HMRC and Football Agents - the Cash Cow to be Milked

Football is a multi-billion dollar industry with a staggering tax bill. The Premier League alone contributes an annual £4 billion to the UK's Exchequer. Over £1.5 billion comes from taxation on players' wages.

This means that out of the £786.6 billion collected by HMRC in the financial year 2022-2023, almost exactly 0.5 percent came directly from the Premier League. In the context of the total tax receipts of the country, which has the sixth-largest economy on Earth, this is quite staggering.

By comparison, Amazon paid a total of just £781 million in UK taxes that year, accounting for less than 0.1 percent of HMRC's total intake. Google paid just £200 million, or 0.025 percent.

The Tax Avoidance Issue

Recent reports claim that Premier League teams have avoided £470 million in tax solely in terms of agents’ fees since 2015. Over £250 million of this has been in just the last three seasons. The players themselves are also part of this issue. Many receive a significant portion of their income from image rights deals paid to companies they own, which have much lower tax rates than their playing contracts. There are numerous accusations that players and clubs are being paid what should be salaried income in the form of image rights payments, thereby lowering their tax burden. HMRC is actively pursuing several of these cases.

A few months ago, Tax Policy Associates, founded by British tax lawyer Dan Neidle, published a report claiming that Premier League clubs had avoided almost half a billion pounds in tax over the last eight years. This was achieved by artificially structuring payments to agents. By falsely alleging that agents represented both the player and the club in nearly all Premier League transfer and new contract agreements, players effectively halved their tax liability.

How Dual Representation Works

Most footballers have agents who act on their behalf. These agents typically take a commission every time a player moves clubs or signs a new contract. They also receive a percentage of a player's earnings. The agent's role is to secure the best possible terms for their clients and facilitate moves to the biggest or most appealing clubs.

However, in the majority of Premier League transfers and contract extensions, the agent is recorded as representing both the player and the club. They are cited in almost all deals as having done equal work for both parties. As a result, they receive 50 percent of their fee from the player and 50 percent from the club. This creates a blatant conflict of interest, as the agent seeks maximum compensation for their clients while clubs aim to pay as little as possible.

From HMRC's perspective, the fee paid to the agent generates double revenue—once from the player's end and once from the club's. By claiming dual representation, agents receive half of their fee from the club, which is taxed only once. This arrangement also allows clubs to reclaim VAT.

A Closer Look at the Numbers

To illustrate, consider Football Club A (FCA) that allocates £1 million in agents' fees to sign a player from Football Club B (FCB). If the player's agent were only paid by him, after National Insurance and income tax, the player would receive £534,000. The agent would incur a further £78,000 VAT bill. Thus, HMRC would receive £612,000 from this initial £1 million, leaving the agent with £388,000.

In contrast, if FCA pays the agent as a dual representative, the agent receives £500,000 directly from FCA and £500,000 from the player. The agent ends up with £694,000, resulting in a loss to HMRC of £306,000 on a single transaction worth £1 million.

The Role of Clubs in Tax Avoidance

The biggest driver of this tax avoidance scheme is the clubs themselves. Reports indicate that club accountants have been in dialogue with other Premier League clubs to create a system that appears legitimate. This collaboration gives the scheme an air of being too big to fail, as any attempts to punish it would require severe fines for every club in the division.

In 2021, FA data revealed that 68 percent of all Premier League deals involved dual representation. While dual representation acknowledges the services delivered by agents, it raises questions about its legitimacy. The FA rules state that a football agent may only perform services for one party, except in cases of permitted dual representation, which requires explicit written consent from both clients.

HMRC's Scrutiny and Legal Distinctions

HMRC has a history of scrutinising the financial affairs of Premier League clubs. Between 2015 and 2022, they recovered £573 million across all areas of the football industry. If HMRC pursues clubs for improper payments to agents, some clubs and agents could face significant repercussions.

Premier League clubs' payments to agents aren't the only aspect of football finance where HMRC might be missing out. In July 2022, it was revealed that a record 329 footballers in England, including some of the Premier League's biggest stars, were under investigation for tax avoidance. This number is triple that of the previous season. Additionally, 31 clubs and 91 agents are also under investigation, with many cases concerning image rights payments.

The Tax Burden on Players

Footballers pay a substantial amount of tax compared to other wealthy individuals because they are classified as employees. For instance, Erling Haaland pays close to 50 percent tax on his Manchester City salary. In contrast, dividends are taxed at under 40 percent, and capital gains at 19 percent. Players can form companies to manage their image rights, allowing them to pay business rates of just 19 percent, provided their company is domiciled in the UK.

Many Premier League players establish offshore image rights companies, further reducing their tax bills. While this practice is not illegal, HMRC is concerned about clubs inflating the value of a player's image rights while artificially lowering their salaried income to reduce their overall tax burden.

Conclusion: The Future of Football Finance

As we navigate these complexities, it’s essential to remain vigilant. The intersection of football finance and tax law is intricate and fraught with potential pitfalls. If HMRC decides to take action, the implications could be significant for clubs, agents, and players alike.

Watch this space!