Last Sunday, the Sunday Times went back to an old cause célèbre for the paper with an exposé on tax avoidance by top footballers (Rooney, Barry Walcott).
Previously the ST had exposed the practice of top footballers having their reward split. One sum is paid as traditional salary, subject to income tax and national insurance. Another payment is made to their service company for image rights. Apparently even someone like Joey Barton has image rights, so you can see that it is all somewhat iffy.
Broadly the payment goes into the service company, avoiding the income tax and national insurance. Foreign players could exploit this to its fullest extent because of their non domicile status. The image payments could go into an offshore entity to be extracted by the player once they had finished playing in the UK and cease to be UK resident. As long as income from the offshore entity was not remitted to the UK whilst they are UK resident for tax purposes, they pay no personal tax on this.
Our home produced talent does not have this option. What they are doing is to take a loan from their service company, rather than salary or dividend. The loan is subject to tax under the benefits legislation but it is taxed at the beneficial rate of interest, currently 4%. Up to 5 April 2010, the tax would be 40% of the interest so calculated.
After 5 April 2010, the increase in the top rate of tax to 50% means that the tax is just 2% of the loan each year. So a loan outstanding for 3 years attracts tax of 6%. Of course, in the meantime the loan can be put to good use personally to secure a better net return.
In fairness to our footballers, the same practice is rife in the City as well. The idea will be to take salary or dividend to repay the loan, when the top rate of tax falls.
Some of the more aggressive planning and advice is to the effect that the loan need never be repaid and could be written off. This could be through the footballers going non-resident and then liquidating the company.
My concern, in reading the article, was that it was selective in its attention to detail in order to draw out the theme. It may have left readers (including Lambert Chapman LLP clients) wondering why this cannot work for everybody with their own company.
Buried away in the text was an acknowledgement that the payment of the image rights does bear corporation tax at 28%. In setting out the savings for the footballers, this payment was not deducted from the saving, as it should be.
Nowhere in the article did I see any reference to what we used to call Section 419 tax (now Section 455 tax). This is the tax which has to be paid over to the Revenue if a director’s loan account is still overdrawn more than 9 months after the company’s year end. The tax is 25% of the overdrawn balance. It is recoverable but only after the loan is repayable. This may not be a problem for Wayne Rooney. £1.6 million goes into his image rights company and a Section 455 payment of £400,000 is made to the Revenue. Cash is not a problem. The company is forgoing some investment income (net of corporation tax relief of 28%) but not a huge sacrifice in the overall scheme of things.
The ordinary business owner, by contrast, may not have the liquidity in their business to be able to transfer cash for long term keeping with the Revenue.
The Revenue have already done battle on the question of image rights and some premier clubs are having to pay up additional PAYE. I remember that, in the world of football, what the player gets is always ‘netto’. The Revenue are now looking at the question of these loans and seeking to attack them as shams. It seems to me that they look at taking similar action to what they have done with EBT’s and EFRB’s by charging PAYE and national insurance on loans to employees.
Exploitation of the loan arrangements are available to everyone but the pitfalls will rule it out for a lot of people.
If you need clarification on this topic please call Paul Short on 01376 326266.
