Game, Set & Tax

This year’s Wimbledon winner will net a cool £2.25M in prize money. Not bad for spending a few weeks in the London sun and playing some tennis!

But that’s just the cream on the strawberry as they say in SW19…

The games stars could be earning endorsement income and bonuses ranging from $5-$30M a year too. Those deals could be in place for endorsing racquets, apparel, watches (usually Swiss!) or for wearing logo’d patches of brands all of who want TV and print exposure.

What if the winner isn’t UK tax resident, does any of this income get taxed in the UK?

It certainly does.

You can trace the introduction of these special rules back to our very own rock n rollers the Stones, who spent so long touring in the 70’s that they became tax exiles and so legend goes this resulted in new far reaching laws coming into force from 1977 to tax the income of non-resident entertainers and sportsmen, including payments made indirectly to other third parties on their behalf.

As a result, the UK offers little or no double tax treaty protection to foreign entertainers or athletes.

Consequently, any non-resident sportsperson appearing in the UK is subject to the UK’s withholding tax regime, administered by the ‘Foreign Entertainers Unit’ (FEU) – a specialist unit with in HM Revenue & Customs.

Most prize money or appearance fees paid in respect of the UK performance or activity falls within the ‘foreign entertainers’ regime. The amount of withholding tax applied at source under the FEU
regime is 20%

So on £2.25M HMRC will receive a cheque for £450,000 from the Lawn Tennis Association.

However, this payment is a payment on account of the final UK tax liability of the Wimbledon winners and does not take into account any allowable deduction or expenses incurred. It also doesn’t take into account higher rates of tax or endorsement income which might be UK taxable.

In addition it is necessary to declare any non-uk source income earned as a result of the UK performance e.g. endorsement bonuses and retainers. Unless a UK endorser pays this, there is no requirement for tax to be withheld at source.

The FEU therefore issue Self-Assessment Tax Returns to sports persons who they feel may have additional income or tax liabilities to declare.

So what does this mean for this year’s Wimbledon winner?

Well let’s assume they earn $20M a year in endorsement income and earned a $500K bonus for winning Wimbledon, plus they have some expenses such as agents commission, UK travel and accommodation and legal fees.

The prize money and bonus are taxable in full and a it is necessary to apportion the endorsement income to the UK.

The method of apportionment has evolved in recent years and it is now possible to apply a fraction which takes into account the players UK and worldwide Relevant Performance and Training Days i.e. the numerator of the fraction is the UK activity and denominator is the worldwide activity. For the purpose of this exercise we will assume there have been 19 days spent playing and training in the UK and the total worldwide activity is 330 days. So we apply a fraction of 19/330 x $20M which results in $1.15M being taxed in the UK.

So UK taxed income is as follows:

Prize money £2.25M
Endorsement bonuses £357K ($500K)
Apportioned Endorsement Retainer £820K ($1.15M)
Total income £3.427M

Lets say total expenses are 25% of income = £857K

The athlete has a net UK taxable profit of £2.57M

The tax on this is £1.14M

They’ve had £450K withheld at source and need to write a cheque to HMRC for a further £690K. Ouch.

This is an extreme example of a marquee name sports star at the top of their game and earning huge endorsement deals however these rules impact all sports stars appearing in the UK.

It’s not always the case that additional tax is payable and it is often the case that the FEU withholding tax applied is excessive and repayments can be claimed.

Our Experience

We act for non-resident athletes in golf, tennis, F1, athletics and the NFL.

Our consultants have settled over 100 years of UK tax enquiries focused on the apportionment of endorsement income.

We recognise the importance of making a full and complete disclosure in order to mitigate risk of UK tax audits.

Experienced in reviewing endorsement contracts to ensure correct disclosure is made in the UK and that income which cannot be linked to the UK activity is not assessed in the UK.

Recognise the importance of mitigating UK tax exposure in order to minimise threat of excessive foreign tax credit in home country.