Football agents often get a lot of bad press but the reality is that football clubs often require the services of agents to negotiate effectively with players. Whilst it may seem strange to a layperson, it is relatively common for the same agent to represent both club and player in negotiations. This is known as “dual representation”. Under such an arrangement the club would pay the agent for the services provided to the club and they may also pay the agent, on behalf of the player, for the services provided to the player. The element of the payment which is made on behalf of the player will be treated as taxable income of the player as a ‘benefit in kind’.
In order to assess the taxable income of the player the club would need to quantify the “split” of the total payment – ie how much of the payment is attributable to services provided by the agent to the club and how much is attributable to services provided to the player. Historically a 50:50 split was generally considered to be the industry standard and acceptable from a tax perspective.
However HMRC have recently updated their Employment Income Manual and have produced specific guidance in relation to payments made to intermediaries by football clubs. HMRC’s updated guidance targets the calculation of the split in dual representation situations and makes clear that HMRC will no longer accept a 50:50 split as the default position. Instead, they require an evidence based approach including commercial justification for payments made to the agent – particularly to justify any payments made which are purportedly for services provided to the club.
This new guidance reflects the position we have seen HMRC take in practice over the past couple of years in respect of the 50/50 split – they have raised numerous enquiries about 50/50 transactions (whereas, historically such splits were (generally speaking) not considered contentious, even if there was nothing in writing from HMRC to confirm the position), reflecting a wider increase of scrutiny on the taxation of elite footballers and their clubs.
Recordkeeping is vital
In a scenario where the contract between club and agent contains an agreement in relation to the agent fee to be paid by the club in a dual representation situation, the club needs to be able to demonstrate that the contract reflects the substance of the negotiations. In particular, the work and services provided by the agent to the club should be detailed within the contract and HMRC expects the club to keep an audit trail to confirm that these services were actually delivered. HMRC’s view now appears to be that an underlying representation agreement will be relevant rather than determinative in assessing whether or not the split is reasonable and each case will turn on its own facts.
HMRC suggests that an appropriate audit trail might include details of discussions relating to how the fee and its split were arrived at; telephone notes and meeting notes; and email chains and other relevant supporting documentation. HMRC have included a list detailing the records which a club, agent and player should each consider keeping which can be accessed here.
This list is likely to be met with some resistance by agents and players in particular, as such a high level of record keeping does not reflect the commercial reality of their job. Nevertheless, in the face of increasing HMRC scrutiny, the best approach for club, player and agent is to take steps to ensure that they have built up a body of evidence which demonstrates how a fee split was determined and how it reflects the reality of the division of services provided. HMRC’s approach is still to review each case based on the particular circumstances and the best way to protect against the risk that HMRC will disagree with the split is to ensure detailed records are kept.
Whilst HMRC’s new guidance might suggest an overly zealous approach, the reality is that best practice has always been to ensure proper records are kept. Rather than being transformative, the latest guidance should simply serve as a reminder to football clubs, agents and players that they have a duty to keep proper records of negotiations and not to rely on industry practice as if it were the law.
Reports in the press suggest that HMRC has published this guidance ‘so all parties understand the rules’. What HMRC hasn’t explained, however, is how on dual representation cases the appropriate records should be compiled or how, on a practical level, the appropriate split should be determined. Since the guidance has been published, we have already heard from various clients and contacts in the industry who consider it to be unhelpful, unrealistic and demonstrating a lack of understanding of the commercial reality – how will clubs document and record every phone call, email and meeting on a busy transfer deadline day?
A reminder on reporting
The guidance also states that football clubs should not enter into arrangements or tax planning which is contrary to the intentions of Parliament. HMRC expect the club and its employees to consider the tax implications of entering into arrangements and to calculate and report the taxation on those payments to HMRC in a timely manner. If a club or its employees become aware that agents are being used as a conduit for onward payments to player of disguised remuneration (ie payments to agents were in full or in part ultimately transferred to its player or prospective player, their family or other connected parties) then this will need to be reported.
HMRC also expect clubs to employ adequate governance regarding money laundering requirements, specifically concerning its payments to overseas individuals or entities.