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Farrer & Co | Inn the Field of Play - January 2016: IAAF - Withholding tax and exemptions for athletes

In this week's extensive look at the IAAF, world athletics' governing body, we consider whether events such as the IAAF World Championships will follow previous tournaments and enact specific tax legislation to encourage attendance from the world's elite athletes. The 16th World Championship event is due to take place in London next summer (2017). It is hoped that, by then, the IAAF's current troubles will have subsided and spectators will not be required to suspend disbelief in order to enjoy the athletic performances at this biennial event. Irrespective of the prevailing mood come August 2017 the IAAF, as tournament organisers, will be required to follow the UK legislation regulating the treatment of income earned by foreign athletes engaged in the Championships.

Relevant legislation

Generally under UK domestic law, tax is levied on the income of non-resident sportsmen if related to the performance of a UK sporting event (such as appearance money or prize money). Any person or organisation making such payment of income to non-resident sportsmen is obliged to withhold UK income tax from the payments (known as 'withholding obligations'). Current UK legislation is now incorporated across various statutes including s.965 - s.970 of the Income Tax Act 2007, which (paraphrased) states that "if a payment is made to a person who is an entertainer or sportsman performing an activity in the UK (the relevant activity), the person making the payment must deduct any income tax due on the payment made". A relevant activity is one carried out by the individual in the character of an entertainer or sportsman.

The intention behind the legislation is to treat performances as a trade carried on in the UK but this has sometimes led to the unintended consequence of deterring the very best (and therefore the most highly paid) athletes from willingly performing in the UK. This point is compounded by the active way in which HMRC has sought to recoup not only tax from a sportsman's winnings but also part of their worldwide endorsement income – on the basis that such income is linked to performances in the UK. When comparisons are drawn to other countries' tax rulings, HMRC's stance appears somewhat inflexible.

Agassi v HMRC

The landmark case relating to this legislation was in 2006 between HMRC and US tennis player Andre Agassi which went to the House of Lords. It was held that Agassi had to pay tax on some of the money paid to him by his sponsors for endorsing their products at Wimbledon, even though the payments were made to him by foreign companies with no trading presence in the UK.

The road to exemption

It is clear therefore that in terms of earnings, athletes would regard the UK as a prohibitive arena in which to perform. However, in anticipation of the World Championships next year, the IAAF can look to other governing bodies (such as UEFA) who successfully lobbied the UK authorities to relax the way tax legislation was applied. Indeed, special legislation was introduced in the Finance Act (FA) 2012 to provide an exemption from UK income tax for non-resident football players and team officials involved in the UEFA 2013 Champions League final at Wembley. The legislation specified an exemption from tax on the income levied through the non-resident person's performance in the UK in connection with the 2013 final itself. Furthermore, the withholding obligations mentioned above were not applied to income payments benefitting from this exemption. The pragmatism of special tax arrangements was seen also with the exemption for the 2012 London Olympics and Paralympic Games (the Games) first enacted in the FA 2006. The essence of the legislation was to exempt non-resident sportsmen (and other foreign organisations connected with the Games) from income tax on income earned wholly and exclusively during the relevant period of activity at the Games in London 2012.

Way forward

To conclude, the IAAF will know that the UK has made an economic adjustment to the threat of the non-appearance of high-profile non-resident athletes. The disappointment, for example, of Usain Bolt deciding against performing in the Aviva London Grand Prix in 2010 is something the UK will want to avoid. This is especially the case for a sport desperate to keep the attention of fans who grow ever more sceptical as to the authenticity of the performer.

As usual, the conundrum is that the UK has to balance the political message of taxing wealthy foreign athletes in times of austerity against the economic benefits that a star performer like Usain Bolt can bring. If you consider that Bolt will earn the majority of his worldwide earnings from endorsement deals (e.g. Virgin Media and Puma), it is clear that even a small fraction of UK tax on this source of income would eclipse what he would earn by performing at an event in the UK.

Perhaps the best way forward would be for the UK to continue to tax (or exempt from tax where agreed) non-resident athletes' performances in the UK and simply leave all endorsement income completely untouched. The IAAF has enough to think about and will no doubt be seeking swift clarification on this issue.

If you require further information on anything covered in this briefing please contact Udo Onwere or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Sports page on our website.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, January 2016

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