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      Tuesday 19 November 2019

      Overseas athletes hit by UK income tax

       

      Managing director as representativeMost double tax treaties contain a clause requiring non-resident sportspeople to pay a certain level of income tax, usually at the basic rate, in the territory where events are held.

      Non-resident sportspeople who compete in the UK usually have to file a UK tax return showing their income calculations, which typically include direct UK earnings (e.g. prize money, appearance fees and specific UK-related bonuses) and a proportion of their global endorsement income relating to UK appearances. If their net UK profit exceeds the higher rate limit (GBP37,500 in 2019-2020), additional UK income taxes may be payable to HM Revenue & Customs (HMRC).

      The above sources of income will need to be reported regardless of whether this is earned personally or through a corporate vehicle due to strict “look-through” provisions.

      Filing a tax return may enable the athlete to recover some of the withholding taxes paid at source by claiming deductible expenses. Certain individuals are also entitled to a tax-free allowance each year (GBP12,500 in 2019-2020). However, in most cases, the inclusion of global endorsement income will give the athlete an additional tax liability that HMRC will chase and charge penalties if it is not declared and paid.

      The top rate of UK tax on income exceeding GBP150,000 is 45% so there are serious concerns about the inclusion of an athlete’s global endorsement income into the calculation of their UK tax position This is especially the case if they live in a low tax jurisdiction and will not be able to claim a credit for the UK tax.

      Apportionment of income

      The apportionment of endorsement income was historically based solely on UK performance days divided by global performance days in a tax year. A marathon runner may run two races a year, but if one is in London, 50% of the athlete’s global endorsement income would have been taxed in the UK even if they only spend a few days in the UK. HMRC have now accepted that the income will relate to a range of factors. For example; training, personal appearances and technical input into product development - which is required under the endorsement contract. HMRC therefore now accept an apportionment methodology that includes training days both in the UK and worldwide, which can reduce the entertainer’s UK tax liability considerably.  However, knowing what qualifies as a training day and holding the relevant proof can be quite a challenge.

      Even with the option to include training days in the apportionment of global endorsement income, it is possible for there to be quite severe tax consequences for athletes performing in the UK. A professional golfer who takes part in The Open Championship but doesn’t make the cut may end up paying UK taxes even if they make a loss on their direct income. Take the following example:

      • Direct UK earnings = GBP5,000 (nominal per diems from the organiser)
      • Global endorsement income = GBP5,000,000. Say 6 UK performance and training days over 300 total worldwide would bring in 2% of all global endorsement income into the UK tax net.
      • Example 1 shows taxation of direct UK income only (as in most countries).
      • Example 2 includes an apportionment of global endorsement income (as is the case in the UK and US).
       

      Example 1

      Example 2

      Direct income    

      GBP5,000

      GBP5,000

      Direct expenses (eg travel and accommodation)

      (GBP25,000)

      (GBP25,000)

      Allocation of global endorsement income

      GPB0

      GBP100,000

      Amount per UK income tax return

      (GBP20,000)

      GBP80,000

      UK income tax due    

      GBP0

      GBP24,500

      In this example, the individual leaves the UK with a direct loss of GBP25,000 yet has a UK tax liability of GBP24,500. In the past, this has led some professional sports people to consider whether or not a trip to compete in the UK is worth it. Due to this backlash, HMRC have been forced to exempt certain events from the foreign entertainer’s tax rules such as the Olympics and Commonwealth Games to ensure that the athletes attend.

      UK v Rest of the world

      Other than the UK, historically the US was the only jurisdiction that sought to tax a proportion of a non-resident sportsperson’s global endorsement income. This is less of a problem in the US, where the top rate of income tax is 35%. Moreover, in a past court case involving golfer Reteif Goosen, it was ruled that part of the endorsement income should be attributed to the player’s image, with the remainder apportioned based on playing days. HMRC have been very strict and said that they will not take the same stance as the US on professional image rights for self-employed athletes.

      A handful of other territories are now seeking to request that non-resident sportspeople file tax returns relating to prize money and appearance fees, with attempts to tax endorsement income too (notably France and Canada). But not yet on a consistent basis.  The vast majority of jurisdictions still simply require tournament promoters to withhold the basic rate of income tax from prize money paid to the players, with no personal local filings required.

      For more information, contact:

      Peter Hackleton
      Saffery Champness

      T +44 20 7841 4000
      pete.hackleton@saffery.com
      W www.saffery.com

      Date: October 2019

       Most double tax treaties contain a clause requiring non-resident sportspeople to pay a certain level of income tax, usually at the basic rate, in the territory where events are held.

      Date: October 2019
      Date: October 2019
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