With the dust starting to settle on the latest transfer window and 31 January tax return deadline, one issue that continually arises is a player’s tax liability due to agent’s fee that have been paid on their behalf – in some cases 18 months previously.
How the rules work (UK)
Agent’s fees paid on contract negotiations (whether on a transfer or a renewal) can be complex and are generally the subject of ample conjecture. They typically involve two crucial steps:
- The two clubs agree a fee.
- The signing club agree terms with the player.
Both of these steps (whichever way around they occur) will typically involve mediation by an agent, someone who understands what one or both sides want and liaises with both parties to reach a settlement – much like an estate agent might between vendor and purchaser. This might also be two agents acting on behalf of their respective clients (player and club), both attempting to guide the deal down the path of least resistance.
Typically, in football, it’s the former scenario that is in place – one person bringing club and player together to get a deal done. More often than not, that person is…? The player’s agent. As such, the following happens:
- The fees payable to the agent for their work (typically paid over the course of the player’s contract) are agreed.
- Those fees are deemed to be 50% for their work representing the club (helping them to sign the player), and 50% for services on behalf of the player (helping them to find a suitable club and get a good deal). In limited circumstances, it can be shown that the work that has been undertaken is more for one party than the other (advantageous if more for the club). However, HMRC take a simple 50:50 view on dual representation so any alternative split would need to be justified and backed by evidence.
- The club pays the agent for both their fees and the player’s fees.
- The player is taxed on the benefit in kind that the club have provided to him by settling 50% of the agent’s fee on his behalf.
- The alternative would be for the club to pay the player additional salary (which he would be taxed on) and the player then make the onward payment to the agent. This very rarely happens as it is logistically more complex (in the UK at least, see below).
- The benefit provided to the player is the agent’s fee paid, plus the VAT charged.
- This benefit is included in the player’s P11D from the club.
- The player pays tax (almost always) at 45% on the VAT inclusive benefit
- This is calculated when they complete their tax return
- Some clubs build the benefit into the player’s tax code, such that more tax is deducted through PAYE/payroll throughout the tax year. This can help stop the ‘shock’ tax bill come January after the year end, but is actually a cashflow disadvantage to the player.
- The club will also have paid Class 1A National Insurance Contributions at 13.8% on the benefit in the July after the end of the tax year in question.
- The payment to the agent for club services is a simple business to business transaction. The club can recoup any VAT payable on that fee and treat as a tax-deductible expense. There is no impact for the player.
Some of the big players (those with good accountants at least…) have started to negotiate a loyalty bonus payable in January that covers the tax they have to pay on their agent’s fees for the previous tax year. Tax is obviously also payable on this bonus, so the club need to gross up the payment to give the player the net amount he needs to settle his tax bill. Roughly translated that typically means you need to be a BIG deal and have the club in the palm of your hand when negotiating terms.
Agent’s fees on commercial income are much more straightforward. The player (or their image rights company) invoices the commercial partner (Nike, Adidas, Beats, whoever), then the agent (or the company they are trading through) invoices the player/their IRC for a percentage of the fee (typically c.20% on commercial deals). As the player/their IRC are remunerating the agent directly, or possibly as a reduction before they receive their fee, there is no benefit in kind element to the payment.
What do other countries do?
If we are 50:50 and in the middle of the spectrum, there are those at the extremes – namely Germany and the MLS (i.e. the USA)
In Germany deals are often considered to be 100% on behalf of the club, i.e. there is no player benefit. Furthermore, if there is a player benefit included (i.e. the club pay the agent on the player’s behalf), the player can deduct the cost of paying his agent from the benefit he is receiving from the club such that there is no ‘net profit’ to pay tax on.
Such a deduction would be available for a self-employed individual in the UK (tennis player, golfer etc) but is not available to employed sportspeople such as footballers or rugby players.
In the MLS, things are quite different. MLS regulations make clear that all payments are made to the player, who may then make onwards payments to his agent. Presumably this is on the premise that the player then knows what his agent is receiving. However, dual representation is still recognised.
Therefore, this mechanism works well for the player element of a deal, but where there is dual representation, this means that the player has then paid income tax on a business to business transaction that he is just a conduit for. This makes things tricky as tax has to be reclaimed, and there is often some tax leakage as a result.
What’s next for the UK?
As political pressure builds and the media’s “agent’s are the devil” narrative continues, there is a movement to change how agent’s fees are treated. In terms of capped remuneration, I’d echo Dan Geey’s thoughts in his recent FT article.
For tax purposes, there seems to be an air of resignation in the industry that the days of a proportion of the agent’s fee being deemed as club services are numbered; my question is why…?
Taking the football out of it, what is an agent? What do they do? They help people find jobs. They are essentially highly skilled recruitment agents.
How do recruitment agencies work? Say for instance (I don’t, so you can stop sending me InMails on LinkedIn) I wanted a new job. I contact said recruitment agency, tell them what I’m looking for, how much I want to be paid and where I’d like to work and wait for them to present me with a whole host of options – preferably with table tennis tables in the office. I go to an interview and get the job and the recruiter earns a fee (usually a % of the salary).
Who pays that recruiter? The business employing me. Am I (the individual) subject to tax on a benefit in kind as my new company have paid the recruiter who helped me find said job on my behalf? Absolutely not.
Is the “player” above an individual? Is the “club” not “the company”?
I’m not suggesting that the agents fee should be 100% deemed as services on behalf of the club (as in Germany) and might be throwing the recruitment industry under the bus if anyone with sufficient gravitas read my blog, but it does make you think, doesn’t it?
The reality is that it’s the players that are in short supply. It’s not as if many agents are clambering around clubs trying to find anyone that will take their player, at the top level at least, far from it.
Clubs are falling over themselves to secure talent. The player can take his pick. It’s the club that needs help in securing the player’s services most of the time, rather than the other way around. Of course the agent is helping to secure the best possible terms for his client, but he is also helping to shape the decision around where a player ends up.
Again, arguably this is the opposite to recruiters – yet they are 100% paid ‘company side’.
Yes, the agent is formally instructed by the player (evidenced by the 2-year representation agreement that stops anyone else representing the player during that window), but I would also tell a recruitment company the terms I was after on any move.
Those arguments are for another time. In the interim, dual representation is alive and kicking and once January 2020 rolls around no doubt I’ll again be talking to players about why they have to pay tax on their agent’s fees.
Maybe I’ll send them my blog…
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