With the British Open…er…The Open Championship getting underway yesterday, now is a good time to review the UK’s taxation rules on non-resident athletes. Not only will the golfers in this week’s tournament be liable for taxes on their winnings, but they will also owe Her Majesty’s Revenue and Customs (HMRC—UK’s tax collector) for taxes on endorsement income. In fact, even those who do not make the cut—and will therefore not earn money from the tournament—must pay taxes on endorsements. HMRC has a “Foreign Entertainers Unit (FEU)” whose job is to track the movement of athletes and entertainers who play or perform in the UK throughout the year. Tournaments withhold taxes from athlete earnings, so tracing income and withholding is relatively easy.
The FEU specializes in determining which companies athletes endorse and those which may be paying the athlete for tournament-specific endorsements, such as wearing a logo patch during The Open. Although the payout from winning The Open this year will be £900,000, the winner is also likely to receive winner’s bonuses from his endorsers (golf club, apparel & auto companies, banks, etc.) and may receive bonuses at the end of the season based on his rank. The UK taxes all of this income: tournament bonuses are fully taxed and ranking bonuses are taxed based on ranking points earned in UK tournaments compared to points earned worldwide.
The UK also taxes retainer payments based on the time an athlete spends in the UK as compared to the time he/she spends playing elsewhere. In years past, this income was taxed based on tournament days played in the UK as compared to tournament days played elsewhere. In order to attract top tennis players to the Wimbledon tune-ups, HMRC changed the allocation to include practice days. This change is a major tax-saver to golfers and other athletes who play in the UK.
Under the old law, if a golfer played in 20 tournaments throughout the year, one of which was in the UK and earned $5,000,000 in endorsements, $250,000 of those endorsements would be taxable in the UK ( 1/20 x $5,000,000). Under the new law, if the same player spends 350 days practicing, seven of which are in the UK, only $100,000 of his endorsements is taxable. With the UK’s 40% tax rate, the new law saves the golfer $60,000.
HMRC strictly rejects the idea that any portion of the value of an athlete endorsement is attributable to the company’s purchase of the right to use the athlete’s image and likeness to sell its products. The IRS holds a similar view, although the Tax Court held last summer that up to 50% of a golfer’s endorsement income constitutes royalties (i.e., tax-free income to most non-residents) for the right to use his image.
Finally, if the golfer is paid to make an appearance or for a speaking engagement in the UK before, during or after The Open, he must pay taxes on that income as well.
To recap, golfers playing in The Open Championship will pay taxes on the following income from this week’s work:
- Tournament Winnings – for those who make the cut
- Endorsement Retainers – taxed based on days playing/practicing in the UK v. days playing/practicing elsewhere
- Winning/Placing Bonuses – fully taxed by the UK
- Ranking Bonuses – taxed based on ranking points earned in the UK v. points earned elsewhere
- Paid appearances before, during & after The Open
While the golfers are on the course this weekend, the FEU will be tracking their every move to ensure that it makes as much money as it can off of the UK’s most prestigious tournament.