Kevin Offer’s article on Hull City AFC (Tigers) Ltd v HMRC [2019] UKFTT 227 (Tax Journal, 11 June 2019, bit.ly/2YcEGh0) provided a good summary of this case. Hull City entered into both a playing contract and image rights agreement with Geovanni Gomez under which he received significant sums in relation to his non-UK image rights. These payments were well in excess of the levels considered acceptable by HMRC in similar cases.
As an expert witness on the case on behalf of HMRC, I spent significant time reading the evidence accumulated over eight years, and writing an expert opinion based on that evidence. I do not, however, agree with the conclusions reached in the article.
The first image rights structures arrived in the UK in the mid-1990s. Essentially, players established a separate company to hold their image rights, which would contract with commercial partners for the use of such rights, including the clubs with which an employment relationship exists. The first image rights structures in the UK were enquired into by HMRC, leading to Sports Club [2000] STC (SCD) 443, the only case on image rights to reach UK courts until Hull City. The courts held that the companies held bona fide commercial contracts on which they could be sued, and that the arrangements were therefore ‘not a smokescreen for remuneration’. For most of the last 20 years, there have been ongoing enquiries by HMRC into many image rights arrangements, but these fundamental principles are still observed.
Following Sports Club, there was a period of growth of the use of image rights, particularly using offshore structures. The 2007 transfers of assets abroad rules restricted the use of pure offshore structures, but top players may still use split-structures (UK companies for UK rights and non-UK companies for rest of the world rights). HMRC seeks to limit the split of payments to a maximum of 50:50 (and often much less for non-UK rights).
The author suggested that HMRC and the Premier League agreed a deal on parameters for settling historic cases back in 2010, and that there was little further guidance until 2017. However, between 2014 and 2017, the Premier League and HMRC agreed acceptable levels of payments for the use of image rights: a club cap (limiting overall maximum spend to 15% of commercial income); and a player cap (limiting maximum payments to 20% of players’ annual remuneration (P60 value)). Clubs could sign up to this deal on an annual basis.
The article also suggested that it is extremely difficult to justify that image rights payments are ‘anything other than part of the overall employment package for all but a few players’, predicting that HMRC will now put pressure on clubs to settle any outstanding cases. We do not agree with this analysis.
Premier League clubs have grown hugely over the last 20 years, yet most of their growth over the last decade has been driven by commercial income. (Manchester United, for example, now has almost 100 global and regional commercial partners.) Clubs need to guarantee their players’ contribution to additional commercial activities – and if the players’ rights are held by an image rights company, the club must contract with this company to secure this access. It is incorrect to suggest that image rights structures should not work for ‘all but a few players’; on the contrary, clubs need increased commercial access to the wider squad to fulfil their commitments to commercial partners.
This case should not provide any further ammunition for HMRC to seek to close enquiries on image rights structures. Uniquely in this case, Geovanni was seeking to licence only his rest of the world rights – and was paid 25% of his contract value for this. Given that non-UK rights typically account for a maximum of 50% of the value of the image rights, this places an extreme premium on the amounts paid. The tribunal found that Hull City could not generate the serious commercial exploitation of the rights that would be required to justify such payments – and in fact there was no exploitation at all of those rights.
Clubs are well aware of the caps agreed between HMRC and the Premier League between 2014 and 2017, and routinely use 20% as the maximum amount they are willing to pay to players for use of image rights – and often agree to pay significantly less based on their valuation of the rights. Hull City did not observe these limits, and the tribunal rightly found in HMRC’s favour in this case. However, it has little wider application for commercial image rights arrangements.
Pete Hackleton, Saffery Champness (peter.hackleton@saffery.com)
I am pleased to see the article has generated some response and welcome Peter’s comments. I remain of the view, however, that an agreement covering the image rights of a player and entered into with the club that he plays for may be difficult to defend in the future. The agreement is unlikely to have been entered into without the playing contract and so there would seem to be a link with the employment and therefore open to a challenge. Perhaps we will have to 'agree to disagree' on this point and take any further discussion outside the journal.
Kevin Offer (Hardwick & Morris)
Kevin Offer’s article on Hull City AFC (Tigers) Ltd v HMRC [2019] UKFTT 227 (Tax Journal, 11 June 2019, bit.ly/2YcEGh0) provided a good summary of this case. Hull City entered into both a playing contract and image rights agreement with Geovanni Gomez under which he received significant sums in relation to his non-UK image rights. These payments were well in excess of the levels considered acceptable by HMRC in similar cases.
As an expert witness on the case on behalf of HMRC, I spent significant time reading the evidence accumulated over eight years, and writing an expert opinion based on that evidence. I do not, however, agree with the conclusions reached in the article.
The first image rights structures arrived in the UK in the mid-1990s. Essentially, players established a separate company to hold their image rights, which would contract with commercial partners for the use of such rights, including the clubs with which an employment relationship exists. The first image rights structures in the UK were enquired into by HMRC, leading to Sports Club [2000] STC (SCD) 443, the only case on image rights to reach UK courts until Hull City. The courts held that the companies held bona fide commercial contracts on which they could be sued, and that the arrangements were therefore ‘not a smokescreen for remuneration’. For most of the last 20 years, there have been ongoing enquiries by HMRC into many image rights arrangements, but these fundamental principles are still observed.
Following Sports Club, there was a period of growth of the use of image rights, particularly using offshore structures. The 2007 transfers of assets abroad rules restricted the use of pure offshore structures, but top players may still use split-structures (UK companies for UK rights and non-UK companies for rest of the world rights). HMRC seeks to limit the split of payments to a maximum of 50:50 (and often much less for non-UK rights).
The author suggested that HMRC and the Premier League agreed a deal on parameters for settling historic cases back in 2010, and that there was little further guidance until 2017. However, between 2014 and 2017, the Premier League and HMRC agreed acceptable levels of payments for the use of image rights: a club cap (limiting overall maximum spend to 15% of commercial income); and a player cap (limiting maximum payments to 20% of players’ annual remuneration (P60 value)). Clubs could sign up to this deal on an annual basis.
The article also suggested that it is extremely difficult to justify that image rights payments are ‘anything other than part of the overall employment package for all but a few players’, predicting that HMRC will now put pressure on clubs to settle any outstanding cases. We do not agree with this analysis.
Premier League clubs have grown hugely over the last 20 years, yet most of their growth over the last decade has been driven by commercial income. (Manchester United, for example, now has almost 100 global and regional commercial partners.) Clubs need to guarantee their players’ contribution to additional commercial activities – and if the players’ rights are held by an image rights company, the club must contract with this company to secure this access. It is incorrect to suggest that image rights structures should not work for ‘all but a few players’; on the contrary, clubs need increased commercial access to the wider squad to fulfil their commitments to commercial partners.
This case should not provide any further ammunition for HMRC to seek to close enquiries on image rights structures. Uniquely in this case, Geovanni was seeking to licence only his rest of the world rights – and was paid 25% of his contract value for this. Given that non-UK rights typically account for a maximum of 50% of the value of the image rights, this places an extreme premium on the amounts paid. The tribunal found that Hull City could not generate the serious commercial exploitation of the rights that would be required to justify such payments – and in fact there was no exploitation at all of those rights.
Clubs are well aware of the caps agreed between HMRC and the Premier League between 2014 and 2017, and routinely use 20% as the maximum amount they are willing to pay to players for use of image rights – and often agree to pay significantly less based on their valuation of the rights. Hull City did not observe these limits, and the tribunal rightly found in HMRC’s favour in this case. However, it has little wider application for commercial image rights arrangements.
Pete Hackleton, Saffery Champness (peter.hackleton@saffery.com)
I am pleased to see the article has generated some response and welcome Peter’s comments. I remain of the view, however, that an agreement covering the image rights of a player and entered into with the club that he plays for may be difficult to defend in the future. The agreement is unlikely to have been entered into without the playing contract and so there would seem to be a link with the employment and therefore open to a challenge. Perhaps we will have to 'agree to disagree' on this point and take any further discussion outside the journal.
Kevin Offer (Hardwick & Morris)
