A review of HMRC’s changes to the taxation of sports testimonials and benefit matches
Published 10 February 2016 By: Simon Concannon
This article explains (i) how income received by athletes from testimonial and benefit matches is currently treated; (ii) the issues that HM Revenue & Customs (the Revenue) have with the current treatment; and (iii) the proposed changes to the treatment that were recently announced by the Government in their Autumn Spending Review. It will be particularly useful for clubs, athletes and their advisory teams.
Seymour v Reed
James Seymour played cricket for Kent before and after the First World War. A prolific run scorer, who scored over 2000 runs in 1913 and over 50 first class centuries during the course of his career, he deserves better than to be remembered primarily for lending his name to a decision concerning tax law.1 That decision, the House of Lords judgment in Seymour v Reed,2 established the judicial precedent for the tax treatment of income derived from sporting testimonials.
The case concerned Seymour's benefit match at Canterbury in 1920. Under the rules of the Kent County Cricket Club at the time, its professional cricketers might be granted a benefit. The organisation of the benefit match, the collection of subscriptions and its subsequent distribution were reserved to the discretion of the club committee. The committee paid over the gate money to Seymour (who used it to buy a farm). The Revenue sought to tax the payment as income.
The House of Lords ruled that the payment was not taxable. It held that where, as in Seymour's case, a benefit match or testimonial was organised to demonstrate an appreciation for the qualities of a player, the proceeds are not to be treated as earnings and are not taxed as employment income. Instead, the payment was to be treated as a gift to the player in his personal capacity.
The current treatment
The decision in Seymour v Reed has not meant that payments to a player from a testimonial or benefit match will never be subject to income tax as earnings derived from employment. The position is set out in Revenue "concessionary" guidance:3 it all depends on the particular circumstances of the player and his or her club. Where the right to a testimonial or benefit is written into the player's contract of employment, or where the club always grants its players a testimonial or benefit, the proceeds will be taxable as income derived from employment.4
There does not have to be a written contract for this to be the case; it could be a verbal agreement or simply "standard practice" at the club. In each case, therefore, it is necessary to look at the terms of the player's own contract and, if there is no contractual entitlement, at what is customary at the club.
It is more likely that the proceeds from a testimonial or benefit will not be taxed as earnings from employment where the testimonial or benefit is organised by a "testimonial committee" that is independent of the club.
This has become common practice across different sports; the rationale is that it removes the existence of an employment relationship between the player and the entity providing the testimonial or benefit – thus making it harder to argue that the payment is earnings derived from employment.
The issues for the Revenue
There is an element of artifice about such an arrangement as, in practice, it is very unlikely for a testimonial or benefit to be awarded to a player without the agreement of the employer concerned, i.e. the club.
Indeed, the very formation of an "independent" committee may well have been prompted by a decision to grant a player a testimonial and benefit. This "element of artifice" is one reason why the Revenue has been agitating for a change in the law5 – and why it now appears to have been granted its wish.
Another argument advanced by the Revenue was that the tax treatment of the proceeds of a testimonial contrasts with other payments made as "tokens of appreciation" by members of the public, such as tips paid to waiters, hairdressers and taxi drivers. These are treated as taxable income derived from employment.6
The coming changes
The Government announced it its Autumn Spending Review7 that it would be changing the rules on the taxation of income from sporting testimonials and benefits.
In a nutshell, sportspersons will be liable to income tax on all profits arising from a sporting testimonial or benefit, subject to an exemption of up to £50,000, where the arrangement is not contractual. The £50,000 is effectively a new lifetime exemption which is intended to ensure that modestly paid sportspersons who are approaching the end of their playing career are protected from the changes.
The exemption will apply for a period of 12 calendar months only, beginning with the date that the first event is held in a "testimonial year". This is the case even if the "testimonial year" straddles the tax year, as it invariably will, the sporting seasons not reflecting the fiscal year. If any part of the exemption is unused at the end of the 12-month period, this will be lost – it cannot be carried forward to future testimonials or benefit matches.
The new regime will apply to the common position, described above, where the testimonial is organised by a testimonial committee, independent of the club. Legislation will be introduced in the Finance Bill 2016 to make the necessary income tax changes. The Government will also be introducing new National Insurance legislation, that is consistent with this new tax treatment.
The new tax rules will apply to sporting testimonials or benefits that are granted or awarded on or after 25 November 2015, and apply to events that take place after 5 April 2017. There is therefore a short window in which testimonials can be arranged where the income generated and paid over to the player will not be taxable as employment income.
Although the changes have not yet passed into law, there is very little doubt that they will do. The Autumn Statement indicates that the Government has already conceded as much as it intends to by including the £50,000 threshold.
Reactions and comment
Jason Ratcliffe, the Assistant Chief Executive of the Professional Cricketers' Association, has expressed disappointment at the changes, noting that the existing system has been in place for almost 90 years and that:
"It's especially disappointing that from 2017 players who commit their time to a lifelong career of cricket from a very young age, won't be able to benefit as many players have over the decades, or indeed for the cricketing public to demonstrate their appreciation and gratitude in the same way".8
According to the Government, up to 220 independent testimonial committees are temporarily established each year to organise non-contractual or non-customary testimonial events. The founders of such testimonial committees will need to watch out for the new legislation.9 If the £50,000 exemption is exceeded, they may need to operate PAYE and deduct National Insurance Contributions (NICs) from the testimonials and benefit matches they have arranged. This will be an unwelcome additional administrative burden.
The concept of the "testimonial" or "benefit match" calls to mind a bygone era when professional sportsmen were paid an "ordinary" income, in line with that of other working men, with the caveat that their career would be a short one and that they would need an additional sum to help them through to retirement age.
For sportspersons in less fashionable sports or lower league footballers a testimonial still fulfils this purpose today. At the other end of the scale, Wayne Rooney has been granted a testimonial match for a Manchester United eleven for 3 August 2016 from which the profits raised are expected to be well into seven figures. Rooney has promised to donate the earnings to charity.
This is an increasing trend among top Premiership or international footballers; Niall Quinn, for example, reportedly raised £1 million for charity at his benefit match.10 Charitable donations like this that are made under either Payroll Giving or by Gift Aid do not currently benefit from any relief for NICs on the sums donated.
The Government has made it clear that to give relief for NICs where part or all of the proceeds from a sporting testimonial or benefit match are donated to charitable causes would not be consistent with current policy and therefore NICs will continue to be due.
Public attitudes to testimonials have changed since Seymour's day. It seems unlikely that cricket fans would have begrudged Seymour a tax-free sum, whereas if a Premiership footballers were to receive a million pounds tax free, this would doubtless attract considerable criticism. Part of the Revenue's argument for the new legislation is that "times have changed" so, in this respect, the new tax rules should not come as a surprise.
Following publication of the draft legislation and a further technical consultation, the Government announced, on 16 March 2016, that the exemption for income from sporting testimonials would be increased from £50,000 (as originally proposed) to £100,000. A revised tax information and impact note was also published by HMRC and is available to read here:
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- Tags: Cricket | Finance Bill 2016 | Football | Government | HM Revenue & Customs (HMRC) | Tax Law | United Kingdom (UK)
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Simon is Head of Tax at national law firm Walker Morris LLP and has over 25 years of experience as a tax adviser and planner having built up considerable expertise and experience in corporate financial and property tax planning.