Policy paper

Income Tax: treatment of income from sporting testimonials

Published 9 December 2015

This policy paper was withdrawn on 18 March 2016

This information has been updated, please read Income Tax: update to - treatment of income from sporting testimonials.

This information has been updated, please read Income Tax: update to - treatment of income from sporting testimonials.

Who is likely to be affected

Employed sportspersons who receive income from a sporting testimonial or a benefit match.

Independent testimonial committees who may now have to operate Pay As You Earn (PAYE), and deduct employee and employer National Insurance contributions (NICs) on income from a sporting testimonial or a benefit match for a sportsperson.

General description of the measure

The measure confirms that all income from sporting testimonials and benefit matches for an employed sportsperson will be chargeable to tax, and liable to employee and employer NICs. This treatment will be subject to an exemption of £50,000 of the income received during the testimonial year, except where there is a contractual entitlement or customary right to the sporting testimonial or benefit match.

Independent testimonial committees will now need to operate PAYE where the total proceeds from a non-contractual sporting testimonial or benefit match for a sportsperson exceed £50,000.

Policy objective

This will clarify the income tax and NICs treatment where an employed sportsperson receives income from sporting testimonials and benefit matches. The new lifetime exemption of £50,000 will ensure that employed sportspersons on modest incomes who may be coming to the end of their playing career are protected from those changes.

Background to the measure

The guidance currently published by HM Revenue and Customs (HMRC) on the tax treatment of sporting testimonials and benefits for employed sportspersons does not reflect changes made to legislation as detailed below. Some testimonial income which should already have fallen within the charge to tax may have been treated incorrectly as a result. HMRC’s current guidance is therefore an extra statutory concession.

A consultation on the withdrawal of this and other extra statutory concessions was held during the summer of 2014. It was clear from the responses to that consultation that employed sportspersons on modest incomes would have been disproportionately affected by its withdrawal.

At March Budget 2015 the government announced that the current tax treatment of payments from sporting testimonials for employed sportspersons as set out in HMRC’s guidance would be preserved while it considered representations, and that no changes would be made before April 2016.

At Summer Budget 2015 the government announced that it would consult on the tax treatment of income from sporting testimonials and benefit matches. HMRC published a consultation paper ‘Tax Treatment of income from Sporting Testimonials - Proposals for Legislation’ on 8 July 2015 and the consultation ran until 2 September 2015. A summary of responses to the public consultation has been published on the GOV.UK website.

Detailed proposal

Operative date

The measure will have effect for the income from non-contractual / non-customary sporting testimonial events held on or after 6 April 2017 where the testimonial has been awarded on or after 25 November 2015. Income from sporting testimonial events held on or after 6 April 2017 where the testimonial or benefit match was awarded before 25 November 2015 will be subject to existing arrangements.

Current law

Where an employed sportsperson has a contractual right, or a ‘custom’ is established to a sporting testimonial or benefit match, then the income (after expenses incurred are deducted) is chargeable to tax as earnings of the sportsperson under Section 62 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) from the related employment.

HMRC’s treatment of sporting testimonials and benefit matches where there is no contractual right (or no custom established) has relied on the 1927 tax case of Reed v Seymour. This case established the principle that where a testimonial or benefit is organised to demonstrate affection and regard for the personal qualities of the sportsperson, the proceeds are not from the employment and are not earnings.

However, this does not take into account changes to tax legislation that have taken place since then. In particular, it does not take account of the introduction of the ‘benefits code’ in 1948, and more recently in 2011 the introduction of Part 7A of ITEPA which applies a charge to tax on employment income provided through third parties.

HMRC’s current practice is concessionary. The House of Lords’ ‘Wilkinson’ judgement (R (Wilkinson) v Inland Revenue Commissioners 2005) established that various concessions exceeded the powers available to HMRC to depart from the strict statutory position. Our guidance on sporting testimonials is such a concession and cannot be maintained.

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to amend ITEPA to clarify the law in this area and confirm that income arising from a non-contractual or non-customary sporting testimonial or benefit for an employed sportsperson is liable to income tax. Legislation will also be introduced before April 2017 mirroring the tax treatment to implement the necessary changes in respect of NICs.

The changes to ITEPA will also include the introduction from 6 April 2017 of a single lifetime exemption of £50,000 from income tax. This will apply to income from a non-contractual or non-customary testimonial being paid to or on behalf of an employed sportsperson. The exemption will apply for a period of 12 calendar months only, beginning with the date the first event is held in a ‘testimonial year’, even if that year straddles more than one tax year.

If any of the exemption is unused at the end of that 12 month period, this will not be available to carry forward to a future sporting testimonial or benefit match for the sportsperson, or against any other testimonial events held after the end of that 12 month period.

Any non-contractual or non-customary testimonial events held after 6 April 2017 from a testimonial that is awarded to a sportsperson prior to 25 November 2015 will fall within existing arrangements.

As a consequence of implementing the income tax legislation, where an independent testimonial committee is chargeable to corporation tax on trading income from the sporting testimonial or benefit, and the sportsperson is treated as an employee, Corporation Tax legislation will be amended in Finance Bill 2016 to allow sums paid over in respect of PAYE and the associated NICs liability, and the net payment to the sportsperson, to be deductible against corporation tax.

Summary of impacts

Exchequer impact (£m)

2015 to 2016	2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
-	-	negligible	negligible	negligible	negligible

This measure is expected to have a negligible impact on the Exchequer.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

Research indicates that some 220 sporting testimonials or benefit matches are held annually. Employed sportspersons who have a contractual entitlement or customary right to a sporting testimonial or benefit match will not be affected by these changes as these are already fully charged to income tax and NICs. This will affect only a small number of individuals who may now have to pay income tax and NICs on some of the income from their sporting testimonial or benefit match.

This measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

While the measure is not targeted at any specific age group, and applies equally to sportspersons of all ages, it is recognised that it may affect individuals who feel they need to retire from their sport. Any adverse effects applicable for a specific age group is offset by the exemption of £50,000 being available to income arising to an employed sportsperson from a non-contractual sporting testimonial or benefit match. This measure is therefore not expected to have any disproportionate effect on people with protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on businesses and civil society organisations.

Up to 220 independent testimonial committees, that are temporarily formed each year to organise non-contractual or non-customary testimonial events, are expected to be affected by the changes. All committees will incur a one-off cost of becoming familiar with the changes, and those affected will also need to monitor proceeds to identify if the exempted amount has been exceeded.

If the exemption limit is exceeded, the committee will incur an additional administrative burden in order to operate PAYE on some of the proceeds and report tax and NICs deductions to HMRC by a Real Time Information (RTI) return. The committee will also be liable to pay employer NICs and will need to monitor PAYE costs for Corporation tax purposes. Overall, these costs are expected to be negligible.

Operational impact (£m) (HMRC or other)

There will be no significant operational impacts on HMRC arising from this measure and no IT changes will be required. HMRC will however need to provide clear guidance on the changes brought by this legislation. Because of the small number of sporting testimonials and benefit matches taking place annually any increased contact is likely to be insignificant.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored and assessed alongside other measures in the government’s package of reforms, through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact the Employment Income Policy Team on email: employmentincome.policy@hmrc.gsi.gov.uk or Telephone: 03000 521589.