Taxation of image rights agreements – vital lessons for football clubs and players from the Hull City Tigers v HMRC decision
In a Decision1 released on 22 March 2019, the First-tier Tax Tribunal2 (FTT - Judge Jonathan Cannan) ruled that payments made by a (then Premier League) football club to an offshore service company, purportedly in respect of a player’s image rights, in fact constituted the player’s earnings.
The judgment provides the first comprehensive judicial guidance in almost 20 years as to how the Tax Tribunals should approach the question of whether payments purported to be for use of image rights in fact constitute “earnings”3 of the player (and are thus subject to income tax (PAYE) and National Insurance contributions (NIC)) and the circumstances in which a Tribunal is likely to find that such payments were in fact disguised remuneration.
As well-known international footballers started to move to the Premier League in the 1990s, the top clubs began to adopt the use of image rights contracts. These allowed them to separate the payment of players for playing football under their employment agreements, from payments to the player’s (often offshore) image rights company in consideration for the right to commercially exploit the player’s image. The assumed advantage was that payments genuinely made for use of a player’s image would not be treated by HMRC as salary, but rather as payments to the offshore image rights company for services provided, thereby saving income tax for the player, and National Insurance contributions for both the player and the club.4
In 2000, the tax treatment of image rights payments was tested before the Special Commissioners5 in Sports Club plc, (Evelyn) & (Jocelyn) v HM Inspector of Taxes6. The Appellant club and the players involved were at the time anonymised, but it has since been widely reported that the club was Arsenal and the players were (then current) Dutch international Dennis Bergkamp (Evelyn) and former England international David Platt (Jocelyn). The Special Commissioners held, relevantly, that on the particular facts of the case, the promotional and consultancy agreements entered into between Arsenal and the players’ image rights companies had an independent value and the payments were not a “smokescreen” for additional remuneration. Given the stature of the players involved, it was clear that commercial sponsors were willing to pay for the right to use their images in association with products, the players had had similar agreements with other clubs, and other players of equivalent calibre and renown also had similar agreements in place. The Revenue did not appeal the decision in Sports Club and several years passed before the issue was considered again.
In January 2005 HMRC opened another enquiry into a UK resident player who was not UK domiciled, in order to investigate the facts underpinning an image rights agreement between his then Premier League club employer and an offshore image rights company. HMRC was concerned in the particular circumstances of this case that the “image rights agreement” had not been entered into for genuine commercial reasons (as per Sports Club) and that the payments made pursuant to it were in fact disguised remuneration leading to a concomitant obligation on the club to operate PAYE/NIC in respect of the payments.
Following a two-year enquiry in which it was unable to provide evidence to support the level of image rights payments which had been made, the club accepted that a large proportion of the payments made had in fact been wages and conceded its liability to operate PAYE and NIC on those sums, settling (under a confidential settlement agreement) with the Revenue on that basis7.
Following this enquiry, HMRC decided to review how common such “image rights” arrangements had become in practice since Sports Club. In July 2007 it opened enquiries into 25 football clubs in the Premier League and Championship. Whilst the facts varied between cases, a pattern emerged in which clubs struggled to provide evidence to justify commercially why they had entered into image rights arrangements. Moreover, the payments said to have been made pursuant to those arrangements were often uncommercially excessive. HMRC’s conclusion was that in a number of cases, clubs were using the arrangements as a tax avoidance tool as well as a means of gaining an advantage over competing clubs by offering tax free perks to entice sought-after players to sign for them instead of a rival (see the Hull v HMRC Decision at paragraphs 51-53).
In December 2010 the Premier League met with HMRC in order to try to find a workable solution to this issue on behalf of its members. A settlement proposal was formulated in relation to prior years’ image rights payments, using as its basis the broad fact patterns which had emerged during the individual club enquiries. All of the clubs into which enquiries were opened ultimately settled on the proposed terms with the exception of Hull City (see the Hull v HMRC Decision at paragraph 52).
The Facts in Hull’s case
Having recently been promoted to the Premier League for the first time in its history, Hull City signed8 former Brazilian international, Geovanni, in July 2008 on a free transfer, following his release by his previous club Manchester City at the end of the 2007/08 season. Four months after the signing, Hull entered into a separate “Image Rights Agreement” in respect of Geovanni’s overseas image rights with Joniere Ltd, a service company registered in the BVI. In the period December 2008 to July 2010, Hull paid Joniere a total of £440,800, purportedly under the terms of two such “image rights” agreements.
In August 2011, HMRC opened an image rights enquiry in relation to Hull. In circumstances in which Geovanni was no longer UK resident, was not UK domiciled, and had by then reprised his playing career in Brazil, no enquiry was opened into his individual tax affairs. Following an 18-month enquiry, on 20 February 2013 HMRC issued Regulation 80 Determinations9 against Hull in relation to unpaid PAYE and Section 8 Decisions in relation to unpaid NICs10 in respect of the tax years 2008/09, 2009/10 and 2010/1111 totalling approximately £250,000 in unpaid income tax and NI contributions. Following an HMRC internal review which upheld the Determinations and Decisions on 1 April 2015, Hull notified a statutory appeal to the FTT in April 2015.
The Parties’ Contentions
Hull contended that the Image Rights Agreements were, per Sports Club, genuine agreements which required payments to be made to Joniere in respect of Geovanni’s image rights. It argued that in the absence of any argument posited by HMRC that the agreements were sham, there was no basis to characterise the payments made pursuant to them as earnings.
HMRC contended that it was not necessary to advance a case of sham. Relying on the approach set out by the Supreme Court in the cases of UBS and Deutsche Bank v HMRC12 and RFC 2012 Plc (in liquidation) (formerly Rangers Football Club Plc) v Advocate General for Scotland13 HMRC argued that taking all the circumstances into account and viewing the payments realistically, they represented earnings of Geovanni and not payments for image rights at all. Accordingly, Hull was liable to account for tax and national insurance in respect of them pursuant to Part 2 of the Income Tax (Employment and Pensions) Act 2003.
The Findings and Decision
The FTT agreed with HMRC’s submission that it was necessary to look at the substance of the sums paid, not their form, in order to determine whether, realistically viewed, the payments were a reward for Geovanni’s past, present or future services as a footballer (i.e. “earnings”) or whether they were in fact consideration for the licensing of his overseas image rights (paragraph 35).
The Tribunal also agreed that it was not necessary to find that the agreements were a sham or pretence in order for HMRC’s case to succeed, nor was it necessary for it to deploy the Autoclenz14 approach whereby a Tribunal may disregard or “look behind” written terms in an agreement which do not genuinely reflect the true intentions of the parties to that agreement (paragraph 47).
In concluding that the payments, viewed realistically, were earnings, the Tribunal made the following notable findings of fact:
Whilst it is not just players in the “elite group of recognisable sportspeople” who have image rights with an overseas commercial value, what makes a player sufficiently recognisable for their image rights to be valuable will include: their talent; the league in which they play; the team for which they play and possibly other personal attributes (such as their nationality) (paragraph 118).
Clubs who intend to acquire and exploit players’ image rights would be well advised to keep negotiation of that agreement separate to the salary negotiation and to ensure that the valuation of image rights is documented by reference to a business case for the initial acquisition, together with analysis monitoring the effectiveness of the exploitation of the rights over the period of the agreement (paragraph 53(5)).
Hull did not, at the time, have the experience, resources or ability to exploit the commercial opportunities associated with players’ overseas image rights. The club’s two principal sponsors were based in Hull and yet the domestic market was, notably, not covered by the image rights agreements (paragraph 53(6)).
No due diligence had been carried out by Hull in relation to Joniere and there was no evidence that the Club had ever taken steps to ascertain whether or not Joniere actually owned Geovanni’s image rights (paragraph 72). In the circumstances, nobody at the club could reasonably have believed at the time that Geovanni’s overseas image rights had any commercial value (paragraph 123).
Geovanni’s basic wage at Hull under his playing contract was £748,800 and the annual “image rights” payment of £187,200 was exactly 25% of that sum. However, there was no reliable evidence at all as to how the parties had arrived at quantum of the annual image rights payment and no valuation advice had been sought or received by Hull at the time (paragraph 86).
Viewing the facts realistically, the Tribunal found that the reason that Hull took no steps to exploit Geovanni’s overseas image rights was because it never had any clear intention, plan or real interest in commercially exploiting those rights (paragraph 90), in particular, the Tribunal held (at paragraph 128):
There was no reliable evidence as to how Hull had arrived at the quantum of the annual image rights payments.
Hull never obtained a valuation or opinion as to the value of Geovanni’s overseas image rights in 2008 or 2009.
Hull offered to increase the sum payable for Geovanni’s image rights in 2009 without any contractual obligation to do so and as part of negotiations intended to secure the player’s services as a footballer for a further year.
Hull did not have the resources to exploit Geovanni’s overseas image rights even if there had been a market to do so.
Geovanni’s overseas image rights were never in fact commercially exploited, before, during or after his period at the club.
No one at the club had ever addressed their minds to whether it was realistic to consider that the club could commercially exploit Geovanni’s overseas image rights.
The payments made in purported connection with overseas image rights were in fact made in order to encourage Geovanni initially to enter into – and then to extend – his playing contract with Hull. In short, they were a reward for his services as a footballer and formed part of his earnings (paragraph 100).
The Hull decision is the first time that the FTT has considered the taxation of payments purportedly made in connection with a footballer’s image rights since 2000 (in Sports Club) and it should be of widespread interest and application to clubs, players, agents and advisors in the football industry in connection with the negotiation of image rights contracts.
It is also likely to result in HMRC scrutinising afresh the use of image rights agreements in the sports and entertainment sectors, with particular scrutiny on whether there is sufficient evidence of commerciality where these agreements are used.
Evidence of commerciality will come in many forms, but might include, (among other things):
Documented consideration of the justification for the use of image rights agreements at board level.
The acquisition of independent and specialist valuation advice prior to entering into such agreements.
Proper enquiry into whether an individual has actually established an image rights company in an appropriate jurisdiction and has legally assigned their image rights to the company.
Evidence of negotiations between a club and an image rights company in relation to the value of the image rights. This should be conducted separately to the negotiation of the terms of the playing contract.
The creation and ongoing review of specific business plans detailing anticipated revenue generation and outlining the types of promotional opportunities in which the individual might be utilised, and in which territories.
The compilation of detailed schedules setting out the number, type and frequency of events which the individual might have to attend pursuant to the image rights agreement.
Contractual clauses suspending payments in prescribed circumstances (e.g. in the case of a footballer going out on loan to another club).
Of course, at the conclusion of its contractual term, clubs would be well-advised to undertake a review of the arrangements both in order to discern whether or not they have actually received value for money and also to inform future image rights negotiations. An annual report might be produced in order for the board to review the return on such contracts.
Finally, given the danger that a “global” negotiation might suggest that an “image rights” payment was in fact part of an overall employment package and/or an inducement to extend a playing contract, parties would be well-advised to consider a contractual term for an image rights agreement which is not co-terminus with the length of the playing contract or contract of employment. A 12 month agreement, renewable only on satisfaction upon annual review that the agreement has been fruitful, is likely to be persuasive evidence that the payments, viewed realistically, were genuinely made in consideration for the right commercially to exploit a player’s image rights, and were not earnings.
The article is based upon an original piece by the authors that is available to view here15. Akash Nawbatt QC and Sebastian Purnell appeared on behalf of the successful Respondent, instructed by the General Counsel and Solicitor to HMRC.
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- Tags: Commercial | Employment | First Tier Tax Tribunal | Football | HM Revenue & Customs (HMRC) | Image Rights | Premier League | Tax | United Kingdom (UK)
Queen's Counsel, Devereux Chambers
Akash Nawbatt QC’s principal areas of practice are Tax and Employment law. He is instructed in complex and high value litigation, and has appeared before the Employment and Tax Tribunals, the High Court, Court of Appeal, House of Lords and the Supreme Court. He is ranked as a leading silk for Tax and Employment by both Chambers & Partners and Legal 500, and is described as "A fearsome cross-examiner," who "really gets to grips with the detail of a case". To follow Akash on Twitter (@AkashNawbatt) click here, and on LinkedIn, click here.
Barrister, Devereux Chambers
Sebastian Purnell is ranked in the legal directories in all three of his principal practice areas (Employment, Tax and Sport). He has appeared before the Employment and Tax Tribunals, Sports disciplinary tribunals, High Court and Court of Appeal in a broad range of statutory appeals, disciplinary proceedings and judicial review proceedings. Seb is ranked as a leading junior in Employment by Who’s Who Legal and a leading junior in Tax and Sport by Legal 500 which describes him as “thorough, calm and creative, with excellent experience in complex sports tax cases” To follow Seb on LinkedIn, click here.