As a sportsperson, travelling the world and competing from different global locations is an exciting endeavour. If you’re a non-UK resident sportsperson, you should be aware of the tax implications to avoid being hit with unexpected tax demands.
From income and performance bonuses to endorsements and expenses, Gurdeep Dhanjal, Manager in the Private Client Department, outlines some of the key tax considerations that non-resident spokespeople should keep in mind when competing in the UK.
Article 17 of the OECD model tax treaty (and such specific provisions of the relevant double tax treaty with the UK) indicates that a sportsperson could be caught by withholding tax despite not being a tax resident in the country of performance. Since 1987, UK legislation has been in place to establish the charge to tax.
Unless covered by the specific exemptions which typically apply to team sports, non-UK resident sportspersons are liable to a 20% withholding tax charge on their UK gross income and expenses. Income can include prize money, image right fees and appearance/promotional fees among others.
The 20% withholding is merely a payment on account of income tax and in most cases, additional tax will be due. The additional tax can either be settled via a withholding tax application, which is completed before the event, or via a self-assessment UK tax return, after the year end. It should be noted that final filing could lead to tax timing issues since the UK’s tax year is not co-terminus with other countries, such as the US.
It should be noted that domestic UK tax law looks through any corporate structures in place and imposes the withholding tax charge on the individual.
Sportspersons are sometimes given non-cash remuneration such as sporting equipment and goods. For example, a golfer might receive a car for a hole-in-one. Such payments are regarded as taxable receipts for UK income tax purposes.
The income is treated as being paid net of UK withholding tax, and so the asset value must be grossed up at the 20% basic UK tax rate when calculating the final position.
Bonus income, such as that received by Formula 1 drivers based on their Championship standing may be subject to UK tax in the tax year of receipt. For example, if a driver wins 10 points at Silverstone from their total of 100 points, 10% of the bonus could be subject to UK withholding tax. The UK Revenue may argue that this income relates to the UK relevant activity (e.g., a race at Silverstone) and as such final filing may be required to settle the UK tax position.
Athletes in receipt of grant income, say by a local governing body, will typically not suffer any UK tax on the award of income provided it was not awarded for services.
The UK holds double tax treaties with many countries. There is often a provision contained in the relevant double tax treaty which eliminates an individual’s exposure to withholding tax, provided their income and gross expenses do not exceed a prescribed threshold.
For example, US tax residents earning less than $20,000 (including grossed up expenses) in the UK in a single tax year should not suffer any withholding at source.
Endorsement retainers are caught within the withholding tax regime even if the individual is a non-UK resident, and the relevant contract deal is agreed outside of the UK.
There are two methods to calculate the UK proportion of endorsement income; the Relevant Performance Days (RPD) or the Relevant Performance and Training Days (RPTD) and these are both relative to the time spent in the UK.
It is recommended that UK and worldwide days are recorded accurately to correctly determine the charge to UK tax and to evidence the apportionment if queried by HMRC. Care should be taken to ensure the appropriate method of calculation is chosen but since a non-resident sportsperson is likely to spend a significant proportion of training days outside the UK, the RPTD method is often preferable.
Whilst UK tax may potentially be offset against the sportsperson’s tax liability in their home country via relief provided by the double tax treaty (or domestic law), care should be taken to ensure there is no/minimal wastage of foreign tax credit as the top rate of UK tax is 45%.
There have been numerous examples of individuals refusing to compete in the UK given the punitive tax charges which can arise, especially where prize money is low relative to the level of endorsement income!
For expenses to be allowed for UK tax, they must be incurred wholly and exclusively for the trade (for those who are deemed to be self-employed in the UK).
Invariably, some expenses have a dualistic nature, and it is the taxpayer’s responsibility to quantitively demonstrate the element that relates to the trade.
Broadly, medical expenses, physiotherapy, dietary, and physical training expenses are examples of costs incurred that typically carry an intrinsic dual nature. For example, physiotherapy treatment during the course of a competition/event may be allowed where the personal benefit is marginal and unavoidable, but each case should be independently reviewed.
It is possible to approach the UK’s Foreign Entertainers Unit (FEU) in advance of the event/competition to agree on the tax treatment of expenses.