Can the UK survive as a major player in international sporting events without changes to the way events and competitors are taxed?

Guest blog post, from Steven Dunham, Dunham Consulting As the UK prepares to host the world’s largest sporting event, the London 2012 Olympic and Paralympic Games, part of the so-called ‘Golden Decade’ of sport events to the held in the UK, the long term ability to compete to host major sporting events continues to be undermined by HM Revenue & Customs’ (HMRC) attitude and strategy to the taxation of the organisers and competitors at these events. The danger is that the UK will be seen as ‘closed for sport’, deterring organisers from wanting to consider the UK as a location for their event and prompting athletes to question whether participation in an event staged in the UK should be included in their schedule. The impact of losing or not being able to attract the world’s best events and athletes to the UK needs to be measured in more than pure economic terms alone. The recent enquiry by the Riots, Communities and Victims Panel into last Summer’s riots identified a lack of ‘belonging to society’ as a key factor, especially in the young and sport, more than any other activity, builds bridges, brings together all levels of society and develops a level of inclusion for the benefit of all. So, how do we find ourselves in this position? Taking athletes first, the UK revenue authorities, in line with most other countries, tax non-UK resident competitors on prize money and appearance fees attributable to matches or tournaments held here. However, in addition to this, HMRC also seek to tax a proportion of an athletes’ global endorsement income following their victory in a tax case against Andre Agassi back in 2006. The only other country that applies the same treatment to worldwide endorsement income is the US. In addition, since their victory, HMRC has significantly changed the way it calculates how much of this endorsement income should be liable to tax. Initially a proportion of overall deals which related to non-playing services (the ‘image’ element) was excluded from the UK tax calculation, with the ‘playing’ element simply pro-rated based on time spent in the UK in a particular tax year. However in recent years, HMRC has sought to take a different approach by asserting the whole contract relates to ‘playing’ services and apportioning on the basis of the proportion of the events an athlete takes part in, which has the overall effect of yielding a higher return for HMRC. The impact of these rules on athletes behaviour has already been seen with Usain Bolt declining to take part in the Aviva London Grand Prix in 2010, Rafael Nadal announcing he will not be taking part in the AEGON Championships at the Queen’s Club this year and the ATP considering moving the end of season World Tour Finals from London once its current deal expires in 2013. Turning to the event holders, where they are also non-UK resident, such as International Olympic Committee (IOC), FIFA, UEFA, ATP, ICC etc, they could potentially fall within the charge to tax in the UK. The length of time the event holder is expected to be in the UK is the key issue as if they are regarded as having a ‘permanent establishment’ during that time they could be subject to tax as an entity. This is in respect of direct taxes, VAT is subject to different rules and is not considered here, though it too can have a significant financial impact on an event. It is normal that the event holder will include as part of the conditions for a successful bidder, to indemnify the event holder from any tax liabilities that may arise on them as a result of being awarded the event. If a bidder is unable to offer such indemnities or secure exemptions from their revenue authorities, then it is unlikely they will be successful in securing an event, as was the case for the 2010 UEFA Champions League final, when UEFA cited the lack of certainty over the taxation of the event in its reason for choosing Madrid over London as the venue. Because of HMRC’s unwillingness to alter the current rules, what we have seen is individual sports lobbying both Government and HMRC for specific event exemptions, which though ceded to in certain situations, has led to holders of UK based events demanding a level playing field as they consider the value of their events could be eroded if they are unable to secure the world’s best athletes to compete. To date, legislation has already been enacted in Finance Act 2006 for the 2012 Olympic and Paralympic Games in London to exempt non-UK resident individuals and organisations from income and corporation tax from the period from 30 March 2012 to 8 November 2012. However, HMRC have announced in their guidance notes that what they consider to be exempt activities under the legislation are not as generous as first thought, meaning organisations and individuals, especially athletes, will need to take care so as not to fall within the normal taxation provisions for non-UK residents. Finance Act 2010 included specific exemptions for non-UK resident finalists of the 2011 UEFA Champions League held at Wembley, which exempted from income tax any employment or trading income arising on employees related to duties or services performed by them in the UK in connection with the final. A similar exemption has been included in Finance (No 4) Bill 2012 to apply to the 2013 UEFA Champions League final which will also take place at Wembley. Budget 2012 also saw the Government announce that legislation would be included in Finance Bill 2013 to exempt non-UK resident athletes competing in the Glasgow 2014 Commonwealth Games from tax and the assumption is this is likely to follow that introduced for London 2012. Another welcome, if surprising, move was also announced in Budget 2012 when it was stated that HMRC will revise its practice on the taxation of non-resident sports people to take training days into account when calculating the proportion of worldwide endorsement income subject to UK tax. However, there are still questions around what constitutes training days and the non-inclusion of travel days that need to be addressed. In addition, the bigger issue of what is included in the endorsement income calculation on which the tax is assessed needs to be revisited. Currently HMRC still consider the whole of these contracts relate to performance and make no allowance for the value of the athlete’s image so look to take into account 100% of the contract value in the apportionment calculation. A recent tax case in the US involving the golfer Retief Goosen saw the courts attribute a 50/50 split between image and performance for on course endorsement contracts and the case has not been appealed by the IRS. Therefore a movement by HMRC in this area would also be beneficial, though surely the long term solution must be to exclude endorsement income altogether from the calculation and only tax prize and appearance money. So while specific exemptions are being given and there does appear some movement in HMRC’s attitude to the endorsement income issue, surely the time has come for tax exemptions to be provided for all major sports events to be hosted in the UK? Studies have suggested that the amount of tax collected from non-UK resident athletes on their endorsement income is around £7m per annum - a minute sum when set against the UK’s overall tax take. The substantial economic benefit to the UK economy that these events bring far exceed the tax lost and the social impact of hosting major events and being able to witness major sports stars in our country has on society means the current situation cannot continue. Sport is a vital piece of this country’s make-up and if we are to continue to preserve this for future generations the taxation of major events and athletes cannot undermine this. For further information please contact: Stephen Dunham Tel: +44(0)118 933 2588 Email: steve@dunhamsconsulting.co.uk Website: www.dunhamsconsulting.co.uk