Are you the next Fernando Torres?

7 February 2011

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%.

Image rights

Image by Jonathan Ruchti. I don't think this is him though.

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... 2%?

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.

TOPICS:   Tax

9 comments

  • Tom
    Either this is bullshit from start to finish or you've missed out a lot of salient information. Are you saying the club will pay a footballer a small amount PAYE then a larger amount for image rights? So in effect they're paying him for permission to show his face on the pitch and not kick a ball with a bag over his head? Or perhaps the image rights is seperate because players receive a seperate payment for licencing their image to go on lunchboxes and easter egg boxes etc. In which case that's a seperate commercial contract and of course an individual will seek to avoid paying as much tax as possible. Where are you getting the 4% for borrowing from? If it's a UK based company then they'll pay a benefit in kind over a certain amount but the "loan" has to be paid back. Could have been a good article but fuck me, this reads like a GCSE English project.
  • Sam T.
    Hi Tom Thanks for your comment. In answer to your points: 1) it is not bullshit from start to finish, but thanks for asking. If it had been I would have appreciated you pointing it out 2) generally yes aside from a small (er) amount subject to PAYE, the image rights are generally payments for not appearing with said bag on head, or perhaps as Frank Sidebottom. Separate sponsorship contracts would naturally be taxed as such, but the foreign entertainers legislation will normally bite you in the bottom anyway by seekingto tax the proportion of earnings generated in the UK on the basis of number of appearances. Unless of course you are a champions league footballer playing in the 2011 final, an Olympian, or played in the Ryder Cup in Wales last year. Poor old Andre Agassi who was the test case must be rolling in his tennis whites. 3) 4% is the current official rate of interest prescribed by HMRC for use in benefit in kind calculations. Any kind of loan has to be paid back. Eventually. But you could then wind the company up and pay no income tax at all... 4) I think it was a good article, I'd rather not, and you never met my GCSE English teacher. Cheers
  • MrRobin
    Yes, a BIK payment can be avoided by paying interest on the loan (currently at 4%), however, if the loan is not paid back by the company tax year end then a 25% charge (of the loan amount) is due in corporation tax
  • Sam T.
    I had no idea Bitter Wallet readers were such tax experts. There would be no tax advantage in paying the interest to avoid the BIK charge- the tax charge (at 50% of 4%) is cheaper than paying 4%. *If* a company is a close company, and image rights companies may not necessarily be so, then a notional dividend payment can equal a tax charge of 25% if amounts are not repaid, not at the company tax year end as you suggest, but rather 9 months after that date. Furthermore, many footballers do not actually need the cash so leave it in the company to act as their pension fund. Besides, there is nothing to prevent repayment of a loan 8 months and 29 days after the year end, and then obtaining a further loan 2 days later. There are also numerous non-domiliciary tax planning measures that players, such as Spaniard Torres, could employ to further escape a UK tax liability. Anyone else?
  • Tom
    Excellent. That's the sort of thing/level of detail that should've been in the original article. You have restored my faith in Bitterwallet.
  • MrRobin
    I see, so it's the type of company that avoids the 25% corp tax charge. I'm sure a repayment just before TY1 + 9months followed by a new loan TY2 + 2 days would fire red flags all over HMRC's computer systems. Or am i giving them too much credit? A quick google search shows that Hector is indeed looking into these schemes
  • Terry-Thomas
    Interesting article, and surely the place for longer analysis of the intricacies of tax law is in the comments not the original article.
  • Nob
    I do blow jobs for cash, and avoid paying tax.
  • markymark
    @nob The last one was rubbish. I want my money back, plus 4% interest.

What do you think?

Connect with Facebook, Twitter, or just enter your email to sign in and comment.

Your comment