Football clubs must keep detailed records to evidence the split of payments made to player agents or other intermediaries in cases where those intermediaries provide services to both the club and the player, HM Revenue & Customs (HMRC) has confirmed.
The new guidance represents a change in stance from HMRC which was previously willing to accept by default that football clubs and players paid an equal share of agents’ fees in cases where there was dual representation.
The new guidance puts significant record-keeping obligations on clubs, according to tax disputes expert Ian Robotham of Pinsent Masons, the law firm behind Out-Law.
Ian Robotham
Legal Director
Where HMRC identify indicators of risk, not only will it contact clubs for evidence of the commercial justification of the contract, but they may also contact players and former players directly
Where football clubs use an agent to represent them in negotiations with players and the agent also represents the player, sometimes known as dual representation or tripartite agreements, the club may pay the agent for the services provided on behalf of the player as well as the services provided to the club.
Payments which a club makes on behalf of the player are taxable as employment income of the player. Where the club pays the agent for the services provided to both it and the player, the club needs to work out what proportion of the payment is attributable to services provided to the player so that the benefit provided to the player by the payment by the club can be calculated and taxed on the player.
Historically HMRC would accept an equal split between the services provided to the club and those provided to the player. HMRC's new guidance makes it clear that "an evidenced and commercial justification" must be made for payments and it will not accept a default split.
The guidance sets out the kind of evidence that clubs are expected to retain. This includes letters, contracts, faxes, memos, notes of meeting, notes of telephone calls, iMessages, SMS/Text messages and emails.
Robotham said: “In our experience, HMRC are already routinely requesting contemporaneous evidence of services provided by agents. Recording the audit trail of the negotiations with agents and keeping contemporaneous evidence of all telephone calls, texts and meetings to record the precise role of agents in deals could be a nightmare in the frantic run up to the closing of the transfer window."
According to the new guidance, if the contract sets out the agent fee to be paid by the club and player, clubs will only be able to rely on the contractual split if that reflects the substance of the negotiations, and they will have to keep detailed records to evidence the fact.
Where multiple agents are used in respect of the same player, which can often be the case and particularly with players coming from overseas, the guidance makes clear that HMRC expects clubs to retain documentation to evidence the work and services provided by each agent. Where the club is aware that a registered agent has assigned or subcontracted agent duties to a third party, HMRC also expects the club to retain all evidence relating to this arrangement.
Trevor Watkins
Partner, Head of Sports
Coupled with the regulatory requirements set out by the FA, this development places further emphasis on transparency and accuracy in setting out how contracts and transfers are negotiated
The guidance also sets out some "indicators of risk" which may cause HMRC to look more closely at the arrangements. These include payments treated as a benefit to the player being lower than amounts those players are due under existing arrangements they have with agents, payments to individuals who are connected with, or family members of, the players, and payments to sub-agents.
Robotham said that it is clear from the guidance that HMRC is particularly concerned about payments to agents which end up in the hands of the player, their family or other connected parties and that HMRC expects clubs to inform it and account for tax appropriately if they become aware of such arrangements.
“Where HMRC identify indicators of risk, not only will it contact clubs for evidence of the commercial justification of the contract, but they may also contact players and former players directly,” said Robotham. “This could lead to difficult conversations with players and agents in the event that adequate records have not been retained.”
Sports law expert Trevor Watkins, also of Pinsent Masons, said: “Clearly HMRC remain suspicious that dealings between agents, players and clubs are inaccurately recorded. Coupled with the regulatory requirements set out by the FA, this development places further emphasis on transparency and accuracy in setting out how contracts and transfers are negotiated. Whilst helping HMRC chase down correct payment of tax, it is part of a global football system that requires a level playing field from both tax and football regulation.”
HMRC has also recently updated its guidance in relation to image rights. The new guidance was issued following a case that came before the First-tier Tax Tribunal concerning Hull City, where the club made substantial payments to a new player's personal service company which owned his image rights. The tribunal decided that, in reality, the payments were a reward for the player’s services as a footballer and formed part of his earnings.
"HMRC will continue to scrutinize the substance of payments made under image rights agreements,” according to the new image rights guidance. “With material transactions there is an expectation of evidenced planning, valuations and distinct negotiations. HMRC expects clubs who make image rights payments to have the commercial desire, resource and ability to exploit those image rights. It will seek to substantiate that when investigating these transactions."
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