The following guidance concerns athletes resident in the UK.
Cricketers, footballers, rugby players and the like are employees of the club for which they play. They may, however, receive other income of the kind received by athletes.
You should always consider whether the income is properly chargeable as employment income before agreeing a computation that taxes the income as trade profits.
Athletes: Trade or hobby?
That an athlete is described as an amateur is not decisive in considering whether he should be taxed under Part 2 Income Tax (Trading and Other Income) 2005. The leading figures in athletics are likely to be taxable on their earnings as persons carrying on a trade.
But the activities of most athletes remain a purely leisure pursuit or hobby, even though payments may occasionally be received, e.g., the Athlete Personal Awards from Lottery funding. The distinction between a hobby on the one hand and a trade on the other is very much a question of fact and degree. Amateur status is not decisive.
In one or two years an athlete’s earnings may have exceeded the expenses. And, perhaps, the whole of the athlete’s time may be devoted substantially to sporting and associated activities. However, even the presence of both those pointers is not decisive. You will need more information before deciding whether the athlete is organising the activities in a business-like manner and with a view to making a profit.
Officers will need the full facts concerning:
- the nature and scale of the activities and the way they are organised
- competitions and events entered in the relevant period, the athlete’s final position in each event and any prizes received
- any grants or similar receipts from sporting or other organisations, and copies of documents setting out the terms under which they are received
- any attendance or performance fees, and sponsorship or endorsement fees, with copies of the contracts and relevant documentation
- any other income from associated activities including journalism, TV appearances etc
- the terms of any agreement with an agent negotiating contracts with sponsors etc
- the cost and nature of expenses
Athletes: Tax treatment of income: case studies
Many athletes are engaged in hobby. Where the activity (i.e., athletics and all related activity including for example after dinner speaking and promotion work) is organised in a business-like manner and the athlete is seriously interested in profit the athlete is likely to be carrying on a trade.
Despite being ranked in the world top 10, Helen competes in a sport where it is generally very difficult for even top athletes to attract sporting income. The physiological demands of her event mean she can’t work while training at the level required to be world class. Her only source of income is therefore currently her Athlete Personal Award (APA).
The award alone does not bring into existence a profession. Helen’s sporting activities do not amount to carrying out a professional activity through her sport. As the APA is a voluntary grant given for nothing in return, the award is not taxable.
Lloyd is on a team on the World Class Performance Programme. He receives a £16,000 Athlete Personal Award (APA). Although he competes at world level, he still holds down a part-time job as an administrative assistant. In his sport it is generally very difficult for athletes to attract sporting income. He has been given £1,500 and some sporting kit as a gift by a local manufacturer. Lloyd’s sporting activities do not amount to carrying on a trade. Therefore, each of the payments Lloyd receives needs to be looked at separately for tax purposes.
As Lloyd is not carrying on a trade, the APA is not taxable.
The £1,500 and the value of the sporting kit are not taxable as these were not received under an enforceable contract and Lloyd did nothing in return.
If, however the facts and documentation indicate that the £1,500 payment was received under an enforceable contract for work done for services rendered, the £1,500 and the value of the sporting kit would be taxable as miscellaneous income under Part 5 Chap 8 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), not as trading income.
Any loss of earnings support paid to Lloyd by his sport’s governing body is not taxable as Lloyd is in employment. Loss of earnings support paid to an athlete who carries on a trade is a taxable trading receipt.
Mary participates at elite level in a sport which requires heavy expenditure on equipment. She moved from her parents’ home, where she normally lived, to a flat which she rents near the sport’s national training facilities because it is too far to travel from her parents’ home each day.
She is in receipt of an Athlete Personal Award (APA) of £22,000 and sponsorship income of £7,000. This total funding of £29,000 is however insufficient to meet her training and subsistence expenses which include the costs of the flat. Even though Mary is still only exercising a hobby and not yet trading it is worth noting that if the sponsorship income is received in return for services rendered, and this could simply be an endorsement of certain products, then the £7,000 would be taxable as miscellaneous income under Part 5 Chap 8 ITTOIA 2005. The APA is not taxable as Mary is not carrying on a trade.
Mary wins gold at the World Championships and engages an agent to help her exploit her recent success. She can secure more sponsorship income and promotional work for a national company.
Mary’s sports activities are no longer a hobby for tax purposes. She is now organised in a business-like manner and conducts her sports activities with a view to profit. She is now taxable as she is carrying on a trade.
Mary’s trading income includes:
- sponsorship/endorsement fees,
- appearance fees etc from competitions and events,
- income from associated activities undertaken by her (e.g. TV appearances), and
- the value of goods or equipment supplied to her.
From her trading income she can deduct revenue expenses incurred wholly and exclusively for the purpose of her trade (e.g., training costs, travel expenses to events etc or indeed any expenditure incurred solely for business purposes).
She will also be able to claim capital allowances on any qualifying equipment she has purchased for the purpose of her trade.
Whether such expenses and capital allowances are allowable in computing profits will depend on the facts of each case. All claims for expenses and capital allowances should be supported by records and documentation.
If an expense has a duality of purpose, part of the expense may be allowed in computing trading profits. Subsistence costs such as the flat rental, flat overheads and other living costs are unlikely to be wholly and exclusively for the purposes of Mary’s trade. Part of the cost may be deductible if an identifiable part or proportion of the expense is incurred wholly and exclusively for the purpose of Mary’s trade. For example, if Mary uses a room in her flat exclusively as a gym and to store her sports equipment, she may claim a proportion of the rent and other accommodation costs as a trading expense.
Athletes: Sources of income
Athletes may receive all the following types of income:
- Athlete Personal Awards funded by the Lottery
- grants and gifts
- sponsorship and endorsement fees
- appearance, participation, and performance fees
Athlete Personal Awards, grants and gifts
An athlete who receives only Athlete Personal Awards is unlikely to be carrying on a trade.
Where a grant or gift is received from a commercial concern, the facts and documentary evidence may however indicate that the payment is in reality a kind of sponsorship or endorsement fee.
Sponsorship and endorsement fees
Sponsorship, or product endorsement, usually involves the athlete lending his name to a promotional campaign. This may be through advertisements or through personal visits to retail outlets. The product may not, of course, have any athletic or other sporting connection. The arrangements will normally be contractual, though the form of the contract may vary from a formal written agreement to an informal letter or even a telephone call. Where accounts are under enquiry it will normally be useful to obtain a copy of any written agreements or other documentation.
The tax treatment of this income depends on whether the athlete is treated as trading or carrying on a hobby. If it is a hobby, the income will be taxable as miscellaneous income under Part 5 Chap 8 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). If the athlete is trading, the income will be taxable as trading receipts.
Appearance, participation, and performance fees
To attract leading athletes, many competitions organisers offer substantial sums for appearances or participation at meetings. In addition, bonuses may be paid for meritorious performances such as winning or setting records.
Athletes may also receive fees from activities not directly connected with sport, such as writing newspaper articles, making TV appearances, and opening supermarkets.
The tax treatment of this income depends on whether the athlete is treated as trading or carrying on a hobby. If it is a hobby, the income will be taxable as miscellaneous income under Part 5 Chap 8 ITTOIA 2005. If the athlete is trading, the income will be taxable as trading receipts.
Athletes: Service companies
Some leading athletes have their own companies, which are often described as sports consultancies, providing the services of the athletes.
Where the contracts have been made between the sponsor and the service company the income will be taxable on the company. However, where the contracts have been made between the sponsor and the athlete the income will be taxable on the individual (not the company), even if the company is entitled to receive the income (for example, because the service agreements says that the athlete must hand over the money).
You should consider whether the rules on service companies and other intermediaries apply when reviewing such companies.
S34 Income Tax (Trading and Other Income) Act 2005
Professional athletes are subject to the same general rules as other persons carrying on a trade.
This means that these athletes are entitled to deduct a range of expenses incurred in earning the trading profits of their professional activities subject to the general rules that the expense must be:
- not capital in nature, and
- incurred wholly and exclusively for the purposes of the trade.
Where an expense is incurred for more than one purpose, the wholly and exclusively rule will usually prevent a deduction from being allowed. However, where an identifiable part or proportion is incurred wholly and exclusively for the purposes of the athlete’s trade, that part is deductible.
Expenditure with an intrinsic duality of purpose
Some expenses are likely however to cause difficulty where there is an intrinsic duality of purpose. Medical expenses including physiotherapy, special diets and training expenses are typical examples where the purpose of the expenditure may include a non-trade element.
The following cases should all be considered in connection with medical expenses:Norman v Golder  26 TC 293, where it was concluded that doctor’s bills inevitably have a non-trade purpose.
- Murgatroyd v Evans-Jackson  43 TC 581, where nursing home fees were disallowed because recovery from ill health was not a trade purpose.
- Prince v Mapp  46 TC 169, where surgery costs to allow the taxpayer to play the guitar were disallowed.
- Parsons v HMRC Commissioners  where the costs of a knee operation, chiropractor and masseur expenses incurred by a stunt man were allowable because the expenditure had a special character dictated by the occupation as a matter of physical necessity’ and any private purpose was anunavoidable effect’ of the expenditure. The expenses were therefore only incurred for the purposes of his profession. Other expenses associated with general health and fitness were disallowed.
With the above in mind, our view is that expenditure that would normally be considered to have an intrinsic duality of purpose, be it medical including physiotherapy, nutritional or sports training, may be deductible in the case of professional athletes where:
- it is far removed from their ordinary needs as human beings,
- it is of a special character dictated by their occupation as a matter of physical necessity, and
- any private benefit is an unavoidable effect of the expenditure.
For example, physiotherapy treatment during a competition or immediately before or after an event where any personal benefit is marginal may be deductible. Similarly, nutritional advice, supplements, and training costs where the advice etc was so specific as being directly tailored to the particular athletic discipline may be deductible. A similar rationale may be applied to medical expenses although it must be noted that it will be more exceptional for medical costs to be allowable.
Whether an expense is ultimately deductible will remain dependent on the specific facts of each case.
Athletes: Timing of Income
The time at which an athlete’s taxable income should be taxed depends on whether the individual is carrying on a trade or a hobby.
If the athlete is trading, deciding when to include the income as a trading receipt will involve consideration of the relevant agreements and all the surrounding circumstances to apply the correct accounting treatment.
If the athlete is not trading and the income is taxable under S688 Income Tax (Trading and Other Income) Act 2005, the amount taxed is the amount arising in the tax year.
Athletes: Payments in kind
The tax treatment of non-cash payments (such as kit, goods, or sporting equipment) received by the athlete depends on:
- whether the individual is considered to be carrying on a trade or a hobby, and
- whether the non-cash payment was received as a gift or under a contract for work done.
If the non-cash payment is received purely as a gift and the athlete did nothing in return, the value of the non-cash payment is not taxable. If the athlete is not carrying on a trade and the non-cash payment was made under an enforceable contract in return for work done by the athlete, the value of the non-cash payment is taxable as miscellaneous income under Part 5 Chap 8 Income Tax (Trading and Other Income) Act 2005.
If the athlete is carrying on a trade, the value of the non-cash payment is taxed as trading income in the same way as a cash payment.
Athletes: Miscellaneous income
Chapter 8 of Part 5 Income Tax (Trading and Other Income) Act 2005 taxes income not otherwise charged, also known as miscellaneous income. These charging provisions may sometimes be considered as an alternative where the athlete’s activities fall short of trading. However, it can only apply to income contractually received in return for work done, services rendered or facilities provided. It cannot apply to voluntary grants given for nothing in return; see Scott v Ricketts  44 TC 303.