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Taxation of image rights: contracts and commerciality

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Image rights arrangements are back in HMRC’s crosshairs. This is perhaps not surprising, especially given the prominence of commercialised social media,as payments for individual sportspersons or celebrities’ image rights come under regular scrutiny. When a payment for the use of an individual’s image is made to an image rights company, it may be suspected that the payments are earnings, rather than a commercial payment for exploitation of an image. As a result, it has become increasingly important to distinguish between employment contracts and image rights contracts, in form and substance.

In this context, the sports world is yet again in the spotlight; HMRC’s image rights guidance and investigations continue to focus on clubs and players alike.

HMRC is using its powers to initiate PAYE enquiries in respect of clubs, and its wider fraud investigations powers into individual sports players, including under Code of Practice 8 or 9, to examine arrangements and levy outstanding tax liabilities, penalties and interest on clubs and players.

Recent press attention

It has been widely reported that rugby clubs and football clubs’ image rights arrangements, as well as those of individual sports players are under a microscope from both professional bodies and tax authorities (see, for example, ‘Image rights the key in Leicester Tigers salary inquiry’, The Times, 4 January 2022).

In particular, the world of professional rugby is grappling with the twin pressures of the Premiership’s salary cap regulations and HMRC’s PAYE and image rights enquiries. Where image rights arrangements are treated to be earnings for tax purposes, rather than commercial payments, clubs may also have exceeded the salary cap regulations and be subject to points penalties and fines. The financial exposure could be significant, as any investigation by HMRC into such arrangements may also result in an outstanding income tax and National Insurance liability, together with penalties and interest under the taxes legislation.

Case law and HMRC guidance: a brief recap

The legal definition of image rights arrangements has rarely come before a tax tribunal or court. Following Sports Club plc v CIR [2000] STC 443, HMRC accepted that image rights payments are separate from salary payments under an employment contract. The position became more nuanced when the Supreme Court in Rangers [2017] UKSC 45 examined a remuneration arrangement by which employees were paid through a trust, and confirmed that employment income paid from an employer to a third party (such as an image rights company) could still be taxable as employment income, depending on the circumstances.

In the most recent judicial consideration on this issue, the First-Tier Tribunal (FTT) gave practical guidance on the key circumstantial factors in a typical image rights arrangement in Hull City AFC (Tigers) Ltd v HMRC [2019] UKFTT 227 (TC). When Hull signed star player Geovanni in 2008, the club and the player entered into a standard Premier League footballers’ contract. The club then entered into an image rights contract (IR contract) with Geovanni’s personal service company (PSC), under which Hull licensed the right to exploit the non-UK image rights of the player, in return for payment of an amount to the PSC.

The FTT found that the existence of the IR contract was not conclusive in deciding whether the payments made were in respect of Geovanni’s services as a football player or in respect of his image rights. Instead, the FTT looked at the substance of the payments and concluded that the payments were earnings from employment. This was on the basis that (inter alia): there was no reliable evidence as to how the club arrived at the amount of the annual image rights payment to be made; the club never obtained any valuation or opinion regarding the value of the image rights of the player; the club did not have the resources to exploit the image rights of the player; and the commercial value of the image rights was questionable.

Against this backdrop, how can clubs ensure that their contracts reflect, in substance, commercial payments for the exploitation of an image?

The heart of the issue: the underlying contracts

In the current environment, clubs need to check their underlying contracts: there must be clear differentiation between payments received by players for performance of their employment duties under their playing contracts (player contract), concluded between them personally and the club, and payments received pursuant to an IR Contract, which is a separate contract between the club and an image rights company (IRC) usually set up by the player.

As emphasised in HMRC’s guidance, HMRC expects clubs that make image rights payments to have the commercial desire, resource and ability to exploit those image rights and be able to demonstrate that ‘commerciality [is] at the heart of an agreement between an employer and a company established by an employee for the exploitation of image rights’ (Employment Income Manual at EIM00739).

The fundamental principle underpinning any IR contract is that the player has valuable intellectual property that is separate and distinguishable from their primary commercial abilities (i.e. playing sports), and the club would not be able to fully exploit that intellectual property but for a separate IR contract.

When a separate IR contract is concluded between the club and the player’s IRC, the club must derive more from the exploitation of those image rights than would otherwise be received under the player contract

Some sportspersons do not have the desire or profile to contract under a separate IR contract. As such, standard form player contracts often incorporate some basic commercial rights arrangements and promotional activities (see, for example, the Premiership Rugby standard player contract, Schedule 2). These arrangements intend to ensure proper governance of any exploitation of players’ image rights for the overall commercial viability of the game, and to avoid confusion between the club and player when making other agreements.

Typically, promotional activities provided for under a player contract will include sponsorship appearances, press interviews, charitable activities, photographic opportunities and obligations to wear certain kit or  leisurewear. Whilst seemingly broad, player contracts can (and should) limit promotional activities, for example, to 20 hours per month. Provision can then be made that any rights not specifically dealt with in the player contract shall be deemed to belong to the player and they may exploit those rights as they see fit subject to the general provisions.

When a separate IR contract is concluded between the club and the player’s IRC, the club must derive more from the exploitation of those image rights than would otherwise be received under the player contract. IR contracts will provide for the use of a player’s image and for the IRC to procure additional promotional
activities, such as:

  • the player’s attendance and participation in meetings, functions, photography, and film recording sessions, match day and non-match day hospitality functions, charitable activities, community activities and conferences;
  • the player’s engagement with all training, advice and support provided by the club in relation to social media obligations;
  • the player to wear such attire and uniforms, or exhibit brands or advertising symbols as required by the club;
  • the player to be photographed, filmed, recorded by and in any media, and permit the image rights to be printed, published, used and broadcast in a club context by and in any media; and
  • the player to maintain active Instagram, Twitter, Facebook and YouTube profiles and make a certain ‘minimum’ number of promotional posts.

The commerciality of the arrangement will be undermined where, on a strict reading of the contracts, the club could require the player to perform all or nearly all the same activities under either the player contract or the IR contract.

Clubs should therefore conduct a regular review to identify the realistic maximum number
of monthly appearances that a player would ordinarily make under a player contract. The requirements of an IR contract should exceed that standard level, so that the additional promotional appearances bargained for truly reflect an increase in the duties required of players with IR contracts.

When agreeing IR contracts, clubs should be mindful that they are contracting for a supply of image rights from a third party, the IRC. Clubs should therefore document their arm’s length negotiations of the terms with the IRC and undertake due diligence on the image rights company, for example, to check that the image rights are properly assigned to it. 

Valuation of image rights payments

Demonstrating a commercial valuation of image rights is key.

In the past, in practice, a sportsperson’s total package was negotiated by ‘assigning’ a certain proportion of his overall remuneration (up to 20%) as image rights payments. It would appear that no regard was had to the actual number of appearances or other acts of exploitation of the players’ image rights by the club.

Such a valuation is no longer adequate. HMRC expects that image rights payments correlate to commercial revenues of the club (EIM00738); such payments must be justifiable on a forward looking basis at the time the IR contract is entered into, on the basis of the value expected to be returned by the image rights themselves.

The commercial approach necessitates a prediction of longer term value at the outset of the arrangement: when the IR contract is negotiated and executed, and even before the player plays for the club or the image is exploited.

Although such predictions may be practically difficult to make for each player, in Hull City, it was suggested that it is commercially sound to accept that players may be categorised in different image rights ‘tiers’. One valuation can then be applied to each tier of players. In that case, the FTT found that ‘the value of a player’s image rights comes from club sponsors and other businesses who might want that player to be associated with their brand. There are different tiers of such businesses.’

In this context, the club should use best efforts to create image rights tiers and make a judgment as to which ‘tier’ a player belongs, supported by an independent valuation. First, such judgment can be based on the player’s historic on-field performance, off-field media presence and overall commercial impact. In addition, clubs are equipped to predict the short term future profitability of the player, for example by estimating merchandise sales. While not precise, a monetary value must be determined for each player’s image. As ever, detailed records of the valuation process and commercial considerations must be kept.

Tracking activities and commerciality

In demonstrating the ongoing commerciality of the image rights arrangement, regular monitoring of activities performed under the IR contracts is essential.

This could include the following steps:

  • Maintain records and evidence of active exploitation of image rights and the impact of those acts (for example, social media analytics to assess engagement for each player).
  • Log promotional activities performed pursuant to IR contracts and activities performed pursuant to player contracts, and regularly compare the level of activities to ensure additional services are being required under IR contracts.
  • Develop a business plan for the exploitation of each player’s image rights, which should be regularly
    reviewed against the overall business plan of the club for image rights.

The commercial approach necessitates a prediction of longer term value at the outset of the arrangement

  • Monitor the organic development of players’ images over time, for example, recording follower count, social media engagement level, social media mentions and traditional media coverage.
  • Check compliance with any minimum or maximum numbers of appearances in the IR contracts and player contracts.
  • Monitor and quantify the commercial revenue generated as a result of the exploitation of the image rights, through social media engagement, new sponsorship deals, increased ticket sales etc. Wherever possible, this should be broken down by player, such as tracking player-specific merchandise sales.
  • Ensure regular board review of the image rights arrangements and the value generated for the club through these arrangements. An image rights review report should be presented to the board at least annually.

Final thoughts

Sport might be a science and sports rules might be exact. However, the tax treatment of salary and image rights payments is not; it requires ongoing engagement by a club and sportspersons to ensure that the relevant contracts and amounts are demonstrably commercial given the circumstances at the time. Clubs would also be wise to continually engage with HMRC as to the adequacy of the steps they are taking.


If you have any questions about the topics addressed in this article, please do not hesitate to reach out to:

Liesl Fichardt
Phone: +44 20 7653 2040

Emily Au
Phone: +44 20 7653 2252