31 May 2022
Many European countries offer favourable tax regimes to foreign sports stars plying their trade there. These include Spain’s special rules known as the Beckham Law, after its most famous beneficiary, and Italy’s tax regime introduced in 2020 which can offer a 50 per cent tax exemption on certain players’ salaries.
The importance of income tax implications for football transfers and how they may scupper a move was recently highlighted in the case of the Chelsea striker Romelu Lukaku. The striker may no longer qualify for the special tax relief offered in Italy if he moves back in the summer, as he only left the country in August 2021.
In contrast, the UK’s rules are more likely to prove a deterrent to getting transfer deals done rather than attracting overseas players to the UK’s leagues. They are also a factor in driving clubs’ wage bills to dangerously high levels if players are to be left in a similar position after tax.
Following the introduction of the Health and Social Care Levy, many high-earning footballers will now be paying an effective tax rate of 48.25 per cent on the majority of their salaries.
In response to this relative high rate of income tax in the UK on footballers compared to some other large football league nations, players and clubs may seek to enter into separate contracts regarding the player’s image rights. However, even this type of planning may not be attractive as it used to be, and HMRC could take the view it is not effective in any case.
Typically, it involves the football player establishing a company, and then transferring a bundle of different intellectual property rights relating to the player to the company. These rights need to be capable of being commercially exploited and, assuming that is the case, a club might licence those rights in return for payments to the image rights company.
It is an area that has been subject to much scrutiny from HMRC over the last decade or so, as highlighted in reports indicating the entire England football squad were under investigation over their pay from the FA.
Even if the structuring is not successfully contested by HMRC, the tax benefit is set to be diminished with the proposed increase in corporation tax rates from 19 per cent to 25 per cent from April 2023.
In addition, the recent focus on “non-doms” could lead to changes in the rules for such individuals, including foreign footballers. For example, Labour’s proposed changes to the “non-dom” rules would limit any UK tax advantage to a short period of time, potentially just a six-month period.
Such a move could materially impact on overseas image rights companies owned by foreign footballers, potentially resulting in income received by such structures being taxable on the players under rules known as the Transfer of Assets Abroad rules.
The quality of the Premier League will undoubtedly continue to attract talent to its roster despite the tax regime, but it could face fiercer competition from clubs in Spain and Italy in the current and future transfer windows. Other leagues such as the Scottish Premiership and EFL clubs may also find their finances stretched further by the increasing tax burden on players.