Attracting top talent: Why the UK should reconsider the way it taxes non-resident athletes
Published 31 August 2016 By: Nicola Parkinson
When the country embraced London 2012 with great enthusiasm, few would have realised that, without the introduction of a simple tax exemption1, London could have jeopardised its chances of ever becoming the host city.
Whilst the UK now recognises the importance its tax laws can have on its attractiveness as a place for international competition, it still continues to deal with large-scale sporting events on a case-by-case basis. Resultantly some international sports stars refuse to participate2 in the UK on the grounds of unfavourable tax treatment. The non-resident athlete's perspective is that the UK tax regime is unattractive because the UK seeks to tax a disproportionate amount of their endorsement income.3 However, rather than reform its current regime to deal with these criticisms, the UK has chosen to offer ad hoc exemptions to a limited number of international events.
With this in mind, this article examines the current status of the tax rules relating to non-resident athletes, the issues that arise as a result and whether, on balance, the UK's policy is in need of reform.
From these explanations, we see that the main point of contention for non-resident athletes is that, in addition to HMRC wanting a share of any of their UK winnings (itself relatively uncontentious), it also wants a share of each athlete's global endorsement income. This typically includes sponsorship/advertising income and payments for image rights, and is true whether or not the relevant contracts were concluded in the UK and regardless of whether the income relates directly to activities carried out in the UK.
Legislation dealing specifically with non-resident athletes was introduced in 19875 and was designed to ensure that competitors paid income tax on all income stemming from their performance in the UK, including income from appearances and endorsements. When the legislation was first introduced, HMRC accepted6 that there was a distinction between passive income (which accrued regardless of whether or even where the individual was competing) and active income (which related directly to a particular competition). HMRC sought to tax only a fraction of the active income based on the proportion of days spent in the UK over a denominator of 330 days (i.e. a full year with an allowance for five weeks' holiday).
However, without any change in the underlying legislation, HMRC changed their approach in 1999. Thereafter, HMRC decided7 that the entirety of an athlete's endorsement income was to be taken into account and that the apportionment should now be calculated based on the number of competition days. For athletes with substantial endorsement contracts or who only competed for a handful of days per year, this represented a dramatic change. For example, a marathon runner with endorsement income of £500,000 (split equally between passive and active income) completes two marathon per year (one being the London Marathon). Under the pre-1999 interpretation, only around £760 is taxable in the UK (1/330 x £250,000).
Following the 1999 changes, the level of UK taxable income increases to £250,000 since passive income is no longer discounted and the runner only completes two competition days a year. The rules were relaxed after Budget 20128 to allow athletes to take account of training days which will greatly assist athletes like our hypothetical marathon runner, but even this has its caveats and HMRC expects athletes to keep detailed logs.9
Impact of UK policy on non-resident athletes
One of the main criticisms of the UK's taxation of non-resident athletes is that they can end up paying more in UK taxes than they have actually won. It is worth noting that the rules which tax endorsement income still apply even where there is no prize money up for grabs.
Imagine that Pablo is an up and coming tennis star resident outside the UK. He is climbing the world rankings and has quickly become tennis' latest poster boy. All this means he has just landed a new endorsement contract with Nike worth £6 million a year.
This year Pablo has won £250,000 at each of the four Grand Slam tournaments (the French Open, Wimbledon, the US Open and the Australian Open) taking his prize winnings to £1 million.
Pablo's total training and performance days during the year total 321, of which 21 were spent in the UK. So for UK tax purposes, his taxable income is £642,523:
|Portion of Endorsement Income (21/321)||£392,523
|Total UK Taxable Income||£642,523|
This will create an income tax charge of approximately £275,236:
|Amount||Tax Rate||Tax Charge|
This is more than Pablo won playing in the UK. Depending on the terms of the UK's tax treaty with the country in which he is resident, Pablo may be able to claim double tax relief such that he can reduce his tax liability in his country of residence by reference to the tax paid in the UK. However, he may not receive full relief if the tax rate applicable in that country is less than in the UK.
The consequence is that several high-profile sports stars have questioned the benefits of competing in the UK. Most notably, Usain Bolt refused to compete in the Aviva London Grand Prix citing UK tax laws and only returned to the UK for London 2012 after the Government granted athletes specific exemptions.10 Other stars who have spoken out against the UK's tax laws include Rafael Nadal (who opted to compete in Germany over Queens in the run up to Wimbledon)11 and Sergio Garcia12.
Introduction of ad hoc exemptions
As a result of these criticisms and the pressure placed on governments to offer incentives to secure the right to host international events13, the UK Government now has a policy of introducing one-off exemptions for specific events. These exemptions disapply the usual income tax rules which could catch any winnings, appearance or endorsement income for the period of the specified events. The introduction of an exemption is typically the result of a request from the organisers or the team submitting a bid to host the event.
Events that have benefited from this policy include the Champions League final in 2011 and 2013 (Wembley having missed out on the 2010 final as a result of the UK's tax rules), the London 2012 Olympics and Paralympics as well as the Glasgow Commonwealth Games. No exemption was made available for the Rugby World Cup, reportedly on the basis that the International Rugby Board never a request and it was not a condition of the UK hosting the event.14
In order to better facilitate its policy, the Government introduced new legislation as part of the Finance Act 201415 to enable the Treasury to introduce new exemptions by way of regulation (rather than a new act of Parliament). The first example of this rule in action was the recent publication16 of regulations to cover the 2016 London Anniversary Games and the 2017 World Athletics Championship.
The Government's stated policy is that it will only legislate to provide tax exemptions in circumstances where:
- an exemption is a necessary condition of a bid to host an internationally mobile event at the highest level of world sport; or
- where the event in question provides an exceptional opportunity to prolong the legacy of the 2012 Olympic and Paralympic Games.17
To date, the Government has declined to introduce a general exemption for all non-resident competitors or to alter legislation to address the underlying criticisms of the UK's tax rules. This means that competitors at home grown competitions (such as Wimbledon and The Open) will never benefit from an exemption as things currently stand. It also means that less well publicised events similarly do not benefit. For example, MP Rebecca Long Bailey highlights18 that although the men's Champions League final benefited from exemption in 2013, the women's final of the same year did not. Whilst there is no suggestion that this is direct discrimination on the part of the Government, it is an unfortunate symptom of its policy.
The way forward
In summary, in the author’s view, the UK's existing tax rules are having an impact on its ability to attract top competitors, and this is a problem that needs to be addressed for the benefit of sporting competition in the UK. The problem can be broken down into two questions:
- Is it right that the UK offers tax exemptions to some non-resident competitors and not others; and
- If not, what should be done to address this issue?
The first question is essentially whether the current system of ad hoc exemptions is fair. Most would assume that all taxpayers in the UK (whether or not UK resident) ought to be able to expect fair and equal treatment when compared to their peers. This is a principle with which the Government's current policy appears to be at odds. The current system cannot therefore be described as fair. In that regard, it is interesting that HMRC's 1986 Charter19 included the concept of fairness, but this was notably absent from the 2016 reiteration. Furthermore, at a time when there is an outcry over big business being given perceived special deals20 and preferential treatment by HMRC, the granting of special exemptions seems to run contrary to prevailing public opinion.
The second question is much more difficult to answer and it is here where economics will likely rule. From a simplistic perspective, income derived in the UK should be taxable in the UK suggesting that the system of ad hoc exemptions should stop. In its place should sit a new regime which better reflects the time spent by athletes in the pursuit of their sport and whether income is actually derived in the UK. This would be a system more closely related to the original system of taxation that existed before HMRC's change of position in 1999.
However, common sense must dictate that if the ability to host major international events brings more revenue to the UK economy than the UK loses in tax revenue as a result of these exemptions, then the UK is better off under the current system. Therefore, whilst the current system might not be fair, it is justified and the only way to bring fairness back to the way the UK taxes non-resident athletes is to offer the exemption to all. This would come at further cost to tax revenues but as far as the author is aware the research indicates that this would be more than outweighed by the benefit to the UK economy of the UK's continuing ability to attract international events.
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- Tags: Athletics | Commonwealth Games | Finance | Finance Act 2014 | Glasgow | HM Revenue & Customs (HMRC) | Income Tax (Entertainers and Sportsmen) Regulations 1987 | London 2012 | Olympic | Paralympic | Tax | Tennis | UEFA Champions League | United Kingdom (UK)
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- How the UK taxes overseas athletes and what the consequences are for UK sport
- A sporting chance – making the UK an attractive place to host major sports events
- 7 key tax law issues affecting sports today
Nicola is a dual qualified solicitor and Chartered Tax Advisor and has spent her career working in both law firms and accountancy practices providing tax advice to her clients in a variety of areas.