On 16 August 2017, HMRC published further guidance on the treatment of 'image rights' that will be of particular interest to clubs, sportspeople, intermediaries and their advisers. This follows on from HMRC's announcement that it has a specialist team looking into abuse of image rights and considers them a "significant tax risk among professional footballers". At the start of the year, HMRC had already opened investigations into 43 players, 12 football clubs and 8 agents.
The use of image rights companies remains prevalent, with several deals involving the payment of substantial sums for the use of a sportsperson's name, image or other personal characteristics going into a separate corporate vehicle rather than directly to the sportsperson.
While a UK image rights company will still be liable to pay UK Corporation Tax on its profits and any salary or dividends paid by such company will also be subject to tax, the rate of tax will generally be lower than it would have been had the image rights company not been used. There may also be tax advantages for sports clubs by structuring a deal in this way. For example, clubs may end up paying less in NI contributions than they otherwise would have had to pay.
HMRC's guidance puts new onus on the Board
It has been reported that HMRC had previously offered Premier League clubs the right to pay up to 20% of a player's total salary to the player's image rights company provided the clubs informed HMRC of the deal and could justify such payments from a commercial perspective.
The new guidance goes further and relates to the use of image rights companies where there is also an employment relationship between the sports organisation and the sportsperson. It suggests that clubs, sportspeople, intermediaries and their advisers will need to take immediate action, not only to ensure that previous image rights deals are justifiable from a commercial perspective but also that future deals comply with the new guidance.
Interestingly, the guidance puts the onus on Boards of Directors of sports organisations to take a lead role in deciding their organisation's strategy towards the use of image rights. The "commercial reality" of the deal needs to be considered each and every time, which suggests that we are moving away from a one size (i.e. 20% of salary) fits all approach.
As a result, sports organisations will need to have "proper regard to the commercial revenues that (they) expect to achieve" from the arrangement and carry out enhanced due diligence on the image rights companies that they are working with. For example, does it have a proper "business plan for promotional activities involving the exploitation of image rights"? What "reviews of performance against that plan" have taken place?
Demonstrating and justifying image rights deals
In a football and rugby context, clubs will need to do more to show that they are getting value from and exploiting the specific image rights that they are paying for. For example, they may need to show a difference in their approach in their marketing activities for players that have separate image rights deals and those players that just have an employment contract with the club.
HMRC has made it clear that sports organisations should keep a record of independent advice received regarding the valuation of image rights. From a practical perspective, this could involve keeping records of the increase in shirt sales or social media activity in a particular jurisdiction following the completion of a transfer involving particular players.
Going forward, it is likely that sportspeople and their agents will also be asked to do more to justify the use of image rights companies. In particular, not only developing business plans for the company but also demonstrating the value of the player's image rights both in the UK and in other jurisdictions. For example, if a particular sportsperson has a big following in Asia or Africa and they are prepared to work on particular marketing activities in these areas with their employers then this would justify a larger payment to the image rights company. In that example, the filing and use of trade marks in such jurisdictions would be advisable.
We endorse the need for image rights deals to reflect commercial reality – which may well mean that for some players a percentage in excess of 20% could well be justified. However, the new HMRC guidance places a heavy responsibility on intermediaries and clubs to give proper consideration to how they intend to use the rights that they are selling or acquiring.
In relation to existing image rights arrangements it would be advisable for clubs to review those deals and be prepared to justify them to HMRC, if necessary. Where it looks like the club has not properly used the rights that have been granted by the image rights company or such usage is out of line with the amounts paid, the club may want to consider making a voluntary disclosure to HMRC upon taking proper advice.
Going forward, it is likely that clubs, sportspeople, intermediaries and advisers will need to work together in advance of any transfer to adequately plan and value a sportsperson's image rights. The new guidance does not close the door on image rights – far from it – but it does give a clear indication as to the type of work parties will need to do in order to justify their use.
As a result of the new guidance, we are planning to hold a Chatham House Rule roundtable discussion in late September where interested parties can discuss the above issues in more detail. Please click here if you would be interested in attending.