Image rights and HMRC

HMRC’s recent challenge against Portsmouth FC in the High Court has once again thrust the issue of professional sports and image rights payments into the public eye.

HMRC v Portsmouth FC

HMRC’s primary aim in this case was to block a Company Voluntary Arrangement (CVA) and force the winding up of the football club, which is currently around £130million in debt. The CVA had already been agreed by the majority Portsmouth FC’s creditors, and would have the effect of pulling the club out of administration.

HMRC’s main argument against the CVA was that the Football Creditors Rule, whereby football related creditors receive payment in full before other creditors, meant they were unfairly prejudiced if the CVA were to go ahead.

HMRC’s original tax claim of £24million did not give them enough clout as a creditor to block the CVA outright. HMRC needed at least a 25% claim over the entire debt in order to prevent the CVA going ahead. In order to rectify this, HMRC bolted on a further £13million in unpaid taxes to its claim.

This additional amount of tax was related to payments made to individual players via their image rights companies. HMRC argued that these payments actually constituted as employment income and as such, should have had PAYE and NIC’s applied to them.

Mr Justice Mann, who presided over the case, rejected all of the arguments presented by HMRC.

Good news for image rights?

Arguably, this can be viewed as a significant victory for clubs who effect payments to image rights companies for using a player’s image as part of its own branding.

However, it is doubtful whether such payments will go unchallenged in future. Although HMRC have no intention in appealing against this decision, the payments made to image rights companies by football clubs remains to be high on HMRC’s target list.

HMRC’s claim failed due to inconsistencies rather than a general acceptance of image rights payments to offshore companies. The additional £13million tax bill seemed to have been cobbled together in order to block the CVA. If HMRC were owed £37million, and not £24million as originally claimed, then it had the right to block the CVA outright.

However, the additional tax could not be clearly justified or quantified by HMRC. As a result of this, the court could not allow an arbitrary amount to be the crux for deciding the future survival of a football club, where a CVA had already been agreed.

The future of image rights payments to companies, by clubs remains uncertain. They should be treated with caution, not be excessive, and clubs and players alike should be ready to deal with a HMRC challenge.

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