Since the introduction of the Finance Act 1986, HMRC has sought to tax non-resident, non-domiciled athletes competing in the UK both on the earnings they make while they are in the UK as well as on a proportion of their global endorsement income. The theory behind this decision is that a proportion of athletes' endorsement income can be directly linked to their performance in competitions held in the UK.

Whilst one can see the logic of such an argument, this regime of taxing an athlete on both his/her competition winnings and global endorsement earnings can in certain circumstances result in the somewhat bizarre situation whereby a non-resident, non-domiciled athlete who has competed in the UK becomes liable to pay more income tax than the amount he/she actually earns whilst competing in the UK.

Although essentially having to pay to compete in the UK is yet to have a profound effect on established tournaments such as The Open or Wimbledon, it has already led to certain athletes, such as Sergio Garcia, refusing to compete in less well established events held in the UK. The existing tax regime is also fast becoming a determinative factor in the decisions of sports governing bodies not to award tournament hosting rights to the UK. Indeed, when asked why Wembley had lost out in its bid to host the 2010 UEFA Champions League final, UEFA's president, Michel Platini, famously responded "the reason was the taxes".

The provision in the 2010 Budget for the forthcoming Finance Bill to exempt "certain persons" from income tax in respect of "certain income" arising in connection with the 2011 UEFA Champions League final to be held at Wembley, may be an indication that, in order to avoid the UK becoming a sporting pariah, HMRC will be relaxing its approach to the taxation of non-resident, non-domiciled athletes in the future. However, perhaps more likely, this decision not to tax footballers competing in the 2011 UEFA Champions League Final may just be another example of pragmatism at work. Whether this approach becomes a precedent that HMRC is bound to follow in relation to other sports is likely to depend largely on the amount of pressure that those other sports' governing bodies place on HMRC and/or whether HMRC considers it pragmatic to do so.

Interestingly, if HMRC is "forced" into relaxing its taxation of non-resident, non-domiciled athletes then it is conceivable that it may begin to look to compensate for this potential loss of revenue by recouping more tax from other sporting sources. HMRC's recent enquires into the image rights agreements entered into between leading football and rugby clubs and their players or associated entities may indeed provide some indication as to where HMRC might be looking to fill this potential revenue gap. Additionally HMRC's decision not to tax footballers taking part in the 2011 UEFA Champions League Final may indeed prove to simply be an example of HMRC giving with one hand whilst taking with the other.

Authors:
Glen Atchison, Partner and Head of Tax

Bob Mitchell, Partner and Head of Sport

Nicolas Murfett, Solicitor