In the wake of growing inquiries into the tax affairs of the football industry, HM Revenue & Customs (“HMRC”) has recently released new and updated guidance on the tax treatment of football agents’ fees paid by a club on behalf of a player.
Over the past few years, payments made to agents have attracted increased HMRC scrutiny, particularly in the context of dual representation. HMRC’s latest guidance confirms a shift away from previous generally accepted industry norms and we aim to take a look at what the tax implications may be for clubs, players and agents going forward, as well as providing some practical steps on how to mitigate the potential risks.
Dual representation: What is it and what is the issue?
Dual representation is where:
- An agent provides services to both the player and the club on a particular transaction – for example: i) advising the player during the negotiation of the contract; and ii) advising the club on its negotiation strategy with the selling club and facilitating a good dialogue between the parties (including the player).
- The club will pay the agent’s fee for the services provided to the club (“Club Services”) and the club will also pay, on the player’s behalf, the fee for the services provided to the player (“Player Services”).
- Any payments which a club makes on behalf of the player, in respect of Player Services, are then subject to income tax because they constitute employment income of the player. The dual representation arrangement is often (but not always) documented by an agreement between all three parties (i.e. the club, the agent and the player - a “Tripartite Agreement”).
A Tripartite Agreement typically sets out, amongst other things, what comprises Club Services and what amounts to Player Services. Alternatively, the division of labour for Club Services and Player Services will be detailed in separate representation contracts between the agent and the club and the agent and the player respectively – information on fees will also be included in The FA IM1 document which will also be submitted to the league and The FA as part of the transaction.
It is not uncommon for clubs to draft Tripartite Agreements or representation contracts with the agent using the briefest of explanations of the services which the agent is to provide to the club. In fact, we have seen clubs simply tick the box, on The FA’s standard template club-agent representation contract, indicating that the agent is “…appointed by the club to provide services in relation to [Player]…” and elect not to elaborate any further on what exactly the agent is contracted to do in respect of the Club Services. This article will explain why this practice must change.
Prior to the issuing of HMRC’s latest guidance, the generally accepted industry norm was that, in circumstances of dual representation, the total agent’s fee would be split equally at 50:50. In essence, in order to assess the taxable income of the player, clubs would quantify the split of the agent’s fee as follows:
- 50% of the total payments were considered to relate to Club Services (which the player would not pay income tax on).
- 50% were considered to relate to Player Services (which the player would pay income tax on).
However, the latest guidance confirms that HMRC will no longer accept a default split of 50:50 of agents’ fees on dual representation transactions. Instead, HMRC will now expect:
- Clubs to be able to demonstrate an evidenced based approach to the payment of agents’ fees, which provides for commercial justification of the apportionment that has been made between Club Services and Player Services.
- Clubs, who rely upon the fee split as drafted in a Tripartite Agreement, will only be able to do so if they can demonstrate that the agreement reflects the substance of the negotiations (i.e. the work and services provided by the agent to the club should be clearly detailed within the agreement and a club should be able to evidence that the services were actually delivered).
This change in attitude by HMRC solidifies the approach that it has taken in its investigations in recent years, which has seen the tax authority challenge and bring into question the legitimacy of the apportionment of agents’ fees on dual representation transactions. From HMRC’s point of view, reality suggests that the services provided to a player in respect of a transaction are far more likely to outweigh the services that are provided to the club and so the split in agents’ fees needs to be brought in line accordingly. What this means is that, going forward, HMRC will expect a club to retain documentation to demonstrate the reasoning behind any apportionment of agents’ fees that it decides to make, as well as being able to evidence that the services have actually been delivered.
What documentation should be retained?
It is clear from the guidance that HMRC will expect clubs to retain an accurate and contemporaneous audit trail, which substantiates the services provided by the agent to both the club and the player on a dual representation transaction. The guidance sets out the kind of records that each party to a dual representation transaction ought to consider retaining, in order to provide evidence of the nature of the arrangements that have been entered into, as well as the commercial justification for any payments that have been made in connection with any such arrangements. The keynote examples of documents given in the guidance include meeting notes, telephone notes, memos, contracts, emails, iMessages and SMS/Text messages.
More specifically, the guidance encourages both clubs and agents to retain records covering:
- The specific reasons for engaging the agent for the specific transaction.
- Contemporaneous evidence of the engagement of the agent, the instructions given, and the level of fee discussed.
- Contemporaneous evidence of the work done by the agent for both the club and the player.
- Evidence to support the basis of any split in the agent’s fee paid between Club Services and Player Services.
- Evidence to support any variation of the fees shown in the player/agent representation agreement and the subsequent tri-partite agreement.
- Evidence to demonstrate that the fees paid to agents are commensurate with the services they provided.
On the player side, the guidance recommends that players should consider keeping records covering:
- Discussions held with the agent during the transfer or contract negotiations.
- Their understanding of any conversation resulting in their agent being engaged by the club as well as them.
Whilst the guidance provides detailed pointers on the types of documentation that parties to a dual representation transaction should consider retaining, what HMRC has not clarified is how the audit trail should be put together or, more crucially, how the appropriate split in agents’ fees should be determined.
During the course of this summer’s transfer window, the new guidance is likely to come under criticism by some agents and club officials involved in transfers and contract negotiations as they will no doubt be of the view that the record keeping requirements are overly burdensome and do not reflect the reality of their respective jobs – particularly where a lot of work is conducted via telephone and at a fast pace.
Nevertheless, in order to ensure compliance with the guidance, best practice would be for clubs and agents to ensure that detailed records are kept and that those records go some way towards demonstrating how agents’ fee splits are reached and how those splits reflect the reality of the services provided.
What does this mean for Tripartite Agreements?
Given that the guidance states that those clubs who rely upon contractual arrangements with agents and players should be able to demonstrate that the agreement reflects the substance of the negotiations, it is of paramount importance that:
- Proper care and attention is afforded to the drafting of Tripartite Agreements.
- The Tripartite Agreement should set out in clear and accurate detail the specific services being performed by the agent in relation to Club Services and Player Services.
- Clubs consider including an obligation on an agent that they are to provide to the club evidence of delivery of the services, on an intermittent basis.
- Fundamentally, clubs should no longer be relying upon ‘precedent template’ Tripartite Agreements.
- Clubs, agents and players pay close attention to the wording of any tax indemnities that are inserted into Tripartite Agreements. In circumstances where a club, on behalf of the player, makes payment of the agent’s fee attributable to Player Services then a club will want to ensure that it has the ability to recover from the player any further taxes that it has had to account for as a result of it paying the Player Services fee.
- From the agent’s and player’s point of view they will want to ensure that any indemnity is drafted in a way that is not too onerous on their position, particularly given HMRC’s increasing scrutiny, the likelihood of further tax becoming payable (plus interest and penalties) and the increased possibilities of club’s relying upon indemnities.
Whilst all parties will no doubt anticipate that this latest guidance will lead to an increased amount of work, record keeping and potential scrutiny from HMRC, there may be a silver lining for clubs.
Given that clubs will have to give careful thought as to what services the agent is to provide by way of Club Services, for any of those services that are ‘ongoing’ for the duration of any player contract, the clubs now have an opportunity to actually hold the agent accountable for delivery of those services – in fact, clubs may take the view that fees for Club Services should be payable on a periodic basis (as opposed to one lump sum or annual lump sums) subject to the agent actually delivering those services, or even further, providing evidence of that service delivery.
If an agent does not provide the Club Services, in breach of the representation contract, then a club can consider withholding payment or even terminating the contract as a result of the agent’s breach.
What are the consequences of failing to comply with the new regime?
HMRC will typically apply a “light touch” approach to taxpayer compliance whenever new legislation or guidance is introduced, however there is no mention of that in the updated guidance and we expect HMRC to start applying the new guidance with immediate effect (i.e. this summer’s transfer window). HMRC will expect clubs and agents to comply with all of their usual self-assessment obligations, in particular with regard to payroll/PAYE and the requirement to report taxable benefits in kind to HMRC.
Any errors can lead to HMRC imposing interest and potentially significant penalties (in addition to any missing tax). HMRC’s penalty regime focuses on “taxpayer behaviour” and therefore being able to show that all reasonable steps have been taken to adhere to HMRC’s latest guidance should mitigate against those onerous penalties.
Takeaway Points and Practical Steps
- If clubs and agents aren’t already doing so, they should be taking steps to ensure that they retain an accurate and contemporaneous audit trail, which includes details of discussions that support the basis of any split in the agent’s fee paid between Club Services and Player Services.
- Clubs should ensure that any Tripartite Agreement accurately sets out in detail the specific services which are to be carried out by the agent on behalf of the club and the player. A club should be able to illustrate that the services were actually delivered.
- Clubs should avoid relying upon previously used Tripartite Agreements as ‘standard precedents’.
- Obtaining specialist legal advice prior to entering into Tripartite Agreements or representation agreements between a club and agent is of paramount importance for clubs, agents and players as it helps to ensure that their interests are protected as much as possible, whilst remaining compliant with applicable tax legislation.
Brabners is here to help intermediaries, players and clubs navigate the challenges that may lie ahead and we would be happy to discuss any concerns regarding some or all of the issues set out above. If you have any queries about how you should be dealing with the tax treatment of agent’s fees then please do not hesitate to contact Andrew McGregor or Matthew Lavelle in our sports sector team.
