How to structure image rights companies for international athletes working in the U.K.Jon Elphick
There appears to be an increasingly common misconception in the media that international athletes set up image rights companies as a “tax dodge” or part of a “secret deal” in an illegitimate attempt to reduce their UK tax liabilities.
In the author’s experience, such comments bear little resemblance to the requirements for any image rights arrangements to be legitimately established, both from a professional perspective and in the eyes of the UK tax authority, HM Revenue and Customs (“HMRC”).
This article looks at how international athletes living in the UK can structure their image rights arrangements to ensure that they are within the law. Specifically, it examines:
- HMRC’s current view on image rights;
- A short refresher on image rights companies;
- Non-UK image rights companies, and how international athletes working in the UK can use them effectively (including a worked example); and
- Author’s comment
HMRC’s view on image rights
HMRC’s position on image rights is not much of a “secret”. It is published within their internal manuals which, although aimed at providing guidance to HMRC employees, are freely available to any member of the public via their website. As an aside, the author would note that the individual tax arrangements of individuals (including athletes and/or sports club) are kept confidential by HMRC, as is the right of every taxpayer in the UK.
HMRC’s manuals (CG68405 to CG68415) likens an “image right” to “a bundle of tangible and intangible assets”, which could include contractual rights, registered trademarks, copyright and passing-off of goodwill. The recent case of Robyn Fenty and others v. Arcadia Group Brands supports the view that the protection of an “image right” derives from the passing-off of Goodwill.
HMRC’s manual CG68010 defines Goodwill as being “the whole advantage of the reputation and connection with customers together with the circumstances whether of habit or otherwise, which tend to make that connection permanent”.
This suggests that the athlete themselves would have to build both their reputation and connection with customers in order for any value to be, or have been, generated. In other words, the “image right” holder has to have undertaken sufficient activity to generate value in their image, rather than an image right being a passive element of an athlete’s tax planning. Moreover, the act of generating revenue from the right will generally require some sort of activity to be personally undertaken on the part of the individual athlete (whether that be a promotional photoshoot, participation in an advertising campaign, or a simple meet and greet as part of an arranged public event).
What is much less publicised (and per my above comment, rightly so) are the terms of the arrangements agreed between HMRC and the various football clubs in the UK who, as well as paying athletes a salary for representing the club, will make additional payments to some or all of those athletes in order to use their image and endorsement for commercial purposes. These arrangements are not “secret deals” put in place to allow clubs and players to dodge taxes; they are flexible arrangements that are intended to be reviewed annually based on pre-set parameters that focus primarily on a club’s commercial revenue (i.e. the amount of income a club has received from commercial partners by virtue of making the images rights of their playing staff available for exploitation). The value that the individual images have contributed to that revenue is also assessed. These parameters. were carefully developed by HMRC after spending over 4 years thoroughly investigating the image rights and commercial arrangements of the various premier league football clubs The are well summarised in an articleby Pete Hackleton published on LawInSport in July 2016: The current legal status of image rights companies in football.
Image Rights Companies
It is clear from the above that, although not a separate legal right under English law, HMRC recognises the existence of ‘image rights’. It is also clear that where image rights arrangements are put in place, there has to be some commercial substance behind those arrangements in order for an athlete to receive additional revenue from their “image rights”. In other words, an athlete cannot inflate the value of their image rights simply to take advantage of tax efficiency. With that in mind, there are a number of ways for an athlete’s image right activity to be structured.
As with any trade or profession, the activity can be undertaken as a sole trade (i.e. by the individual themselves), as part of a partnership (i.e. by the individual as part of a group of similar people undertaking a join activity together) or by a company.
Whilst carrying out the image right activity as a sole trade or part of a partnership should not be discounted completely, an “Image Rights Company” does provide a number of benefits to athletes. Companies have a number of well-known features, such as having limited liability and being considered to be separate legal entities, distinct from its members (rather than acting as an extension of its members). These provide legitimate non-tax reasons for structuring any business activity, including image rights exploitation, through a corporate vehicle.
Using Non-UK Image Rights Companies
Most, if not all, international athletes who become tax resident in the UK will be considered to be “non-doms” (in other words, foreign individuals whose family heritage derives from outside of the UK). This essentially means that:
- If the athlete is already well known when moving to the UK, then they are likely to have more value to a commercial partner in their home territory (or continent) than they do in the UK and, as a consequence, will generate more endorsement income from outside of the UK; and
- As a non-dom, the athlete can elect to be taxed under the non-dom regime whilst they are resident in the UK and mitigate UK tax on non-UK income and gains (you can read more about the tax position of a non-dom in a previous article written by this author for LawInSport: How athletes will be affected by the UK’s changes to “non-dom” tax rules).
Assuming the above is correct, a non-UK registered Image Rights Company is likely to be a highly tax efficient (and legitimate) vehicle for an athlete to use for commercial exploitation, providing it is done correctly.
Consider, the arrival in the UK of Bruce, an antipodean rugby league player who joined a top Super League club for the 2016/17 season.
Bruce has spent 10 years as a rugby professional in Australia and is one of their best known current players. Whilst Bruce will be well known amongst most rugby league supporters in the UK, his commercial value is likely to be far greater in Australia than it is here. Therefore, it is far more likely that Bruce will earn more valuable endorsements contracts to promote Australian brands than he would to promote UK brands.
What could Bruce do?
As a first step, Bruce will need to make arrangements that will allow him to easily distinguish between the territorial exploitation of his image. If Bruce was to split the exploitation rights to his image, it would allow him to provide separate licenses for UK exploitation and for non-UK exploitation, allowing revenues to be directed in a tax efficient (and compliant) manner.
Bruce can then set up a non-UK company, say, for example, in Malta or, as an alternative, he could participate in an existing image rights exploitation company established to collectively exploit the image rights of other international athletes. Bruce can then provide the Maltese company with the exclusive right to use his image for commercial exploitation anywhere outside of the UK. This can be achieved by selling (i.e. assigning outright) his non-UK image rights to the company or by way of granting an exclusive licence to the company for exploitation of these rights. Note that Bruce can also consider licensing his UK image rights into a UK company as well, but the UK tax position of granting a licence and the subsequent exploitation will need to be carefully considered.
If Bruce sets up the arrangements correctly, then his UK tax position would be as follows:
- Income received from UK endorsement deals should be taxable in the UK. Income derived from personal endorsement deals is subject to UK income tax, which is currently charged at rates of up to 45%. It is possible to structure these deals through the use of a UK company, bringing the tax liability down to (currently) 20% corporation tax.
- Income received by the Maltese company would not be subject to UK tax. Such income is taxable in Malta and subject to the Maltese tax regime. The current rate of corporate income tax in Malta is 35%, with royalties from certain trademarks being exempt from tax. Where tax is incurred on non-Maltese income, then the Maltese tax authorities refund 6/7 of the corporate income tax paid by the company when profits are distributed to the Maltese company shareholders, giving an effective tax rate in Malta of approximately 5% .
- Where Bruce receives a distribution of the profits from the Malta company, no further Maltese tax would be charged. In addition, Bruce can avoid a charge to UK tax on the distribution if he elects to pay tax in the UK on the remittance basis and he does not remit any of the money into the UK. Depending on when the profits of the company are paid out to Bruce, and where he is tax resident at that time, there may be additional tax due at that time, but Bruce will be able to plan in advance in order to minimise his liability.
Whilst this may sound like an easy way of avoiding UK tax, there are some highly complex laws in place in the UK that prevent UK residents from setting up this type of arrangement in order to simply avoid UK tax. The main legislation aimed at preventing such arrangements are known as the “Transfer of Assets Abroad” (“TOAA”) provisions found in the Income Tax Act 2007. There are additional anti-avoidance provisions, but these are not examined in detail here.
In simple terms, where a person (the ‘transferor’) makes a transfer of any asset, to any person outside the UK (whether cash, shares, image rights or even simply passes an opportunity), and the transferor is or becomes UK resident and can benefit from any of the income derived from the asset transferred, then the TOAA rules will be in point. The TOAA rules apply by simply disregarding the offshore person receiving the income and attributing the income directly to the original transferor.
In our example, Bruce would be the transferor (he has transferred his image rights to the company) and he could retain the ability to benefit from his image rights (as shareholder and/or the ultimate licence holder of his image). Therefore, the TOAA rules can apply to disregard the fact that income is received by the Malta company and to attribute that income back to Bruce personally. Bruce would be subject to UK income tax on this income at the relevant income tax rates (see above).
However, in order to prevent a tax charge arising, we should consider three important points:
- Firstly, the TOAA rules contain an exemption where it can be shown that the arrangements were set up for genuine commercial reasons. These rules are known as the “motive defence”. If a taxpayer can demonstrate that the structure was put in place for commercial reasons, and the purpose (or one of the purposes) for setting up the arrangement was not to avoid a liability to tax, then a charge to tax under the TOAA provisions will be avoided.
- Secondly, additional safeguards, known as the “EU defence”, have been written into the TOAA rules, to ensure their compliance with EU regulations and fundamental freedoms, such as the free movement of capital and the freedom of establishment. If a taxpayer is able to demonstrate that a business has genuinely been set up in another EU territory, and the business genuinely carries on a commercial activity, then a charge to tax under the TOAA provisions will be avoided.
- Finally, where it is clear that the revenue is generated from outside of the UK, and no UK activity has taken place in order to generate that income, then the taxpayer can still rely on a claim to be taxed on the remittance basis. This means that irrespective of the TOAA rules, a UK tax charge will only arise if the income is subsequently remitted back to the UK.
In this case, whilst Bruce may be able to argue that the “motive defence” applies on the basis that there is genuine substance to the Maltese business activity, HMRC will likely counter that the arrangements are still motivated by an intention to avoid a charge to UK tax. It is likely to be difficult to defend against this argument successfully, depending on the circumstances.
Instead, it will be much easier for Bruce to claim the “EU Defence” by demonstrating that the Maltese business is genuine, has a trading presence (an office, staff members etc) in Malta, and genuinely undertakes an activity of exploiting his image. Providing these points can be demonstrated, Bruce will not suffer a UK tax charge on the endorsement income received from his non-UK image rights. This underlines the importance of ensuring that image rights arrangements have sufficient underlying commercial substance.
Failing this Bruce could also claim the remittance basis, and thereby avoid UK tax on foreign income unremitted to the UK. Bruce should take advice to ensure that there are no further global taxes due on this income.
The current legislative framework in the UK provides non-dom athletes with the ability to legitimately structure their non-UK affairs in order to minimise their UK tax liabilities. However, it is worth noting that we have seen a changing landscape over the last few months, with significant changes in the UK’s non-dom regime and the Brexit vote coupled with increasing media pressure in respect of image rights arrangements.
We anticipate that there will be a number of changes implemented by the government in conjunction with the Brexit process, and it would not be a surprise if these changes impacted on the tax position of non-doms as a whole (and international athletes as a consequence). Consequently, it will be even more important for international athletes to make sure that they are well advised going forward.
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- Tags: Companies Act 2006 | Corporate | European Union | Finance (No 2) Act 2015 | Finance Act 2016 | HM Revenue & Customs (HMRC) | Image Rights Companies | Income Tax Act 2007 | Intellectual Property | Tax | Treaty on the Functioning of the European Union (TFEU) | United Kingdom (UK)
- The current legal status of image rights companies in football
- How athletes will be affected by the UK’s changes to “non-dom” tax rules
- Attracting top talent: Why the UK should reconsider the way it taxes non-resident athletes
- Playing the game: The UK’s approach to taxing sports stars