The current legal status of image rights companies in footballPete Hackleton
Back in April 2014, the author wrote an article for LawInSport (available here1) in relation to taxation and image rights. Over the last two and a half years, the landscape has changed quite significantly. The purpose of this article therefore is to revisit the historic position, and then to look at what has changed primarily in the UK, but with an eye on other European football leagues.
The FA Premier League was formed in 1992, in part to capitalise on the perceived commercial value of English football both domestically and through global television markets. Over the next few years a number of the top footballers from around the world moved to England to play in the Premier League. As these players started to move to the UK, the standard of football increased, as did the global appeal of the English game. Broadcasting rights both in the UK and across the world increased exponentially. This virtuous circle meant more money for the member clubs, with the increase in their share of central broadcasting revenues, and more money to spend on players. This further increased the quality of the product for broadcasters and fans to enjoy, and consequently the broadcast rights became even more valuable.
As the new millennium came and went it became clear that the value of high-profile talent employed by the clubs went far beyond the registration rights that attach to their on-field ability. In almost all cases, players were still acquired for their on-field ability, but the commercial value of a player was not to be underestimated. Real Madrid estimated that David Beckham’s total contract value over his four year deal was recouped in the first six months he spent in Madrid on shirt sales alone. During his four years in Madrid, merchandising profits increased by a staggering 137%.
Delivering on commercial agreements is a key factor for Premier League clubs to be able to deliver to their commercial partners and increase revenues. In order to do this, it is absolutely vital to secure commitment from key talent (both players and managers) to contribute regularly to the clubs commercial programmes.
The start of image rights structures in the UK
As top international players started to move to the Premier League in the 1990’s, the use of image-rights contracts became increasingly popular. Such agreements allowed clubs to separate the payment of players for playing football under their employment agreements, from payments to a player’s image rights company for the use of the player’s image. The image rights payments were not treated as salary but payments to the company for services provided, therefore saving income tax for the player, and National Insurance for both the player and the club.
In the summer of 1995, Arsenal Football Club bought the Dutch International Denis Bergkamp and then England captain David Platt from Inter Milan and Sampdoria respectively. Both players had existing non-UK image rights companies and contracts. Arsenal entered into playing contracts with both players personally, and image-rights contracts with the two players’ image rights companies in order to secure the players’ commitment to the club’s commercial projects.
The UK tax authorities later enquired into the image rights arrangements due to the “tax loss” caused by such payments falling outside the charge to income tax. Ultimately the case of Sports Club plc v Inspector of Taxes2 went to a Tribunal hearing in 2000, and it was held that:
“On the facts, the promotional and consultancy agreements had an independent value. The players had had similar agreements with other clubs and it was clear that organisations were willing to pay for the right to use the players’ images in association with their products, as provided for under the agreements. Other players of a similar calibre also had such arrangements. Moreover, it was not right to describe the payments as a “smokescreen” for additional remuneration…payments were to be made under them [the image rights contracts] and they could have been sued upon them”3
It is clear therefore that in this case (to date still the only case taken by HMRC to the Tax Tribunal in relation to image rights structures) the courts found in favour of the taxpayers, Platt and Bergkamp.
Subsequently HMRC argued, through correspondence, with various football clubs and image rights companies that the Premier League playing contract (clause 4) covered all the services provided by players – that clubs already hold the right to utilise a player’s image under this clause. However, this was clearly not the case, as clause 4.11 states:
"4.11 Nothing in this clause 4 shall prevent the Club from entering into other arrangements additional or supplemental hereto or in variance hereof in relation to advertising marketing and/or promotional services with the Player or with or for all or some of the Club’s players (including the Player) from time to time."
Accordingly, where a player’s image rights have separately been transferred into a company, the services provided to clubs under an image rights contract would typically go beyond what is expected of a player under the standard Premier League contract. Clause 4.11 gives the club and the player the right to enter into a separate deal in relation to the use of the player’s image outside the standard playing contract, a right that is clearly a valuable one for the club to contract with.
Image rights contracts have been and continue to give clubs the vital ability to require a player or manager to carry out activities over and above their contractual obligations. This in turn drives the continued success, increased brand identification and crucially, the increased revenues of both the football clubs.
Key considerations in establishing the image rights structure
In order to set up an image rights company it must be clear that the individual has an image that has an independent value to sponsors. If the image has a value, and the player or manager wants to hold this in a separate entity in order to protect and separately manage those rights, the image should be valued and the rights formally transferred/assigned to a company. Capitals gains tax (CGT) will typically be due on the transfer of rights based on the market value of those rights. Tax advice should always be taken on establishing such a structure.
Once the company is established and the rights transferred, then on any future transfer a club will need to negotiate a deal between the player or manager personally for their playing performance duties. In addition, if they want access to the individual’s image for commercial activities over and above the basic rights granted at Clause 4 of the Premier League contract, then the club will separately need to negotiate a deal with the image rights company.
Often, the individual will not be UK domiciled for tax purposes and will have worked in a number of other countries before coming to the UK. Consequently, the individual’s image rights may be more popular outside the UK than in the UK. In that scenario, the individual might establish two image rights companies; a UK resident company to manage UK rights, and a non-UK resident company to manage non-UK rights. There is often clearly a tax benefit for doing so, as it ensures that non-UK source income from personal commercial deals are not brought into the UK tax net for non-domiciled individuals. However there are often also significant commercial benefits; the non-UK resident company often has access to or knowledge of non-UK markets and can therefore maximise the value of such rights. There is no reason why non-UK rights of a player or manager currently working in the UK would need to be managed in the UK.
Historically, there was pressure on clubs to monitor the benefit they receive from the image rights arrangements as they would any other commercial contract they enter into. Assessing the benefit of an individual player or manager on the clubs commercial activities can be difficult – what is the incremental value of one player on a club commercial deal?
Out of control?
Over the ten years from the first image-rights arrangements, a significant number of image-rights contracts were entered into, and HMRC commenced numerous enquiries into the contracts entered into by many clubs. It was clear that best practice was not being followed in many cases (the rights were not being properly assigned, clubs not using the rights licenced or paying inflated values for the rights) with image rights contracts increasingly being used as a way of merely delivering a more tax efficient overall “package” to players.
HMRC therefore changed their angle of enquiry in this area and began opening enquiries into the overall tax affairs of many FA Premier League and Championship clubs, focusing primarily on the use of image rights contracts. During these enquiries HMRC demanded a huge amount of documentation and further information relating to the image rights arrangements that clubs had entered into. The enquiries required extensive time on behalf of both HMRC and the clubs in order to collate and process the information requested.
Ultimately, after a considerable amount of time, effort and commitment on both sides, HMRC offered the clubs a deal to settle historic image rights enquiries up to 31 December 2010. The deal was based on the club’s turnover, and required a partial settlement of income tax and National Insurance Contributions (NICs) which would have fallen due had the payments to image rights companies been treated as salary payments. Most clubs accepted this deal and the newspapers over the next couple of years regularly highlighted clubs who had made provision in their accounts for settling historic image rights enquiries.4
HMRC’s settlement offer was not binding on any club or future deal. The vast majority of clubs accepted the HMRC deal, purely to achieve some certainty with regard to their potential tax exposures. At many clubs there was an acceptance that whilst some structures were perfectly robust, others potentially had weaknesses; no evidence of the assignment of rights to the players image rights company for example, or insufficient records for the use of the rights by the club.
The deal therefore gave the club a “clean slate” by clearing all ongoing enquiries up to 31 December 2010. Consequently, there was a nervousness around the implementation of image rights arrangements going forward. However, advisers were clear that where the arrangements were carried out properly, with the rights assigned by the player to a company, and the club utilising the rights licensed from that company, the structures were still effective.
Some clubs started to re-consider image rights arrangements for top players, where they felt comfortable in being able to demonstrate the usage of the rights. Other clubs were still very reluctant to fall back into the uncertainty of the past few years, and therefore refused to use image rights completely. This put many clubs at a significant disadvantage in relation to the overall net of tax packages that they could offer.
The HMRC “deal”
During 2014, a number of the top Premier League clubs entered into detailed negotiations with HMRC to seek to agree some parameters which, if followed, would mean clubs were “safe” from HMRC enquiry in relation to their image rights arrangements. A deal was finalised in February 2015, applicable initially for 3 seasons (2014-15 to 2016-17).
The deal was effectively split into two “caps”, a Stage 1 Cap and a Stage 2 Cap. The Stage 1 Cap (known as the “Club Cap”) sought to limit the amount that a club could pay in total under image rights arrangements, and this is broadly defined as 15% of commercial revenues. This limits the amount that clubs can pay to image rights companies to a proportion of their overall commercial income, which of course is generated in large part by use of those images. Commercial income is defined in the agreement, but is largely everything outside of matchday revenue and broadcasting income. The Stage 1 Cap is a logical step as it means the more commercially active clubs, requiring greater use of the players images, have a greater cap.
The Stage 2 Cap (known as the “Player Cap”) limits the amount that can be paid to an individual player’s image rights company by reference to his playing salary. This limit is set at 20% of annual “variable earnings” – essentially 20% of the P60 value.
The club therefore have an overall limit in relation to the amounts that they can pay across all of their image rights companies – by reference to the clubs’ commercial income; and a maximum that they can pay to each individual player. As far as HMRC are concerned, this “limits the mischief” in relation to overall payments to image rights structures.
It should be noted that there is an exceptional player rule, where clubs can write to HMRC to seek to pay certain players an amount in excess of 20% of variable salary. HMRC have been clear that they believe that this relates to genuinely exceptional players where the image has a clear value (e.g. Messi, Ronaldo). We are aware of one Premier League club which has applied for this in relation to an existing deal, and the approach has been turned down by HMRC.
Once a club agrees to the deal with HMRC, they will have to provide an annual summary of all image rights payments, to show that the Stage 2 Cap is met, and an overall calculation referencing figures in the clubs statutory accounts to show that they are within the Stage 1 Cap. They will also have to highlight 3 “Relevant Appearances” for each player with an image rights payment, to show that the rights are being actively used. The definition of a “Relevant Appearance” is fairly loose however – often a single tweet supporting one of the clubs commercial partners will be sufficient.
Image rights – onshore or offshore?
For a UK resident and domiciled player, establishing a UK image rights company is the only option. The anti-avoidance rules at s.720 Income Tax Act 2007 in relation to the transfer of assets abroad would result in any offshore company being effectively ignored for UK tax purposes, with the individual continuing to be taxed personally at income tax rates (typically 45%) on the money received by such entities.
For a UK resident non-domiciled individual however, the non-UK company can still be effective, as long as the funds received by the non-UK entity are non-UK source. For this to be effective therefore, the player will typically establish two companies; a UK company for UK rights, and a non-UK company for non-UK rights. The club deal might then be split into two, with a contract between the club and the UK company for the use of UK rights, and a contract between the club and the non-UK company for non-UK rights. In relation to non-club deals that the agent sources for the player, non-UK deals should go to the non-UK company, with any UK deals (in terms of endorser or place of performance) contracted to the UK image rights company.
HMRC recognise that for many players moving to the UK, the image has significant value outside of the UK. However, many enquiries have been raised into the “non-UK source” nature of payments from a UK football club to the non-UK image rights company. The contracts must be clear that such payments are for non-UK duties; perhaps on pre-season tours, or away matches in the Champions League, and the use of the image in overseas markets. If asked, the club must be able to substantiate the overseas use of the image. HMRC are clear that the majority of the value is in the UK (where the bulk of matches are played), whilst clubs will typically argue that most of the commercial growth is outside the UK, and therefore where the value of the image is maximised. In practice, where the payment to a non-UK company represents over 50% of the total image rights payments, a challenge from HMRC can be expected.
Use of image rights in other leagues
Despite the above deal giving Premier League clubs more comfort around their image rights arrangements, the use of image rights structures has been increasingly clamped down upon overseas. In Spain for example, whilst image rights payments are allowed under certain parameters, 85% of the income of the company is treated as “salary” of the shareholders. In the other major leagues in Europe, in Italy and Germany image rights companies are now rarely used. In France the use of an image rights structure is possible, but the club still suffers significant social security costs, and so given there is little advantage for the clubs, the use of the structures is still relatively rare.
In addition, the highly public issues around the use of image rights in various territories are a further deterrent. The Lionel Messi case is ongoing, and his club-mate and countryman Javier Mascherano received a suspended one-year prison sentence for tax evasion after his image rights structure was investigated by the Spanish authorities.5
This can be helpful from a UK tax perspective. As set out above, when the rights are transferred to a company, the player is making a disposal for capital gains tax purposes, and is therefore subject to tax on the value of the image. The image therefore has to be valued, effectively using a discounted cash-flow approach. This aims to estimate uncertain future tax flows; and if the reality is that if the player leaves the UK, the image rights will cease to have meaningful value; this can help to reduce the current value of the rights.
It is clear that in England & Wales a properly established image rights structure is still effective for tax purposes. As noted above, the verdict in the Sports Club case itself made clear that:
“Moreover, it was not right to describe the payments as a “smokescreen” for additional remuneration…payments were to be made under them [the image rights contracts] and they [the image rights companies] could have been sued upon them”.6
The recent agreement between HMRC and the Premier League clubs was a positive step. It is clear that HMRC now recognise that the clubs are global brands, and need to secure additional access to their top talent in order to satisfy an ever-increasing list of global partners. If the players’ rights are held by a company, the club have no choice but to engage with the company. The deal has allowed HMRC to place restrictions on the extent to which such structures can be used, and therefore to limit any “tax loss” to The Exchequer.
As ever however, it is essential to ensure the structure is established properly at the outset, whether a UK only company or a UK/non-UK structure for a resident non-domiciled player.
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- Tags: Broadcasting | Championship | England | Football | HM Revenue & Customs (HMRC) | Image Rights | Income Tax Act 2007 | Intellectual Property | Premier League | Spain | Tax Law | The FA | United Kingdom (UK) | Wales
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About the Author
Pete Hackleton is a Tax Partner in the Sports & Entertainment Group at Saffery Champness. Pete is a member of the Institute of Chartered Accountants in England and Wales and the Chartered Institute of Taxation.