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Image rights: Are HMRC dropping the ball… or ‘parking the bus? (Part one)
Image rights – Introduction
Like so many things, I’ve been meaning to write this article for some time now. Such is life.
However, this topic came up at the end of a meeting I had with a long standing client. No, it wasn’t an international sports star. It was actually with an old lady living in deepest darkest Cheshire who wanted some assistance with her Inheritance Tax planning.
Her view was very much that footballers were ‘getting away with murder’ and that they were much more adept at dodging taxes than dodging the odd stray boot in the penalty area.
One has some sympathy with HMRC. We see politicians and the press gnashing their collective teeth at ‘sweetheart deals’. However, it is difficult to see what they are doing wrong – unless one see’s a certain pragmatism as wrong.
Image rights: What’s the big idea?
The Premier League’s creation back in the 1990’s led to increased wages for footballers and an influx of foreign players. With it came the popular use of image right contracts and structures.
These agreements allowed clubs to separate payments received from clubs into:
Of course, the division of such payments also allowed for the second payment to, perhaps, be paid to a Company. Certainly at present, even where that company is based in the UK, there are attractive benefits (See later).
There was a seminal tax case on image right structuring involving Dennis Bergkamp and David Platt. The taxpayer being successful.
But, come on, it’s just a big ruse?
You might think that this was the fiscal equivalent of the old nutmeg. The treasury the one left scratching their heads after the accountants and lawyers have dinked the ball through their legs akimbo.
However, undoubtedly, many players will have significant commercial clout. Rumour has it that David Beckham had earned revenues for Real Madrid within 6 months that were equivalent to the total he would be paid out over a four year contract!
What does HMRC think about image rights?
What is HMRC’s take on image rights? Is it super high definition or – is it an old black and white portable TV with a coat hanger for an aerial?
The mysterious world of image rights. One would imagine that HMRCs manual would be written in code, and hidden in an underground bunker. With walls thick enough to withstand a nuclear attack and a withering look from Margaret Hodge.
But no. Their view is available on their website via HMRC’s manuals. If you don’t believe me, click here. These manuals are useful because they are essentially a set of instructions issued to tax inspectors. Of course, some sensitive information is withheld from Joe Public in some entries. However, on many issues it will give us the official HMRC line on matters.
HMRC’s view is that:
the concept of an “image right” is, to the extent that it can be protected under UK law, dependent on a bundle of different [intellectual property rights]. These may include, for example, contractual rights, registered trade marks, passing-off of goodwill and copyright.
Indeed, the recent case involving pop superstar, Rihanna supports the view that the protection of an image right may stem from the ‘passing-off’ of goodwill. Here, Topshop sold T-shirts emblazoned with an image of Rihanna giving the impression that this particular garment had been endorsed by the popstar. The judge found that customers may have been deceived into thinking Rihanna had endorsed the clothing thus the misrepresentation was an exploitation of her public position and “goodwill”.
But what is “goodwill”? The manual defines “Goodwill” as:
“the whole advantage of the reputation and connection with customers together with the circumstances whether of habit or otherwise, which tend to make that connection permanent”.
My view of this is that it is not as simple to say the client is a sports person therefore he or she has an image right. It does not simply appear as if by magic. Instead, the image right is developed by the activity of the sports person.
Furthermore, the exploitation of the right does not arise as if by magic either. So for example, a footballer might have to appear in a dreadful Pepsi advert or take part in an interview or photoshoot for a magazine.
Checks and balances – the sweetheart deal?
It was clear that things got out of control throughout the ‘noughties’. As such, HMRC opened investigations in to most Premier League clubs. This led to a ‘deal’ being struck between HMRC and most clubs based on the historic use of such structures based on a percentage of their turnover.
However, were clubs to abandon such structures they would be at a distinct commercial disadvantage as opposed to other clubs internationally? So HMRC were approached a couple of years ago by the big clubs which, ultimately, lead to an agreement.
This agreement is an agreement…sorry…of two halves:
So, of course, one could see this as a ‘sweetheart deal’. However, one could also see this as a pragmatic decision by HMRC.
Why do I say that? Well, clearly, there is authority that such payments made properly are simply not taxed as earnings. However, striking this agreement limits the mischief, the level of payments and the time spent by all concerned in dealing with any dispute.
So, you want to hear more about those image rights vehicles? Join us in the second part of our dribble around image rights.
Should you have any questions regarding image rights or any other issues then please do not hesitate to contact us.