HMRC have announced that from April 2016 they are looking to subject testimonial receipts to income tax (and one assumes national insurance) as if they were earnings from employment. This potential change was craftily contained in a consultation on the withdrawal of certain extra-statutory concessions. The tax status of testimonials is not governed by extra-statutory concession, so this was easy to miss.
Properly organised testimonials are not currently subject to income tax as earnings from employment. If a testimonial committee arranges and derives income from a number of events then they can be subject to corporation tax on their trading profit, but distributions to the player concerned are not subject to income tax. This treatment is derived from long-standing case law and reflected in HMRC’s current published guidance. The consultation suggests that this guidance should be changed.
There is nothing to stop HMRC amending its published guidance at any time – it has no legislative basis. However, in doing so, they do not change the law, merely their published view of the law. Therefore, there is nothing to stop players and testimonial committees continuing with current arrangements after the change if they are confident that, irrespective of HMRC’s published views, they are applying the correct tax treatment, in line with current law. Having said that, such players, clubs and committees can expect HMRC to challenge this position, and the issue is likely to end up in a tax tribunal if the parties wish to take it that far.
However, there is much that can be done before we get to that point. This was initially a consultation that requested views and evidence from interested parties. We have submitted responses on behalf of a number of representative bodies and pointed out:
- Only a tiny proportion of professional sportsmen and women benefit from testimonials.
- Testimonials are currently taxed in line with the law, as derived from the leading case of Reed v Seymour. This concluded that properly run testimonials were events organised independently of employing clubs that gave the public an opportunity (but not an obligation) to make payments to demonstrate their regard/affection etc for the individual player. As such, proceeds from these events were not subject to income tax.
- In order to change this position, a change in the law would be required, not simply an alteration to HMRC published guidance.
- There will be a significant effect on individuals concerned, particularly on non-star, journeymen or lower paid players from a wide variety of sports.
- Proceeds from “star”, for example Premier League football player, testimonials tend to be given to charity.
- If testimonial committee trading profits remain subject to corporation tax and distributions of those profits are also subject to income tax and national insurance without any mechanic to set one against the other, by far the largest benefactor of a player’s testimonial year will be HM Treasury!