Tax laws threaten UK’s standing in international sport- Stephen Dunham

As the UK prepares to host the world’s largest sporting event the London 2012 Olympic and Paralympic Games, part of the so-called ‘Golden Decade’ of sport events to the held in the UK, the long term ability to compete to host major sporting events continues to be undermined by HM Revenue & Customs’ (HMRC) attitude and strategy to the taxation of the organisers and competitors at these events.

The danger is that the UK will be seen as ‘closed for sport’, deterring organisers from wanting to consider the UK as a location for their event and prompting athletes to question whether participation in an event staged in the UK should be included in their schedule.

The impact of losing or not being able to attract the world’s best events and athletes to the UK needs to be measured in more than pure economic terms alone.  The recent enquiry by the Riots, Communities and Victims Panel into last Summer’s riots identified a lack of ‘belonging to society’ as a key factor, especially in the young and sport, more than any other activity, builds bridges, brings together all levels of society and develops a level of inclusion for the benefit of all.

So, how do we find ourselves in this position?

Taking athletes first, the UK revenue authorities, in line with most other countries, tax non-UK resident competitors on prize money and appearance fees attributable to matches or tournaments held here.  However, in addition to this, HMRC also seek to tax a proportion of an athletes’ global endorsement income following their victory in a tax case against Andre Agassi back in 2006.  The only other country that applies the same treatment to worldwide endorsement income is the US.

Initially a proportion of overall deals which related to non-playing services (the ‘image’ element) was excluded from the UK tax calculation, with the ‘playing’ element simply pro-rated based on time spent in the UK in a particular tax year. However, in recent years, HMRC has sought to take a different approach by asserting the whole contract relates to ‘playing’ services and apportioning on the basis of the proportion of the events an athlete takes part in, which has the overall effect of yielding a higher return for HMRC.

The impact of these rules on athletes behaviour has already been seen with Usain Bolt declining to take part in the Aviva London Grand Prix in 2010, Rafael Nadal announcing he will not be taking part in the AEGON Championships at the Queen’s Club this year and the ATP considering moving the end of season World Tour Finals from London once its current deal expires in 2013.

Turning to the event holders, where they are also non-UK resident, such as International Olympic Committee (IOC), FIFA, UEFA, ATP, ICC etc, they could potentially fall within the charge to tax in the UK.  The length of time the event holder is expected to be in the UK is the key issue as if they are regarded as having a ‘permanent establishment’ during that time they could be subject to tax as an entity. This is in respect of direct taxes, VAT is subject to different rules and is not considered here, though it too can have a significant financial impact on an event.

It is normal that the event holder will include as part of the conditions for a successful bidder, to indemnify the event holder from any tax liabilities that may arise on them as a result of being awarded the event.  If a bidder is unable to offer such indemnities or secure exemptions from their revenue authorities, then it is unlikely they will be successful in securing an event, as was the case for the 2010 UEFA Champions League final, when UEFA cited the lack of certainty over the taxation of the event in its reason for choosing Madrid over London as the venue.

Because of HMRC’s unwillingness to alter the current rules, what we have seen is individual sports lobbying both Government and HMRC for specific event exemptions, which though ceded to in certain situations, has led to holders of UK based events demanding a level playing field as they consider the value of their events could be eroded if they are unable to secure the world’s best athletes to compete.