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The lifecycle of an international athlete: understanding UK tax on income for non-residents

Posted: 03/10/2017

This article was originally published as a blog on leading sports law website LawInSport in November 2017. It has since been updated for accuracy and comprehensiveness both here and on the LawInSport website.

Continuing our series of blogs for overseas athletes and their advisers, private wealth expert Laura Dadswell explains the key legal points regarding taxation that should be considered when coming to compete in the UK. 

Specifically, we address the following questions for athletes:

  • Is there specific legislation that I should be aware of?
  • Do I need to pay UK income tax?
  • Will a service company help me to mitigate tax?
  • Do I need to file a tax return?
  • Can I reduce my fixed payments?
  • Who is responsible for deducting withholding tax and accounting for it to HMRC?
  • What if I become UK resident?
  • Are there any concessions I can take advantage of?

The UK tax authority (HMRC) struggles with taxing international athletes in a proportionate manner within the current tax system. In particular, the UK will tax not only fees directly related to time spent in the UK, but will also seek to tax worldwide revenue (including image rights exploitation) on a percentage basis with reference to UK appearances in the tax year in question. Early negotiation with HMRC to explore the possibility of reduced withholding tax or to seek tax concessions is key for those sportspersons considering short term appearances in the UK. Different issues arise for those based in the UK for the longer term.

Is there specific legislation that I should be aware of?

Specific legislation relating to non-resident athletes and entertainers was designed to prevent non-resident individuals from coming to the UK to perform and then leaving without paying any UK tax on the income from their performances.

This legislation aims to treat performances (to include a competitive activity performed in the UK) as a trade carried out in the UK.

The relevant legislation refers to ‘entertainers’ and this is drafted to specifically include “individuals who give performances … as …sportsmen in any kind of sport”. This definition is extremely wide and would include a person who performs alone or with others in a team.

Do I need to pay UK income tax?

A sportsperson who performs in the UK, but who is resident somewhere else, is likely nevertheless to be subject to UK income tax on income that relates to that UK performance. There is no requirement for the individual to spend significant time in the UK.

Most double tax treaties – conventions between two countries that aim to eliminate the double taxation of income and gains arising in one territory and paid to residents of another – require non-UK resident sportspersons to pay a certain amount of income tax in the territory where events are held. Usually this takes the form of ‘withholding tax’ – a tax deducted at source from income paid to a person who is resident outside the relevant country – at the basic rate of taxation (currently 20% in the UK) in the territory where the events are held3.

Where the income is no greater than £1,000 in a tax year, it is not necessary to deduct withholding tax.

What is ‘income’?

The income of a sportsperson is varied. Prize money and appearance fees are staples. However, an ever-increasing proportion of their income comprises endorsement, sponsorship and merchandising contracts which emanate from their image rights.

What is taxable?

Individuals who are non-UK resident are subject to UK income tax on their UK-based earnings only. There are exceptions to this general rule which apply directly to sportspersons.

Sportspersons will be subject to UK income tax on income resulting from or connected (directly or indirectly) with their performances in the UK and in respect of any payment received from endorsement contracts and the like, which can be attributed to their UK performances.

In practice, where a sportsperson performs partly in the UK and partly overseas, an apportionment is required to determine how much of his or her global earnings are in respect of UK performances. In order to calculate the percentage of a sportsperson’s global income that is taxable in the UK, HMRC tends to adopt a robust approach whereby it apportions the income by reference to the number of appearances which are in the UK. This apportionment is usually on one of two bases: either on the ‘relevant performance days’ basis or on the ‘relevant performance and training days’ method.

For example, if a non-UK resident 100 metre runner completes in ten races in one year, one of which is at the Diamond League meeting in London:

Direct earnings from London meeting £500,000 (prize money, appearance fees and a bonus for setting a world record time)

Global endorsement income £15,000,000

If the athlete were to be taxed solely on direct UK income (as is the case in most countries) then the likely income tax in the 2022/23 tax year would be in the order of £207,000 as against gross income of £500,000 (41.4% effective rate of tax). If the income tax computation includes an apportionment of the global endorsement income as well then, on the basis that one of ten races in the tax year was run in the UK, ten per cent of the global endorsement income is brought into account for UK income tax purposes. The income tax payable on that basis jumps to £882,000 as against gross income of £2 million (44.1% effective rate of tax).

Will a service company help mitigate tax?

Many sportspersons choose to ‘trade’ using their own companies which are referred to by HMRC as ‘personal service companies’.

Endorsement contracts are often made outside the UK by a non-UK brand owner to a non-UK personal service company controlled by the non-resident sportsperson. On the basis that neither the brand owner nor the personal service company have any trading presence in the UK, it has previously been argued that the income paid in accordance with such contracts was outside of the scope of the UK income tax rules. Indeed, the leading case on this was brought by Andre Agassi in 2006.

The House of Lords disagreed (4-1) with Mr Agassi and found that there was no territorial limitation on the legislation. As a result it does not matter whether payments are made through a non-UK personal service company or to the athlete direct if the payments pertain to the sportsperson’s activities in the UK.

Do I need to file a tax return?

Non-resident sportspersons who compete in the UK and earn more than the Income Tax basic rate band (currently £50,270) must file a UK income tax return (on an annual basis as required) showing their income calculations, which typically include direct UK earnings (e.g. prize money, appearance fees and specific UK-related bonuses) and the appropriate proportion of their global endorsement income. The withholding tax payments are on account of the ultimate UK tax liability which, in practice, may be greater or less than the amount of tax withheld resulting in an overpayment or underpayment of tax which will need to be corrected.

Can I reduce my fixed payments?

As noted above, it is likely that withholding tax will be applied to a non-resident sportsperson’s UK source income and, typically, this will be at the basic rate of income tax (currently 20%). HMRC is open to arrangements where the sportsperson, by agreement, pays a lesser sum of tax which is considered to correspond as near as is possible to the sportsperson’s final UK tax liability on that payment. An application for HMRC approval to limit the amount of tax withheld can be made in writing or on HMRC’s form FEU 8 at least 30 days before the sportsperson is due to receive payment for the UK performance. If the FEU (the Foreign Entertainers Unit) is prepared to authorise a reduced tax payment it will issue form FEU 4, otherwise tax must be deducted at basic rate.

Who is responsible for deducting withholding tax and accounting for it to HMRC?

It is the payer’s responsibility to self-assess the tax withheld. The payer must complete form FFE 1 and send this to the FEU.

The payer will provide the sportsperson or their personal service company with a certificate (form FFE 2) of tax deduction showing the gross amount of the payment and the tax deducted.

What if I become UK resident?

Individuals who are not resident in the UK for tax purposes do not pay tax on income arising outside the UK. For those who can organise their residence position accordingly, there are clear potential UK tax advantages to remaining non-UK resident subject, of course, to the individual checking the tax rules in the jurisdiction in which they are resident.

Sportspersons staying in the UK on a long-term basis must be wary of the trap of becoming UK tax resident due to the period of time in which they are present here.

HMRC offer an online ‘Tax Residence Indicator’ tool, which can be employed to check if you have been resident in the UK from tax year 2016/17 onwards for the purpose of income tax and capital gains tax.

Are there any concessions?

For many years the UK government came under increasing pressure to change the apportionment rules following a host of sportspersons, such as Rafael Nadal, having openly announced plans to limit their UK appearances as a direct result of the tax rules. The application of the legislation can result in some sportspersons paying more in UK income tax than they earn here.

In response to comments from disgruntled athletes and event organisers/promoters, the government introduced a power in the Finance Act 2014 to enable HMRC to provide tax exemptions for major sporting events. The power allows HMRC to grant exemptions from income and corporation tax by means of statutory instruments.

Tax concessions on this basis are usually for certain large sporting events, and have included the Olympic and Commonwealth Games and the UEFA 2020 European Championship, exempting non-resident individuals from UK tax on their appearances.

Final comment

It is fair to conclude that the taxation of non-UK resident athletes competing in the UK is complicated and that, to some extent, it favours HMRC more than the Revenue authorities in other countries. However – and although it would not affect the ultimate tax liabilities for the sportsperson in question – there is scope to negotiate the precise withholding tax that should apply in certain circumstances.

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