Tax treatment of sports testimonials under the spotlight

Tax treatment of sports testimonials under the spotlight

HM Revenue & Customs (HMRC) are intending to further tighten their stance on the tax treatment of testimonials held for sports professionals.

Traditionally, where a sports professional was granted a testimonial in return for their services to their sport or a particular club, they would be entitled to receive all of the proceeds tax free.  

The testimonial was seen as a way of providing a sports professional with a tax free lump sum as they reached the end of what would often be quite a short career.

However, as wages in sport – in particular football – rose at fast pace, it seemed disproportionate to provide often wealthy sports stars with tax free testimonials.  As a consequence, in 2001 the rules were changed meaning that HMRC would seek to tax:

• Any committee formed to host the testimonial, on the basis that the proceeds would be treated as ‘trading’ income; and
• The sports professional on the basis that proceeds received are derived from employment income.

The rules since 2001

Guidance provided by HMRC from 2001 allowed for certain elements of a testimonial to still be considered to be tax free. 

However, this was only to be applied where an unprompted donation or collection was made available to the sports professional, on a purely voluntary basis as ‘a token of personal esteem’. 

Also where donations were made to charity as part of a testimonial, this would be discounted as income for the sports individual.

This still left the treatment of the taxable elements of a testimonial.  Although the guidance was strictly designed to infer that tax would be payable, ultimately by the sports professional and where appropriate, the committee, in reality it was possible to structure testimonials in a way which meant that very little tax would be payable. 

Using the guidance, many committees have been able to host testimonials for sports professionals, applying the corporation tax rules and rates to any surplus profits.  This has meant that the overall tax payable was lower than if the sports professional had received the income from their club by way of their employment. 

For the sports professional, it was often possible to argue that there was no contractual or habitual entitlement to a testimonial, and as such the proceeds they ultimately received did not form part of their employment income and were not taxable. 

What is changing?

As wages continue to rise in professional sport it has become much more difficult to argue that any element of a testimonial should be tax free. 

Current guidance is also difficult to follow and contains significant grey areas in terms of how certain elements of income and expenditure should be treated.

Therefore it is proposed that current HMRC guidance will be withdrawn and the taxation of testimonials will be simplified.  In future it is likely that all income derived from testimonials will be treated as a voluntary payment by way of the sports professional’s employment.  If this change comes into effect, the proceeds from all testimonials will be treated as earnings and will be directly taxable for the sports professional via PAYE, at the appropriate rates.

If you would like more information or would like to discuss your tax affairs in general please contact our Tax Partner, Chris Barrington on the details below:

Chris Barrington
telephone: 01942 292505