Advising the Olympic sports star, by Chris Belcher

After a seemingly endless wait, the Olympics are now well and truly upon us, and for our athletes the quest for glory has finally begun.

I have only once had the privilege of acting for a top professional athlete; doing so was, for a sports fan like me, very exciting, and threw up some slightly unusual issues.

Cash rich

First, while many (probably the majority) of our clients tend to be ‘asset rich, cash poor’, athletes at the peak of their careers, particularly in sports such as football, can earn a substantial income, making them very ‘cash rich’ indeed.

Second, that income is derived from a number of sources, including prize money and sponsorship endorsements. The income tax implications for these types of income are considerable, particularly when the athlete in question is not resident in the UK for tax purposes.

Third, image rights are now, for the very top stars, more important than their employment income and prize money.

Fourth, an athlete’s career is both fragile and relatively short. Disaster in the form of injury or loss of form can have an immediate impact on earning ability both now and in the future. An athlete who retires in their mid-thirties without a sensible plan for future earning can find themselves facing a real problem.

In my particular case, a plan was formed for the individual athlete concerned. Income tax affairs were the main concern and so needed to be addressed as a priority, but protection of the wealth which had already been accumulated, contractual protection of image rights, and a ‘disaster plan’ in case of injury were also put in place.

Like any other person, the income tax that an athlete will pay is determined by their residence. A resident of England & Wales will be taxed on their earned income – which includes prize money - in the usual way, but for a non-resident, the issue is more complicated (HMRC Helpsheet 303 might be useful for those who come across this in practice).

Tax inspector

In the early 2000s the issue came to a head when Wimbledon champion Andre Agassi appealed against a ruling of the Special Commissioners that his appearances in the UK meant that a proportion of his worldwide endorsement income should be subject to UK tax. The case eventually reached the House of Lords in 2006, where the Inspector of Taxes won.

There were predictions following the Agassi case that international sports stars would avoid competing in the UK as a result of this basis of taxation. Indeed even last year Rafael Nadal ended his commitment to play in the pre-Wimbledon tournament at the Queen’s Club, and Usain Bolt withdrew from the Grand Prix athletics event at Crystal Palace, both saying that to compete could cost them more in tax than they might earn in sponsorship and prize money put together.

The reason for this can be explained by looking at the way in which the tax is levied. If an international athlete enters ten events during the year, one of which is in the UK, then UK income tax is levied on one-tenth of his worldwide sporting income. The event in the UK might entail a stay in the UK of just a week out of the athlete’s year, and previously he would have been taxed on 1/52 of his income, so the present basis of taxation represents, in this example, a five-fold increase in the tax payable.

It is easy to see therefore, that if the event in the UK is prestigious, but has lower prize money than his other events, this particular athlete might end up earning very little from his trip to the UK, but paying a substantial UK tax bill.

International stars also need to be aware of the obligation on those paying their appearance fees and other remuneration to deduct a 20 per cent withholding tax from such payments. This can be mitigated by agreement in advance with HMRC’s Foreign Entertainer’s Unit (FEU) so that a lower rate can be withheld to take account of the individual’s allowable expenses in advance. This is often relevant to musicians and other performers who come to the UK.

Gold medal

Which brings us back to this year’s Olympic Games in London. Regulations were brought into force on 1 July 2012 to raise the threshold above which the withholding tax must be paid. The Income Tax (Entertainers and Sportsmen) (Amendment) Regulations 2012 (SI 2012/1359) operate to increase the amount which may be paid without deduction of the tax from £1,000 to the level of the individual’s income tax personal allowance for the tax year in question.

This, together with the blanket exemptions given by the London Olympic Games and Paralympic Games Tax Regulations 2010 (SI 2010/2913) which came into force on 1 January 2011, should help reduce the tax burden on some of the many thousands of athletes who will be performing in London this summer.

And finally, it is important not to overlook the basic advice which a professional athlete needs just as much as any other client – a properly thought-out will, LPA and trust structures to protect wealth for future generations should all be on the agenda. It is my (admittedly limited) experience that whatever you might read in the papers, the sports star is just as concerned as the rest of the population to protect what he has earned during his career.

Chris Belcher is a partner at Mills & Reeve LLP. Contact Chris on chris.belcher@mills-reeve.com; follow Chris on Twitter @PC_Lawyer