We have heard much about tax avoidance and evasion from the media in recent months, even if they are not always clear about which is which. But whilst it is in my view correct to condemn some taxpayers and their agents for indulging in aggressive and artificial tax avoidance, it is equally appropriate to condemn the tax system when it inflicts an entirely unreasonable rate of tax on a taxpayer. Which brings me back to the provisions for taxation of international sportspeople and entertainers, which I blogged about yesterday.
The issue arises from the UK’s unusual regime for taxing non-resident sportsmen and entertainers who appear in the UK in the course of their professional activities. Basic tax principles would suggest that income relating specifically to UK appearances is taxable here (thus appearance fees, fees for interviews whilst in the UK, prize money won etc) , but the UK regime goes much further than this , in a manner which certainly could, and arguably still can, inflict an entirely unreasonable marginal tax rate on relevant individuals.
This is because the UK seeks to charge tax not only on income specifically relating to UK appearances, but also on a proportion of general sponsorship and endorsement income earned by the individual (or indeed, as Andre Agassi discovered in a famous tax case, by his non-resident service company). Prior to this year, that proportion was computed on the basis of the number of days spent in competition or performing in the UK as a proportion of the number of days spent doing so worldwide.
The results of this in tax terms could be quite horrendous, although they would vary depending upon how active a sportsman or performer was in worldwide terms. Among those to whom the provisions have caused particular concern, and who have reputedly declined invitations to UK sporting events as a result, are Tiger Woods and Rafael Nadal. At first sight they are arguably not among those potentially worst affected by the provisions, on the basis that they play a lot of golf and tennis respectively over the course of a year, and would thus have relatively low proportions of endorsement and sponsorship income attributed as UK income.
However, given that Tiger Woods is reputed to earn £20 million from Nike alone, even a small proportion of his income would be a big number, which presumably makes a decision on whether to come to the UK every few years to play the Ryder Cup (for which players are not paid at all) rather difficult, as it effectively involves him making a large donation to the coffers of HMRC, at an infinite marginal tax rate. This cannot be an equitable system of taxation.
Of course it gets potentially much worse for those who compete or perform less frequently. Marathon runners and boxers, for example, are hardly in a position to compete every day, given the recovery times imposed by the nature of their events, and even Usain Bolt, who featured in yesterday’s blog, is hardly a regular competitor in sprints outside major competitions. Musicians also have to think carefully about the extent to which their tours include UK venues because of the tax consequences under these rules. Taxation under this regime can easily move to becoming confiscation, or even worse, with marginal tax rates well in excess of 100%. And that is bringing the tax system into disrepute with a vengeance.
HMRC’s defence of the regime is disingenuous in the extreme:
“Any tax on other UK income such athletes receive can in most cases be set off against tax paid in their home country.”
This is true up to a point, but only to the extent that there is such a tax liability, with the overall effective rate of tax being the higher of the UK rate and the rate of the country of residence. And if the UK rate s in excess of 100%, double tax relief will be of no practical use whatsoever
.The attempt to correct this situation in Finance Act 2012 is a step in the right direction, but appears not to go far enough to resolve matters in a satisfactory manner. The change will be the inclusion of ‘training days’ in the fraction in addition to competition days, although it remains to be seen what the definition of a ‘training day’ in these terms might be. And there is no suggestion that any account will be taken of travel days, which is another factor that it would appear equitable to include in the denominator of the fraction.
Thus the disincentives for top sports people and entertainers to ply their trade in the UK largely remain, which appears counter-productive in view of the stimulus to the UK economy that major international sporting events provide. This is a regime in urgent need of more radical amendment.