where an individual is present in the UK at midnight, that day will be counted for residency purposes.[10] Prior to 6 April 2008, days of arrival and departure were ignored.

 

Strictly, an individual is taxed as a UK resident for the whole of a tax year when they are UK tax resident for any part of it. It is however possible, by Extra Statutory Concession A11, for a tax year to be split when an individual leaves or comes to the UK partway through a tax year. This means that the UK Income Tax paid because an individual is resident here, is calculated on the basis of the period they are living here rather than the whole of that tax year. This has the effect of splitting the tax year into resident and not resident periods for the purposes of calculating the tax due.

 

This split year treatment will apply to individuals who:

 

–    come to the UK to take up permanent residence or to stay for at least two years, or

–    leave the UK to become permanently resident abroad, or

–    leave the UK for fulltime service under a contract of employment for at least a complete UK tax year and any interim visits to the UK in the period do not amount to 183 days or more in any tax year or an average of 91 days or more in a tax year.

 

Consultations have been ongoing since June 2011 to introduce a statutory residence test. These changes are expected to bring greater certainty in determining residence status and are intended to take effect from 6 April 2013. The proposal states that an individual’s UK residence status will be based on a number of connection factors within the UK (and abroad) and amount of time spent in the UK.

 

Ordinarily resident

 

–    As before, a number of factors can render an individual “ordinarily resident” for tax purposes but where an individual is resident in the UK year after year they will normally be treated as ordinarily resident.

–    Where an individual comes to the UK with the intention to stay for at least three years, they are treated as ordinarily resident in the UK from the date they arrive.[11]

 

Domicile

 

Domicile is not the same as nationality or residence. An individual’s domicile is decided under general law and is interpreted according to previous rulings of the courts. Determining an individual’s domicile can be complex but broadly speaking an individual’s domicile is the country that is their “real” or permanent home which, if they have left, they intend to return to. An individual cannot be without a domicile, and can only have one domicile at a time.

 

The three types of domicile are[12]:

 

–    domicile of origin

An individual will normally acquire the domicile of their father unless their parents were not married in which case it would be the domicile of their mother.

 

–    domicile of dependence

An individual’s domicile will follow that of the person on whom they are legally dependent until such time as they are able to change it.

 

–    domicile of choice

At the age of 16, a person is legally entitled to change their domicile although this is difficult to achieve without moving countries permanently.

 

Personal income subject to taxation

 

A UK tax resident individual is normally taxed on their worldwide income and gains on the “arising basis of taxation”[13], which means they will pay UK tax on:

 

–    their income which arises in the UK;

–    their income which arises outside the UK;

–    gains which accrue on the disposal of the individual’s assets anywhere in the world.[14]

 

However, where an individual is UK tax resident in the UK but:

–    not domiciled in the UK, and/or

–    not ordinarily resident in the UK,

 

there are special rules which may apply to their foreign income and gains. These rules allow an individual to limit the UK tax arising on their foreign income and gains to the amount applicable to income or gains that they, or another relevant person, brings (or ‘remits’) to the UK.[15] [16] [17] [18] UK tax still applies to the individual’s income and gains which arise/accrue in the UK. This method of dealing with the individual’s foreign income and/or gains is called “the remittance basis” and can be claimed on a year by year basis.

 

Individuals who are not ordinarily resident or domiciled in the UK are also able to exempt their foreign income from UK tax where the amounts are small and they meet the conditions set out in the exemption.[19]

 

Whether it is appropriate to claim either the “remittance basis” or the small foreign income exemption will depend on an individual’s circumstances and should be considered on a year by year basis.

 

The charge to tax

 

The calculation of the tax applicable to an individual’s personal income is determined under the Income Tax (Earnings & Pensions) Act 2003 (“ITEPA 2003”), the Income Tax (Trading & Other Income) 2005 (“ITTOIA 2005”) and the Income Tax Act 2007 (“ITA 2007”) as follows:

 

–    part 2-8 of ITEPA 2003 (employment income),

–    part 9 of ITEPA 2003 (pension income),

–    part 10 of ITEPA 2003 (social security income),

–    part 2 of ITTOIA 2005 (trading income),

–    part 3 of ITTOIA 2005 (property income),

–    part 4 of ITTOIA 2005 (savings and investment income), and

–    part 5 of ITTOIA 2005 (miscellaneous income).

 

The net income arising from each source, calculated by reference to the legislation above, is aggregated to arrive at net taxable income on which UK income tax is calculated, as set out in ITA 2007. The applicable rates of tax depend on the nature of the income subject to tax and the tax rates for the tax year 2012-2013 are shown in the table below.[20]

 

In addition, capital gains arising on the disposal of assets are charged to tax under the Taxation of Chargeable Gains Act 1992 (“TCGA 1992”) at the rates applicable to individuals which are also detailed in the table below.[21]

 

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

banding                                   rate of tax on savings     dividend              capital

                                                  and other income           income                gains

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

starting rate for savings

income only to £ 2,710                        10%                           –                        –

 

basic rate up

to £ 34,370                                             20%                           10%                  18%

 

higher rate

£ 34,371 – £ 150,000                            40%                           32.5%               28%

 

additional rate

over £150,000                                       50%[22]                        42.5%[23]            –

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

 

In calculating the tax due, there are also annual tax free allowances for both income tax[24] and capital gains tax[25] that certain individuals can qualify for depending on their tax resident status[26]. These allowances are not available, however, to non-UK domiciled or not-ordinarily resident individuals who are claiming the remittance basis of taxation.

 

In addition certain tax reliefs are available which where applicable can reduce the income tax[27] [28] [29], or capital gains tax payable such as entrepreneurs’ relief[30] for gains made on the sale of a business.

The applicability of any of these exemptions will again depend on the individual’s circumstances.

 

Social security

 

In the UK, different rates of social security contributions apply depending on the nature of the income received as follows (for 2012/13).

 

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

nature of income         applicable                             rate of                    banding

                                       social security                       social security

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

employment income  employers contributions     13.8%                    above £ 7,488

and employees                    – – – – – – – – – – – – – – – – – – – – – – – – – –

contribution                          12%                       between £ 7,605

and £ 42,475

– – – – – – – – – – – – – – – – – – – – – – – – – –

2%                         above £ 42,475

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

business profits          class 4 contributions           9%                         between £ 7,605

and £ 42,475

– – – – – – – – – – – – – – – – – – – – – – – – – –

2%                         above £42,475

– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

class 2 contributions           £ 2.65 per week   No class 2 is due

if annual earnings

are less than

£ 5,595.

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

 

When arriving in the UK to work, an individual is usually required to pay UK social security contributions from the point of arrival[31] unless they are eligible to continue to pay contributions elsewhere under one of the following exceptions:

 

–    Arriving in the UK from an EEA country

For a period of up to 24 months, EEA nationals must generally continue to pay social security contributions in their home EUEA country if they are sent to work in the UK by an employer based in that, or any other, EUEA country.[32] A similar exemption exists for individuals moving to the UK from Iceland, Liechtenstein, Norway (i.e. the other EEA countries) and Switzerland[33], although the period of compulsory home country insurance (and therefore exemption from NIC) has not yet been extended from 12 to 24 months, and special rules may apply to non EEA nationals[34].

 

–    Arriving in the UK from a country with a bilateral agreement

Where an individual is sent to work temporarily in the UK by an employer in a country with which the UK has a bilateral Social Security Agreement[35] covering NIC contributions, they may be able to, or in some circumstances have to, continue paying home country social security contributions.[36]

 

–    Frequent work visits to the UK

Special rules[37] exist for individuals who work in more than one EEA state as part of their regular work pattern. These rules generally provide that individuals pay social security in the country in which they usually live, or where their personal ties are strongest. While this is a subjective test and often difficult to ascertain, most individuals who come to the UK periodically from other EEA countries for work reasons only will be exempted from UK national insurance.

 

If an individual is not covered by the special rules for people coming from the EEA or Switzerland, and not covered by a bilateral Social Security Agreement[38], they may be exempt from national insurance for up to 52 weeks, providing that they meet all of the following criteria[39]:

 

–    they are not ordinarily resident[40] in the UK;

–    they normally work outside the UK for a foreign employer;

–    they are sent to work in the UK for a time by that foreign employer;

–    they do not become employed by a UK employer.

 

If an individual does not meet the criteria above, they will be liable to pay UK social security from the start of their employment in the UK.

 

Incoming professional team sports players

 

Generally incoming professional team sports players come to the UK to play under a full time contract of employment. Whilst the contract period can vary, it is usual for the contracts to be long term and for the player to become UK tax resident due to his presence in the UK. The point at which the player assumes UK tax residency will depend on a number of factors including the time spent in the UK in the first year and whether advantage can be taken of Extra Statutory Concession A11, permitting the split treatment basis of taxation in the year of arrival.

 

From the point of assuming UK tax residency, the player will be subject to UK tax on their worldwide income and gains on an arising basis regardless of where the income was earned and the services performed. To the extent that the player is not ordinarily resident in the UK and/or not UK domiciled, they can claim the “remittance basis” of UK taxation explained above, limiting the UK tax payable on their foreign income and gains to only that remitted to the UK.

 

Depending on the local rules, the player may also be subject to taxation in their “home” territory and it will then be necessary to consider the provisions of the Double Tax Treaties between the UK and the home territory to consider where the primary taxing rights lay and where credit can be obtained for tax suffered in both territories.

 

Employment income

 

Earnings received under a contract of service will be treated as employment income.[41] Earnings[42] includes salary, overtime payments, bonuses both in money and money’s worth arising from services performed under the contract and these are subject to the income tax rates stated above.

 

The UK tax authorities have issued extensive guidance[43] concerning the treatment of income received by team sports players and states that such payments “are earnings from that employment, and are normally chargeable to tax as employment income” and they include the following:

 

–    wages and talent money;

–    payments of a certain amount per match;

–    signing on fees;

–    share of transfer fees;

–    benefit matches and testimonials;

–    loyalty bonuses;

–    payments for representative appearances;

–    certain termination payments.

 

Where the player is taxed on an arising basis, UK tax is due on all income received from the employer regardless of where the employment duties are performed and tax is deducted at source under the “pay as you earn”[44] regulations.

 

The treatment of income arising from overseas performances will depend on whether the player is “ordinarily resident” in the UK and where the employer is based.

 

Where the player is ordinarily resident and has a UK employer, income arising from non-UK performances is subject to UK tax under the arising basis. However, where the player is not “ordinarily resident” in the UK and claiming the “remittance basis” of tax, UK tax is payable on earnings arising from UK performances, and to the extent that earnings arising from overseas performances are paid overseas and not remitted to the UK, the income is not subject to UK tax.[45]

 

Image rights, advertising and endorsement income

 

Payments received in respect of the exploitation of the player’s image rights, advertising and endorsement activities are also treated as income, usually trading income subject to UK income tax at the rates shown. However, the nature of the income received will be determined by the terms of the applicable contracts.

Where the incoming player is taxed in the UK on the arising basis, all income received in respect of image rights, advertising and endorsement activities are subject to UK tax regardless of where the income arises and where the services take place.

 

Where the player is taxed under the “remittance basis” in the UK, it is possible to limit the UK tax payable on income arising from the exploitation of the player’s image rights, advertising and endorsement activities to those services which are performed in the UK only, to the extent that income arising from foreign services is paid overseas and is not remitted to the UK.

 

Determining UK and foreign services

 

In order to determine UK and foreign services, it is necessary to understand where the player performs the obligations under the various contracts. This is not necessarily where the sales, advertising or promotion takes place but where the player is when he performs the various elements of the contract such as personal appearances, photo shoots and sponsorship services.

 

Where the sponsorship or advertising is in relation to the player’s clothing worn or the equipment used in their team performances, the proportion of advertising or sponsorship income subject to UK tax will be higher where the player plays predominantly in the UK regardless of whether the income is remitted here.

 

Social security

 

When an incoming professional team sports player arrives in the UK to take up employment or self employment, they will generally be required to pay UK NICs from the point of arrival unless they qualify for one of the exemptions mentioned above.

 

Nonresident professional team sports players

 

Where professional team sports players are employed by a non-UK team but come to the UK to play a game being held in the UK, they are subject to UK income tax on income arising from their UK performance even though they are not UK tax resident.[46]

 

There is no specific exemption or de minimis income threshold available for non-resident professional sports team players who carry out some of their duties in the UK. There may be some relief afforded by a double tax treaty which the UK has with another country but this depends on the particular facts and circumstances of each case. As an example, the UK/US double tax treaty allows a measure of relief but this is limited to $ 20,000 per taxable year.[47]

 

The income assessable to UK tax includes both the fee or salary payment received in respect of this UK performance but also any expense payments, merchandise, image rights or endorsement income arising from this appearance regardless of whether the income is paid by a UK payer and whether the income is received into the UK. Under the ruling given in Agassi vs. Robinson, it was held that s.555(2) of the Income and Corporation Taxes Act 1988[48] imposes a primary tax liability on the entertainer or sportsman in respect of their UK activities which is not removed when there is a foreign payer.

 

This has resulted in the UK tax authorities seeking to assess a proportion of a foreign sports player’s endorsement, advertising and image rights income which can be directly attributable to a public UK performance.[49]

 

The calculation of the income subject to UK tax is based on the number of public UK appearances as a proportion of total public worldwide appearances. Appearances can include private training days. There is also a requirement to operate UK tax withholding in respect of such income.[50]

 

This approach by the UK tax authorities has caused controversy and there has been significant press comment around professional sports players’ refusal to compete in the UK due to this ruling putting at risk the attraction of the UK as a venue for high profile sporting events which would have a detrimental effect on the UK economy in the long term.

 

The UK authorities have reacted to this by issuing exemptions from taxing sports players earnings arising from certain key UK sporting events such as the Champions League final and the Olympic Games.[51]

 

Tax management

 

As with most jurisdictions, the opportunity to manage the incoming professional team sports players’ exposure to UK tax is in relation to the income that arises from their non-playing activities such as image right exploitation, advertising and sponsorship. Generally, this should be considered ahead of the incoming professional team sports player both signing any playing or non-playing contracts and arriving in the UK.

 

It may be possible for the player to license the rights to exploit his image to either his club and/or third parties. Where the player is not domiciled in the UK, advantage can be taken of the “remittance basis” of UK taxation and if structured appropriately, the player can limit the proportion of image rights income arising from overseas services to the charge to UK tax, on the basis that the income is received overseas and not remitted to the UK. It is therefore common for non-UK domiciled players to receive the income arising for the exploitation of their image by both the club and third parties into a non-UK tax resident entity and for the player to carry out the obligations under the image rights contracts overseas where possible.

 

The UK tax authorities have been very active in challenging the treatment of income received by incoming professional team sports players particularly following the introduction of the additional income tax rate of 50% on income over £ 150,000. The areas of interest include how the club splits the income payable between the player’s salary for club appearances and that attributed to the licence of the player’s image. In addition, the UK tax authorities have sought to agree in advance the proportion of the image right activities that relate to UK performances and are subject to UK income tax, instructing the clubs to withhold UK tax on these amounts before payment is made to the player’s overseas image rights entity.

 

Conclusion

 

Incoming professional team sports players are subject to UK tax under the UK residence rules that apply to individuals. However, planning opportunities exist as the UK system of taxation allows incoming professional team sports players to minimise their UK tax on foreign source income depending on their UK residence and domicile status. However, we are seeing an increase in the UK tax authority’s activity in policing this via challenges regarding income allocation and the enforcement of the “Agassi principle”. It is therefore advisable for any incoming professional team sports player to seek tax advice ahead of coming to the UK and before signing contracts for both playing and non-playing activity.

 



[1] Director, Sports, Media and Entertainment Team, London, UK. E-mail jlloyd@deloitte.co.uk.

[2] Director, International Social Security, London, UK. E-mail jweekes@deloitte.co.uk.

[3] Partner, Global Employer Services, London, UK. E-mail swoodhouse@deloitte.co.uk.

[4] This does not include visiting sportsmen and entertainers who are subject to the rules explained later in this article under “Nonresident incoming professional team sports players”.

[5] Part 2 of the Income Tax Act 2007 (“ITA 2007”) set out the basic provisions on the charge to income tax. Chapter 1 provides an overview, Chapter 2 provides the rates at which income tax is charged, and Chapter 3 explains how an individual’s income tax liability is calculated.

[6] Her Majesty’s Revenue and Custom’s (“HMRC”) practice on residency is now summarised in HMRC’s booklet, HMRC 6 (“HMRC 6”) . This was previously held in booklet IR20. As with IR20, HMRC 6 states that the booklet only provides general guidance and that it has no legal effect. HMRC have always contended that as it only provides guidance, it is not binding. However, it was held in a high profile recent tax case (“Gaines-Cooper”) regarding residency, where although the taxpayer lost, that HMRC should be bound by their guidance. Despite this positive development, because of the way HMRC 6 is drafted (with many caveats and qualifications) it is still difficult for the tax payer to conclude whether an individual has become nonresident solely by adhering to the rules contained in the guidance.

[7] HMRC 6, chapter 2, paragraph 2.2.

[8] HMRC 6, chapter 7, paragraph 7.7.1.

[9] HMRC 6, chapter 7, paragraph 7.5.

[10] HMRC 6, chapter 2, paragraph 2.2.1.

[11] HMRC 6, chapter 7, paragraph 7.7.3.

[12] HMRC 6, chapter 4, paragraph 4.3.

[13] Earnings: section 15(1) of the Income tax (Earnings and Pensions) Act 2003.

Trade Profits: section 6(1) of the Income tax (Trading and Other Income) Act 2005.

Property Income: section 269(2) of the Income Tax (Trading & Other Income) Act 2005.

Savings and Investment Income: section 368(1) of the Income Tax (Trading & Other Income) Act 2005.

Miscellaneous Income: section 577(1) of the Income Tax (Trading & Other Income) Act 2005.

[14] Section 2(1) of the Taxation of Chargeable Gains Act 1992.

[15] Subject to the “remittance basis” charge which is payable by individuals who have been resident in the UK for 7 out of the last 9 years (£ 30,000), or if resident in the UK in 12 out of the last 14 years (£ 50,000) before the year in question. The remittance basis can be applied automatically (i.e. without being claimed) where unremitted foreign income and gains are less than £ 2,000 during the tax year. Automatic application of the remittance basis can also occur where the individual has no UK income or gains (other than taxed investment income not exceeding £ 100), makes no taxable remittances to the UK and either has not been UK resident for 7 out of the last 10 years, or is under the age of 18 throughout that year.

[16] Non-UK income: chapter A1, part 14 of the Income Tax Act 2007.

[17] Non-UK gains: section 12 of the Taxation of Chargeable Gains Act 1992.

[18] Under proposals in the Finance Bill 2012 non-domiciled individuals can bring overseas income and gains into the UK taxfree in order to make a commercial investment in a qualifying business.

[19] Section 828A of the Tax Act 2007.

[20] Section 6 of the Income Tax Act 2007.

[21] Section 4 of the Taxation of Chargeable Gains Act 1992.

[22] The Chancellor announced on Budget Day the intention that the additional rate of tax will be 45% from 6 April 2013.

[23] The Chancellor announced on Budget Day the intention that the additional rate of tax on dividends will be 37.5% from 6 April 2013.

[24] The amount of the allowance is depending on the age and income of the taxpayer (sections 35 to 37 of Income Tax Act 2007). It was announced in the Budget that from 6 April 2013, the age related allowance under section 36 and section 37 will not be increased and their availability will be restricted to those born before 6 April 1948, or 6 April 1938.

[25] Section 3 of the Taxation of Chargeable Gains Act 1992.

[26] Section 56 of the Income Tax Act 2007.

[27] Section 24 of the Income Tax Act 2007.

[28] Section 26 of the Income Tax Act 2007.

[29] The Government has proposed to impose a cap on income tax reliefs claimed by individuals from 2013. This is currently in consultation.

[30] Chapter 3, part V of the Taxation of Chargeable Gains Act 1992.

[31] SSCBA 1992 section 2 and section 4(4).

[32] Article 12(1) of EC Regulation 883/2004.

[33] Article 14(1) a of EC Regulation 1408/71.

[34] EC Regulation 1231/2010.

[35] National Insurance Manual 33105.

[36] For example, article 4.2 of the UK/US Social Security Agreement.

[37] Article 13(1) of EC Regulation 883/2004.

[38] National Insurance Manual 33019.

[39] Regulation 145(2) of SI 2001/1004.

[40] National Insurance Manual 33032.

[41] Section 4 of the Income Tax (Earnings & Pensions) Act 2003.

[42] Section 62 of the Income Tax (Earnings & Pensions) Act 2003.

[43] HMRC Employment Income Manual – 60000 – Tax treatment of particular occupations.

[44] Section 684 of the Income Tax (Earnings & Pensions) Act 2003.

[45] HMRC 6, pararaph 10.10.1 provides a useful summary on how employment income is taxed in the UK .

[46] Section 13 of the Income Tax (Trading & Other Income) Act 2005.

[47] Article 16, 2001 UK/US Double Tax Agreement.

[48] Re-enacted in Section 965 of the Income Tax Act 2007.

[49] Section 13 of the  Income Tax (Trading & Other Income) Act 2005.

[50] Section 966 of the Income Tax Act 2007.

[51] The London Olympic Games and Paralympics Games Tax Regulations 2010 –Statutory Instrument (SI 2010/2913)