All The World's A Stage - Keith Gordon MA, ACA, ATII looks at the basic issues surrounding the taxation of sportsmen and entertainers

Sportsmen and entertainers are generally considered together for the purposes of taxation, because of the overlap of many rules applying to them. The international nature of their work, the potentially enormous financial rewards, and the high profile that the individuals are likely to attract have led to the Inland Revenue setting up a unit which looks solely at the activities of sportsmen and entertainers.

In this article, where there is considerable overlap between the rules applying to the two categories, the rules will be discussed with both in mind. However, for any rules specific to only one category, I will make clear which is being referred to. Statutory references are to the Taxes Act 1988, unless otherwise specified.

Employment or profession

For an individual taxpayer, it is necessary to consider whether the income is assessable under Schedule D or Schedule E. In many cases it will be obvious whether a person should be treated as an employee or not, for example, a player in a cricket team will invariably be an employee, whereas a golfer would be self-employed (unless a slave company is used to divert the player's professional earnings).

However, often it will be necessary to look closely at the nature and source of any income being paid. For example, appearance fees paid to England football players are traditionally channelled through the players' clubs and received as part of their salaries.

In the entertainment world, matters are due close examination. A permanent member of a theatrical company will be assessable on income under Schedule E. (This was confirmed in the case Fall v Hitchen 49 TC 433 which concerned a ballet dancer.) Many long-term orchestra members will also be treated as employees for similar reasons. But it should be noted that some orchestras (including some of the leading ones) are actually partnerships owned by their senior members. In such cases, it will be necessary to identify which members are employees and which are self employed.

Also subject to confusion is the situation of actors who are not permanent members of a company, but who are appearing in long runs of a particular show at a theatre, or possibly on tour. Whereas Mr Hitchen was contracted for five months (plus rehearsal time) to undertake a number of duties, many actors are contracted for a single role as part of their profession. Not only would they have other work before and after the particular run, but they might also take on other work concurrently. On this basis, two actors successfully claimed that they should be treated as self employed at the Special Commissioners.

As the Revenue's Schedule E Manual states at paragraph 7333: '[even] the terms of the contract may not be decisive by themselves, and in the case of artistic workers, such as theatrical performers/artists, the way in which they generally carry on their profession also needs to be considered'.

One continuing profession

Back in 1933, it was held in Davies v Braithwaite 18 TC 198 that successive engagements form part of one continuing profession. A consequence of this is that where entertainers perform overseas the profits are nevertheless assessable under Schedule D, Case II, if the entertainer is resident for the year. Many entertainers circumvented these rules by diverting overseas income to a company. However, the abolition of the 100 per cent foreign earnings deduction and the anti-avoidance legislation in sections 739 and 740, Taxes Act 1988 make such arrangements futile in virtually all cases.

If the entertainer changes residence (i.e. loses or gains United Kingdom resident status) then there is a deemed cessation and recommencement of the profession. However, this does not preclude the carryforward of losses under section 385 from before the change to periods afterwards (section 110A).

Casual income

For many sportsmen and entertainers at the beginning of their careers, they are likely to have other sources of income while becoming established. In many cases, fees they receive from the occasional appearance or performance are likely to be assessable to income under Schedule D, Case VI. It might be difficult to obtain loss relief where expenses (e.g. for equipment or training) exceed income. The description of an individual as amateur should not prejudice the tax position: any source of income is assessable or not, irrespective of the recipient's status.

Many sportsmen and entertainers receive endorsement fees, appearance fees or fees for appearing in advertisements. Even when these are paid as a consequence of the individual's involvement with an employer (for instance, a leading football star is asked to endorse a particular brand of trainer), these can be assessable under Schedule D. There might, conversely, be cases where the individual directs such fees to a company. In such cases, the company would have Schedule D income and the individual would be taxed on the extraction of these amounts in the normal way. This treatment was confirmed in the recent Special Commissioners' decision in Sports Club plc and others [2000] SpC 443. What made this case different was the suggestion that some of the players' emoluments were being directed to the separate company in the guise of marketing payments. This matter will be explored further if the Revenue decides to appeal.

There might, however, be cases where a business provides a product sample to the individual in order to raise the profile of the product. In such cases the gift (or loan) is often without consideration by the individual sportsman or entertainer. Where the individual is self employed there would generally be no tax consequence of such an arrangement (on the basis that the gift is gratuitous). However, if the individual is an employee and the gift is made by reason of that employment, for instance, a professional rugby player might receive the use of a car from a local dealer, then the gift (or loan) would be assessable under Schedule E in the normal way.

Awards, prizes and bonuses

A similar line is taken with other sources of ad hoc income. Where an award is made in return for an appearance, the income will be assessable. But if a grant is made, for example from the Sports Council to meet certain expenses, then it is unlikely that the income would be taxable.

For many sportsmen, prizes are the principal source of income, and these are taxable. Where a prize is unsolicited, however, such as an Oscar, there should be no tax liability.

Normal principles would dictate that bonuses paid for winning matches, races, etc. are also subject to tax, as they are earned either in the performance of the individual's duties or profession. In most cases these normal principles do apply. The exception is Moore v Griffiths 48 TC 338, in which the High Court considered a bonus paid to the winning England team in the 1966 World Cup; it concluded that it was not in the nature of rewards for services rendered, and was therefore not assessable. However, it is generally held that this decision is unique and unlikely to be relevant to future cases.

Sportsmen's miscellaneous income

Horse or greyhound racing is not considered a taxable activity. This means that prizes are not taxable, but nor are expenses allowable deductions. However, the expenses may give rise to taxable income in the hands of the recipients (e.g. salaries of jockeys or stable-hands and trading income of suppliers).

It is traditional for some sportsmen to receive the proceeds of a testimonial match. These were traditionally non-taxable and seen as a reward for a long career with one particular club in order to fund their retirement. This treatment was confirmed by the House of Lords in the case of a cricketer who received 'a testimonial and not a perquisite' (Seymour v Reed [1927] AC 554).

However, with leading players now earning huge wages from their careers, these testimonial events have largely outgrown their original purpose. The Revenue recently sought to challenge this in one instance on the basis that the proceeds were contractually received. Although the Revenue lost at the Commissioners, it is advisable to note the following guidelines from the case Moorhouse v Dooland [1955] 1 Ch 284:

• The payment should not be a reward for past service, but instead a personal gift.
• There should be no contractual entitlement.
• There should not be periodic payments.
• The payment should be in recognition of a distinguished or loyal career 'and by reason of his personal qualities or attainments'.

Footballers, in particular, can also receive a percentage of transfer fees when they leave a club. These are not contractual, but they are common practice and players can reasonably expect to receive them. As a result the £30,000 exemption in section 148 is not applicable. Joining fees are assessable in full under the principles established in Shilton v Wilmshurst 64 TC 78.

Allowable expenses

The normal principles apply for the deductibility of expenses. For most employees, any expenses are likely to be met by the employer as part of the employer's trade and so the issue as to whether an expense is incurred 'wholly, exclusively and necessarily' will rarely arise.

For actors, singers, musicians, dancers and theatrical artists, section 201A permits employees a deduction for agents' fees. Such a relief is not extended to sportsmen.

For some entertainers, it is possible to negotiate a deduction for certain expenses that would normally be disallowable as they are not incurred 'wholly and exclusively'. For example, where a television personality would be expected to have a different outfit for each appearance, it may be possible to obtain a partial deduction for the costs incurred. Similarly, for such individuals, certain cosmetic treatments, e.g. dentistry, may be partially allowable because of the need for the individual to maintain a public image.

However, the normal rules would indicate that any deduction is discretionary. In Mallalieu v Drummond 57 TC 330, a woman barrister was refused the cost of court clothes on the basis that she would have to wear something (the cost of her gown and wig were allowed). In Prince v Mapp 46 TC 169, a guitarist was refused the cost of an operation on his thumb because he admitted that he played the guitar as a hobby as well as professionally.

Overseas earnings

Sportsmen and entertainers who earn money overseas may find that they are liable to tax in the other country. In many cases this would be deducted at source under a withholding régime. Double taxation agreements tend to exclude sportsmen and entertainers from any exemption from this withholding tax régime. However, there will usually be the opportunity for any overseas tax liability to be set off against the United Kingdom tax liability.

Some withholding tax régimes include payments made to companies as well as payments made to the individual. To ensure full credit is given for any overseas tax suffered by the company, one must ensure that sufficient profits are made by the company in the United Kingdom, i.e. the profits are not all withdrawn in the year as salary.

Withholding tax provisions

If a sportsman or entertainer is resident overseas but is paid for an appearance in the United Kingdom, then the payer may be obliged to deduct withholding tax on the payment. The rules are covered in sections 555 to 558 and Statutory Instrument 1987/530.

The standard rate of withholding tax is the basic rate of income tax applicable at the date of payment (section 555(4)). However, the payer can negotiate a lower deduction (either as a percentage or as an absolute amount) if it appears that the final United Kingdom tax liability of the sportsman or entertainer will be lower (Regulation 5, Statutory Instrument 1987/530). The payer must write to the Revenue Foreign Entertainers Unit in Solihull at least 30 days before the proposed payment.

It is not just cash payments that attract a liability to withholding tax. These rules equally apply to transfers of assets. In such cases, the value of the transfer is grossed up at the basic rate. See Example 1.

The tax withheld is not treated as an expense of the profession or vocation, it is instead treated as a payment on account of the recipient's tax liability.

Payments are caught by the rules even if they are paid to other persons (including companies) unless:

• the recipient is United Kingdom resident;
• the recipient is neither connected with nor associated with the entertainer or sportsman;
• the payment would be reasonable under an arm's length transaction.

Deductions of tax are not required in respect of the proceeds of sale of records.

There is no liability in cases where the total amount payable to a sportsman or entertainer in a tax year is £1,000 or less. Payments to associates are included when assessing whether the £1,000 threshold has been reached.

Entertainers' National Insurance

After a number of years in which the true position for National Insurance contributions was in doubt, regulations were introduced to put the previous practice on a proper legal footing. As a result, any entertainer not already treated as an employee for income tax purposes, who receives fees wholly or mainly in the form of a salary is treated as an employee for National Insurance purposes. This treatment does not affect the income tax position.

Although this will usually mean higher National Insurance contributions being paid, it allows entertainers to claim the additional benefits given to employed earners.

Self employed in the film industry

The Revenue recognises that a number of activities in the film industry require a high level of technical expertise. As many of these activities are carried out by individuals in a series of short engagements, the Revenue will treat these engagements as part of the individual's profession. As a result, the income from them will be assessable under Schedule D, Case II. The list of such activities is reproduced in Table 1.

Pensions and retirement

Sportsmen and some entertainers are entitled to draw pensions earlier than other individuals. The list of such activities is shown in Table 2. It should be noted that these rules only apply to income from the individual's principal activity as specified in the list. Further, the maximum pension contributions are not changed and are based on the individual's age and net relevant earnings. For example, a dancer may retire at the age of 35, but can only contribute 17.5 per cent of his income to a pension plan in line with all other taxpayers.

Keith Gordon is a director of ukTAXhelp Ltd and can be contacted by e-mail on keith.gordon@ukTAXhelp.co.uk. The views expressed in this article are those of the author.

Issue: 3801 / Categories: