Are you the next Fernando Torres?
Footballers eh? While we were all worrying about our 31 January tax return deadline, they had more important worries - the transfer deadline. Of course the biggest fish to plop out of the end of January wrangling was ex-Liverpool striker Fernando Torres, who moved to Chelsea for a record £50m. And we all know what a massive impact he had in the game between his current and former clubs this weekend.
Whether that represents value for money, I will leave you to decide, but of more interest to scam-scouring readers such as the Bitterwallet faithful may be how much tax ole Fernando may end up paying on his whopping reported £175,000 a week salary. Not that I am bitter, but the idea of him paying 50% tax on that massive sum, is at least some comfort to my green and twisted soul.
However, it is unlikely that Senõr Torres will end up paying 50% on his earnings. He could end up paying as little as 2%. Yes, as if the handsome, talented, fit Torres didn’t have enough natural advantage, he may now be one of the many footballers rumoured to be taking advantage of a tax scheme to avoid UK income tax. And it’s not even a scam*. So could you do it too? Clearly you wouldn’t save £87,500 a week but surely anyone would agree a 2% tax rate is preferable to 20%, 40% or 50%.
So how does the non-scam scam work? Well, it turns on the existence of some ethereal intangible things called image rights- the idea that someone will pay to have a player’s name or image on a shirt or endorsing their product. What happens is that the football club, probably in conjunction with the player’s agent (and his expensive tax accountant) decide how much the player will get paid for playing, and how much will relate to income from image rights.
When the player gets his weekly pay packet (can you imagine trying to stuff £175 grand into a small brown envelope?), he gets his official ‘salary’ and an extra amount relating to an estimate of image rights income. Clever huh? As a result it is increasingly common practice among footballers to have two contracts when they sign for a club- one which they pay tax on under PAYE same as every other employee, and another that they do the clever bits with.
But forget all this waffling, you want to know how we get to 2% don’t you? The first point is that the image rights money is not paid to the footballer, but is instead paid to an image rights company. If you are a foreign national, say Spanish, you could even pay it into a foreign company. UK companies may be liable for 20% (or conceivably 28% tax if profits exceed £1.5m) but foreign companies could, with the correct advice, escape UK tax altogether.
So assuming we have a company paying zero tax, where does the 2% come from? Well, if the image rights income is paid into a company it then belongs to the company, so if any of the players are feeling particularly cash strapped they will need to get the company to pay them some cash.
You might now be getting all warm and fluffy inside thinking that this magic trick is about to tumble like a house of cards. Unfortunately not. See, they don’t get paid any money from the company, they just borrow it. And the tax charge on borrowing is 4%. At 50% income tax rates that gives us the magic 2%. It really is quite neat.
Do you have any clever bits?
If this tax planning is as legitimate as is claimed, surely there is nothing to stop you from splitting your own employment income into standard salary and image rights income? In theory, this is absolutely possible, but in practice, unless you are as rich, famous and good looking as Bitterwallet’s editor Paul (who can pay me later) your image rights are likely to be worthless.
Having stag t-shirts printed with a picture of you puking in a Greek toilet do not count, so unless you are Fido Dido, you will have an uphill struggle convincing anyone of your image bankability. HMRC have reportedly already investigated some of bigger clubs looking for settlement of underpaid PAYE in respect of ‘overestimated’ image rights payments. Still not a scam though.
*some could argue that it is a scam. All I will say is that it is legal, under UK tax law as it stands, so it is considered legitimate avoidance, not a scam.