 HMRC attack on disguised remuneration – is your club affected? |
In addition to its broader investigations, HMRC is focusing on three areas affecting football clubs: image rights contracts, employee benefits trusts and other forms of disguised remuneration. These are especially risky areas for clubs that may not have been aware of all the implications of the recent changes to the regulations.
Why the goalposts have been moved
The Government has been concerned about tax and NIC avoidance by employers for many years and on
9 December 2010 announced detailed rules to tackle what it calls ‘disguised remuneration’. These rules took effect predominantly from 6 April 2011 although some had effect from 9 December 2010 and from that date onwards, most payments made to employees via third parties (including image rights payments) will fall within the new rules.
Much of the publicity surrounding these rules has focused on the use of employee benefit trusts (EBTs) and employer-financed retirement benefit schemes (EFRBS). However, in practice, the legislation is much wider and catches almost all situations where value is created for an employee (or anyone ‘linked with’ the employee) that is arranged via or involves a third party.
When a charge arises
In the simplest terms, an employer will be liable to pay PAYE and NIC where:
1. a step is taken towards creating an arrangement that involves a third party, and
2. that arrangement will eventually cause some value to be received by an employee (including former or prospective employees) or a person linked with that individual.
To illustrate how wide the legislation is, a person linked with a current, former or prospective employee is defined as any person that would normally be regarded as connected under UK tax law and extended to cover more distant corporate connections and even common law spouses or civil partners.
It is important to note that it is not necessary for an employee to receive any value for tax charges to be triggered. For example, if an employer places funds on discretionary trust for past, present or future employees that alone would not trigger a charge. However, telling the trustees (the third party) how you would like the funds to be spent in the future, for example via a letter of wishes, or telling employees what level of bonus or share ownership they can look forward to in future would be treated as ‘earmarking’ the funds and trigger tax and NIC charges immediately.
The rules are specifically designed to trigger tax charges where EBTs and other similar arrangements have been used in the past to advance value to employees tax-free, such as where amounts are loaned to employees after 9 December 2010 (although HMRC is still challenging pre-9 December 2010 arrangements under the legislation then in force). Under the new rules, as soon as the funds are put in the hands of a third party and in some way linked to an individual (even verbally), tax and NIC liabilities are created.
Image rights arrangements
A number of structures designed to minimise tax liabilities on image rights payments have been used by sports clubs and their players in recent years and, while HMRC has challenged many of them, it occasionally chose to negotiate a settlement for a proportion of the tax and NIC it thought was due rather than taking cases to court. Since 9 December 2010, HMRC has had the tools to attack all image rights arrangements for sports players and any payment made after that date under such arrangements will trigger both PAYE and NIC liabilities under the disguised remuneration provisions.
Where there is an outstanding challenge to image rights contracts for periods prior to 9 December 2010, HMRC has made it clear that it is prepared to negotiate settlements on back taxes. However, where it is not possible to reach agreement with the sports club and player, HMRC will take the case to court.
It should be noted that contracts negotiated between an individual and a sponsor that rely solely on the individual’s ‘celebrity’ status and make no reference to the player’s club (nor involve the use of the club’s kit or logo) are unlikely to fall within these rules as there is no link to the employment.
Third party remuneration arrangements created before 9 December 2010
Existing arrangements where loans are already in place should not be caught by these new rules. Employers - and employees - should be wary of changing the terms of such arrangements or advancing further sums, as this is likely to bring the arrangement within the rules. HMRC has also stated that it will continue to challenge the tax treatment of loans and other value transfers made from EFRBS before 9 December 2010 under the existing legislation.
Exclusions from the new rules
As the rules are so widely drafted, it has been necessary for the Government to build in a number of specific exclusions. A list of the more important exclusions is shown below but it should be remembered that each exemption has a number of conditions that will need to be met before it can apply to any given situation:
- an approved SIP, SAYE or CSOP scheme
- an arrangement, the sole purpose of which is the issue of qualifying EMI options
- an arrangement, the sole purpose of which is the provision of excluded benefits (broadly on ill health, accidental death or disablement during service or from a relevant life policy)
- a registered pension scheme (NB: EFRBS are not registered pension schemes), employee pension contributions or purchases of annuities out of pension scheme rights
- an arrangement, the sole purpose of which is making authorised member payments from registered pension schemes
- a transaction that is part of a package of benefits available to over 50% of the employer’s employees or employees whose status is comparable on the same terms
- a commercial loan made in the ordinary course of the lender’s business where there is no connection with a tax avoidance arrangement
- a commercial transaction with the employee in the ordinary course of business where a ‘substantial proportion’ of the payer’s business involves similar transactions with the public, on the same terms and there is no tax avoidance purpose
- employee car ownership schemes (but only over a four year term)
- items on which employees are normally exempt from tax (e.g. work related training etc).
Risks for employers
Clearly, these rules create a considerable risk of triggering PAYE and NIC liabilities where any element of a remuneration package is provided via a third party. Employers should seek advice where any payment or asset transfer to a third party is contemplated in respect of employees, or where the employer itself undertakes to provide future ‘unapproved’ retirement benefits, to ensure that the full tax consequences are understood before it is made.
In the future, sports clubs will no-doubt reassess their contractual arrangements with players over image rights, particularly in relation to celebrity endorsements.
Contact us
For a discussion in complete confidence, please contact Brian Lovie or John Cassidy.
Brian Lovie
Tel: 0131 347 0366
brian.lovie@uk.pkf.com
A former HMRC inspector, Brian has 30 years’ experience in tax and NI issues working on both sides of the fence. He regularly negotiates with HMRC on behalf of clients making PAYE/NIC settlements. Brian is heavily involved in continuing HMRC investigations into football and other sports.
John Cassidy
Tel: 020 7065 0455
john.cassidy@uk.pkf.com
John heads up the tax investigations and dispute resolution team. John has been involved with football industry cases concerning both clubs and players covering a broad spectrum of issues under attack such as image rights, benefits in kind, and the use of offshore structures. | |
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