Today on 11 September 2019, Manchester City will be hosting a testimonial match for retiring captain, Vincent Kompany. After 11 years with the club and with four Premier league titles, two FA Cups and four League Cups under his belt, Kompany seems an obvious choice for the honorary game. How HMRC deals with the proceeds from these testimonial matches, however, continues to be an evolving issue.
New legislation, albeit not yet in force, will bring the National Insurance Contributions ('NICs') treatment of sporting testimonials into closer alignment with the current income tax treatment.
The testimonial match historically was intended to raise money for the departing player, who would no longer be earning steady income. The starting position was that any proceeds raised would be considered a form of ex-gratia payment – or 'gift' – separate from their earnings. There was however a carve-out: if the testimonial payment was a contractual right, then this should form part of their earnings (s.62 ITEPA 2003) and be subject to income tax and Class 1 NICs in full.
With average salaries these days for top premiership players easily surpassing £5m per year, sporting testimonials are now more symbolic. We typically see the proceeds donated to charity instead of the player's pocket: Alan Shearer raised £1.6m in 2006 for various charities in the North East, Steven Gerrard raised over £1m in 2011 to help disadvantaged children across Merseyside, and Wayne Rooney raised £1.2m in 2016 for his foundation. Kompany is no exception, making clear that the proceeds from his testimonial game will be donated to charity via his Tackle4MCR project that aims to eradicate rough sleeping and homelessness in Greater Manchester. Given that his testimonial dinner alone raised more than £200,000 in February of this year, it is safe to assume we will be seeing some substantial sums raised at the game.
With this conceptual change inevitably came a tax change. From April 2017, even income generated from non-contractual testimonials became subject to income tax (s.306B ITEPA 2003) if it exceeded £100,000.
Now, new legislation introduces NICs into the mix – meaning Class 1A Employer NICs will now also be payable (currently at the rate of 13.8% on all earnings above the secondary threshold for almost all employees) as the sums received over £100,000 will be treated as earned income. Crucially, it is not intended that Class 1B Employee NICs will be payable, meaning this change just affects the amount the employer has to pay.
This change is expected to come into effect from 6 April 2020. This is in line with other changes the government has made to require employers to pay Employer NICs in respect of termination payments to employees in excess of £30,000 (previously only income tax was payable on this).
A consequence of this new legislation is that both players and clubs ought to think even more carefully about the different ways of structuring the donation of testimonial match proceeds in order to obtain maximum tax efficiency. If, as in Kompany's case, all the proceeds raised from the testimonial match will be donated to charity, then there may be added scope to take full advantage of tax benefits.