Jeff Millington: Why football finance is a taxing business

Feb 26 2010 Jeff Millington

As Portsmouth become the first Premier league team to go into administration, Jeff Millington of BTG Tax, analyses the sport’s money game

The taxman has always considered that there is scope for abuse when it comes to professional football.

And now the war between football and HM Revenue & Customs is on two fronts – agents’ fees as well as the image rights of players.

HMRC’s tough approach is sending shockwaves through the sport.

Portsmouth, Cardiff City and Southend United have all faced winding-up proceedings in the courts, high profile individuals are also being pursued over alleged evasion, and it has emerged that more than half of the clubs in the Premier League are being chased over tax due on image rights payments where tens of millions of pounds of tax is allegedly at risk.

Britain’s national game is reeling.

The activities of agents were the first to come under scrutiny. In particular, it was alleged that football clubs were incorrectly recording that they had used the agent exclusively and that he did not act for the player during transfer negotiations, or when he re-negotiated his contract with the club. Moreover, it was claimed that in some cases the amount paid to an agent was in reality disguised employment income, such as a signing on fee that ultimately found its way back to the player via the agent.

HMRC will continue to investigate payments to agents and, where they think the amount is excessive, they will look to track the money and see where it ultimately ends up. In most cases, the individual will be non-domiciled and it may be that the agent has an agreement whereby some of the fees he earns will be paid to the player.

There can be a multitude of reasons for this. For instance, in return for a share of the fee, the player will help the agent to penetrate the football market in that player’s country, possibly generating more transfers and agents’ fees in the future.

If you consider that an average agent fee could be in the region of £300,000 to £400,000 and the player receives £200,000 of it, then, if the club was complicit in evading employment related taxes, the tax and NIC loss would be in the region of £102,000.

While this may sound a lot, most clubs’ wage bills are likely to be at least £2 million a month, with a tax and NIC take of £1 million. This figure will be considerably greater with a lot of Premiership teams. So why would a club seek to avoid a £100,000 liability to HMRC and face criminal action just to make a signing?

While HMRC may have justified concerns over some agents’ fees, I believe they should have irrefutable corroborating evidence showing the club was complicit in evading taxes before wasting a lot of taxpayer’s money on criminal investigations with a high profile but little impact to date.

Similarly, HMRC’s assault on image rights has had its setbacks. The Revenue’s view was that “image rights may be a form of remuneration and, as such, should be taxed as income”.

However, in a case involving Arsenal players where HMRC argued that image right agreements were a sham and PAYE was due, the taxman lost. Consequently the appetite to investigate further similar cases diminished.

However, a number of football clubs appeared to believe they could enter into image right agreements with little thought to their commerciality or how the club would exploit the player’s image considering the amount it was proposed to pay.

It soon became a standard part of contract negotiations for a number of players, with some players able to argue that the club benefited from their image in some way – even if only by selling shirts with their names on the back.

It recently emerged in court that England striker Wayne Rooney was in receipt of image rights payments from Manchester United.

HMRC decided that rather than continue with isolated investigations, a project should be undertaken to inquire into the position en masse.

Initial inquiries highlighted a great deal of inconsistency in the amounts being paid and the reasons behind the payments, even within the same club.

So that is the future, but what of the present?

Some people have indicated that HMRC was especially concerned about monies being paid to offshore companies. To be honest if the image right payments had all been paid to UK companies HMRC would have been amazed. Why would a non-domiciled player set up a UK company to receive his image rights for the rest of the world? This would not make commercial sense and would also be tax ineffective.

Where a non-domiciled player has set up an offshore structure HMRC believes it has the right to pursue the person, if needed, via legislation covering the transfer of assets abroad. But the pursuit of the non-domiciled player may well be difficult.

Not surprisingly, HMRC is always going to seek to hit the club on PAYE first and pursue the player second.

On that level HMRC believes it has some very strong arguments given the evidence it has acquired and continues to acquire. From my past experience and understanding of the issues involved, a number of clubs should seek to settle for the best possible deal if HMRC is willing to offer or listen to one.

However, there is still some ambiguity and an argument to be made by the football club. So no matter how confident HMRC is, a number of these cases should be keenly contested and some may be too close to call.

Jeff Millington works in the Birmingham office of BTG Tax, part of the Begbies Traynor Group. He was with HMRC for 24 years and worked in Specialist Investigations, and instigated the current image rights probe