Sport . . .To tax or not to tax? That is the question

Thursday 24 November 2011

Following the decision by Rafael Nadal to play in the Gerry Weber Open at Halle next year instead of the AEGON Championships, having reportedly been offered £750,000 by the tournament, it would be easy to say it was simply because of the money.

Chris Kermode, tournament director of the pre Wimbledon London event, admitted: ‘Rafa will not be with us next year. It’s disappointing, but we know how much he enjoys our event and we hope to be welcoming him back soon.’

The tournament is now owned by the LTA and, though paying guarantees to major stars to ensure their appearance is legitimate; reports suggest they would find it hard to justify more than £400,000 going to Nadal; whilst other sources say he was probably paid double that amount by the tournament in previous years.

The Spaniard and Roger Federer are regularly paid guarantees. They are believed to have received more than $1m to play in certain events, particularly in the Middle East, with Murray and Djokovic not far behind. Tiger Woods could command $3m in golf prior to his downfall.

There is, however, particular concern amongst major sport promoters regarding the UK tax system. Overseas stars are obliged by the Inland Revenue to pay tax on worldwide endorsements in proportion to the percentage of their time spent performing annually in the UK. One American golfer is recently said to have paid 400% tax on his winnings at a couple of events in the UK.

The potential damage cannot be understated, not just to major sporting events in the UK, but also to the economy if it puts off key players from taking part and downgrading the quality of the event.

The previous Government were forced to give an exemption to athletes competing in the 2012 London Olympics and also agreed to waive the rule for footballers so that we could host the 2011 UEFA Champions League final.

Next year is the 20th edition of the Halle tournament , and organizers are going all out to secure a star studded field. Roger Federer has already signed to a long-term contract to appear there, and for both players there is the element of saving on punitive tax rates for plying their trade in Britain.

Usain Bolt’s decision not to compete in the Aviva London Grand Prix was not because he was frightened to face his big rivals, Tyson Gay and Asafa Powell, but it was believed that it was in consideration of the potential UK Tax liabilities and he wanted to avoid the tax burden following the ruling in the Agassi case in 2006.

As Bolt earns a fortune from product endorsements, this means that if he only raced five times this year, HMRC could tax 20% of his total earnings. His appearance fees alone are generally reported to exceed £150,000 per event – so we’re talking big money! In reality the Agassi case was a test case on behalf of a number of top overseas sports personalities, including Tiger Woods and Michael Schumacher. As a consequence of the ruling, the HMRC was able to grab a share of Agassi’s sponsorship income, even though it came from overseas countries and had nothing to do with the UK.

The problem was that the taxman had become greedy and started claiming far more than his share of the overseas sponsorship which is why the test case arose. Agassi was the first non-British based tennis player to be hit with a tax bill by the Inland Revenue. The fear at the time was that the ruling could seriously damage the representation of all tennis players (and sports stars) who intend to compete in UK sporting events. The latest decision by Nadal highlights this fact and that it should not go unnoticed that Federer has never played in the UK other than when required to meet the playing obligations of Wimbledon and end of year World Tour Finals. Federer has always preferred to play the Gerry Weber Open at Halle.

Agassi had argued that as he was not based in the UK and his sponsors had no tax liability in the UK then he should not be required to pay tax in the UK. But Justice Lightman sided with the Inland Revenue who claim that as Agassi visits the UK every year to compete in British tennis tournaments at least some of the revenue he generated through sponsorship should be liable for taxation.

The decision consequently had implications for non-UK resident sportsmen who make occasional appearances in the UK and who receive payment for such appearances from sources outside the UK. Such individuals were no longer able to avoid paying tax on earnings linked to appearances in the UK as they were regarded as UK earnings.

The Agassi ruling also had implications for Britain’s many highly-paid touring sports and show business stars. For commercially-minded stars such as Tiger Woods,  and the Williams sisters, the outcome of what had been known in tax circles as the “game, set and match” case showed that two-week appearances in the UK for the Open,  or Wimbledon can carry a heavier tax cost than they imagined.

In the current age of global financial restraint, austerity and cost reductions, the Inland Revenue have for some years actively looked to close “loop holes” in the system and chase additional tax revenue. No one is surprised that when the Revenue starts hearing about the huge pots of money they get their antennae working!

The Agassi case also affected other sports personalities as well as show-business stars such as Britney Spears, Pink and Beyonce, who earn millions every year from sponsorship deals.

For high-profile sports stars such as Federer, Nadal and Beckham, multi-million pound sponsorship deals are an increasingly significant source of income.

David Beckham’s multi-million-pound salary is boosted by sponsorship deals with such as H+M, Ralph Lauren, Adidas and Police sunglasses. Beckham also earns millions for advertising products in the Far East.

Entertainers such as Beyonce and Spears also found their multi-million pound sponsorship deals affected where they are derived from their appearances in the UK. For many sportspeople and entertainers, sponsorship deals and endorsements are now the biggest part of their income.

Entertainers are currently liable for tax on any earnings made in the UK, but touring is notoriously expensive and can often make a loss. However, big stars may be liable to pay British tax if their sponsorship earnings are ruled to be derived from their work in this country.

While HMRC’s arguments in relation to endorsement work where the performance of duties, such as filming an advert, are carried out in the UK may be reasonable, it appears irrational to seek to tax an athlete on a percentage of a global endorsement contract purely because in the performance of duties, the athlete needs to appear in certain events in the UK.

There is no objection to well-paid sports stars suffering UK taxation on prize money earned in the UK. However, losing or diluting international events due to uncertainty over the tax position of athletes in relation to endorsement income is unacceptable and ultimately costly to the UK economy.