The Big Freeze: How HM Treasury’s freeze on EBTs & EFRBS will leave overseas players skating on thin ice

If the freezing winter temperatures were not enough to put overseas players off playing for English clubs, HMRC’s announcement that they are closing down Employee Benefit Trusts (‘EBTS’) and Employer Financed Retirement Benefit Schemes (‘EFRBS’) with immediate effect will be enough to bombard their agents and accountants with pertinent questions and arguably stop any new overseas talent from coming over to England in the New Year. The announcement made on the 9 December 2010 in HM Treasury’s Pre-Budget report is the second body blow that overseas players face as image rights payments have also taken a hammering in both Rugby Union and Rugby League. The Pre-Budget report states that legislation will be introduced to stop what HM Treasury define as “disguised remuneration” to ensure that income tax and national insurance contributions (“NICs”) on employment income are not avoided or deferred through the use of trusts or other intermediaries, including EBTS and EFRBS. This change in legislation will affect both players and sports clubs who both use arrangements involving trusts and other vehicles as a way of careful tax planning. These schemes which were once seen as tax efficient for both players and clubs alike are now being shut down by the Government who view them as illegitimate ways of avoiding, reducing or deferring liabilities to income tax on rewards of an employment or to avoid restrictions on pensions tax relief. This is viewed by some as another attempt by the Government to decrease the country’s deficit due to the tough economic climate. Whilst this decision is not supposed to take effect until on and after 6 April 2011, FrontRow Legal would be recommending players and clubs to cease making contribution payments forthwith as otherwise as they will be liable to tax. This legislation is not just an accounting exercise; it will have deep seated repercussions that will change the landscape of English sport, including Rugby Union, Rugby League and Football, which are notorious for attracting overseas players. The English tax system is already unfavourable compared with France and Spain the Government, in closing what they perceive as another loophole has effectively blocked off overseas players from forging English careers as it simply will not be worth their while. Whilst image rights remain legal, HMRC have narrowed their scope in Rugby Union limiting the amount that can be paid as image rights to 15% to all past and present international players and 10% to any player that has attained junior/B or representative status. Exceptional players and coaches can make a specific case for a higher percentage capped at 25%, although clubs may be hesitant to make such a case as they do not want to be put under the microscope. Rather than being seen as a tax efficient method for players and clubs, HMRC are viewing image rights as devices to avoid PAYE and NIC obligations and are trying to impose tighter controls on such measures. The status of image rights in Rugby League remains uncertain with the limit yet to be determined. Clubs which were advised to transfer image rights to pensions will now have further headaches on how to treat contractual salary sacrifice arrangements. With the death of EBTs, EFRBS and restricted use of image right schemes, the prospect of playing for England clubs will undoubtedly be less attractive for overseas players especially given the weak pound against overseas currencies. For more information please contact either Richard Cramer at FrontRow Legal. Round Foundry Media Centre, Foundry Street, Leeds, LS11 5QP www.frontrowlegal.com [email protected] Tel – 0113 394 4398 Fax – 0113 298 7400