Image Rights - Getting it right

Branded in the media and by politicians as tax dodges, HMRC and the Government have been under pressure to close the image rights loophole, particularly for football players and clubs.  As well as announcing a focus by HMRC on football clubs with a series of visits, the Chancellor’s Spring Budget 2017 included a promise to publish guidance on the taxation of image rights. The UK is not the only country looking to tax the profits generated from international image rights. In Spain, most notably, this has resulted in high profile criminal prosecutions and fines.

HMRC’s guidance focuses on when image rights income should be taxed as employment income, but there is an international tax element to this issue which is not well understood.  Even with the published guidance, the taxation issues remain complex and following the introduction of criminal corporate offences for failing to prevent tax evasion and eye watering levels of penalties for failures to correctly report tax liabilities, particularly where there is an international element, any person exploiting or paying for the use of image rights needs to make sure that they and their advisers have got the tax right.

Not just a loophole

It would be easy if image rights were just a loophole for Premiership Clubs and highly paid footballers to avoid paying tax on part of their salary – the loophole would be closed and Clubs would simply stop offering separate contracts. The position is far more complex than the press coverage would suggest.  An individual’s identity is a valuable asset.  In the case of a celebrity it is nothing less than a brand. The value of access to that brand lies in the ability to sell ‘stuff’, and frequently that brand is global and valuable. HMRC has the legislation it needs to deal with any element of tax avoidance, the more difficult question is who should be taxed on the profits derived from that brand and by which Government. 

It is unhelpful in tax law terms to talk about the taxation of image rights, as the term is not descriptive of a class of rights recognised in the UK, in common with a significant number of jurisdictions. The value is in the brand, and the contractual arrangements which enable money to be made from the brand will be made up of a bundle of rights and obligations which may or may not include intellectual property rights. The UK tax code may tax the different elements of the bundle differently. The tax may also differ dependent on variables including where the rights and obligations are exercised/performed and how, and where the contract was entered into and is enforceable.

So what are the issues that need to be sorted in order to get it right and avoid penalties and potential criminal sanctions?  Broadly speaking, they fall into three categories:

  • Remuneration - Ensuring that no part of the payment for the use of image rights is disguised remuneration;

  • International - Ensuring that income that is paid to a non-resident is not taxable on the recipient, or the resident individual whose image is being exploited, and that the payer is not required to deduct tax at source;

  • Tax evasion - Ensuring that the exploitation of the brand is a legitimate business and not a tax dodge.

1) Remuneration

HMRC’s guidance focuses on this aspect but given that the guidance does no more than set out its existing position the onus will continue to be on the employer to convince HMRC that payments to an employee or a company connected to the employee are not taxable as remuneration.  The guidance appears at EIM00732 – EIM00739 of HMRC’s Employment Income Manual. In its view, where there is an employment relationship, without evidence to the contrary, payments are employment income, and should be taxed as such. So what does the employer have to prove? There needs to be a commercial contractual relationship which justifies the payments independently of the contract of employment. Unfortunately, for the Premiership Clubs the informal understanding, known as the Protocol, has not been renewed and whilst abiding by the protocol’s parameters as agreed in the past might be of some comfort, every contract is potentially contestable on a stand-alone basis.

Examples of evidence that might be necessary:

  • consideration given by the Board of Directors to the active use of image rights as a benefit to the commercial activities of the employer, whether to seek new agreements, reviews of the outcome of existing agreements, and the possibilities for increased value additional to rights existing under the employment contract;

  • a business plan for promotional activities involving the exploitation of image rights and the outcome of reviews of performance against that plan, including details of actions taken if the employer is not realising a commercial return from an image rights agreement;

  • negotiation of the terms of each image rights agreement to demonstrate consideration on an individual basis and to reflect any differences between the exploitation of image rights within and outside the UK;

  • details of independent advice received regarding the valuation of the image rights, or internal analysis of value based on previous experience;

  • due diligence regarding the image rights company and any advice provided to the employee regarding the establishment of an image rights company;

  • records of activities performed and any subsequent discussions about the performance of services under the image rights agreement and actions taken.

2) International element

If the payments are not taxable as remuneration and are made to a UK tax resident person then the payer and the payee can probably rest easy, as long of course as the VAT position is sorted!  Where the payment is made to a non UK resident the position is more complicated.


The payer of monies under an image rights contract to an overseas person needs to consider the respective elements of the contract and ensure that there is no requirement to withhold tax.  This may mean obtaining advice on the interaction of EU law and Double Tax treaties.  The obligations of the payer may now go further requiring the payer to ensure that the payee is not involved in tax evasion.

3) Celebrity

If the celebrity has an on-going connection with the provider of the image rights, directly or indirectly, then the celebrity needs tax advice on the possible application of anti-avoidance legislation which prevents a UK resident from diverting profits that would otherwise be taxable in the UK to a non-UK resident.  This anti-avoidance legislation does incorporate a remittance basis for non-UK income but that is another area where disagreements will arise with HMRC.  It should not be assumed that this legislation does not bite because the image rights contract was put in place before the individual came to the UK. 

Requirement to prevent tax evasion

From 30 September 2017, the Criminal Finances Act 2017 will impose corporate criminal sanctions for failure  to prevent tax evasion by any employee or agent/intermediary.  Whilst the new Act applies to all corporate bodies, the creation of a corporate criminal offence will be of particular concern to the sports sector, as Clubs can now be held accountable for their employees and agent/intermediary’s actions. If you would like to know more about the Criminal Finances Act 2017, please see our previous blog post about it. The stakes will be much higher post 30 September 2017 and it is imperative that Clubs fully understand the potential criminal liability that could attach to them.

Where next for Image Rights?

The global crackdown on tax avoidance and evasion, of which the new corporate offence is part, combined with the requirement to correct past returns, and heavy penalties for negligent future returns, should help to raise standards of tax advice and behaviour both in the UK and abroad.  In turn this should lead to fewer enquiries and a reduction in compliance costs and penalties. It is to be hoped that ultimately this will make it easier for UK businesses, including Premiership Clubs, to compete competitively, taking into account the tax costs of working and doing business in the UK.

Against this background, image rights contracts should not be part of a tax efficient incentive package routinely on offer to attract talent to work in the UK.  On the other hand, the commercial exploitation of image rights via companies, UK and international, will continue and great care needs to be taken in relation to image rights contracts to make sure that:

  • Agreements are commercially driven rather than motivated by tax avoidance and properly documented;

  • Appropriate tax advice has been taken; particularly if there is an international element (and in view of the requirement to correct, now would be a good time to check out existing image rights contracts and related corporates to ensure that past income and gains have been correctly returned);

  • Appropriate due diligence is undertaken to ensure that the organisation is discharging its obligations to prevent tax evasion; and

  • Evidence is retained to demonstrate the commerciality of the agreement in case required.

Mills & Reeve specialises in advising sports and other rights holders on commercial matters including image rights. If you're interested in learning more about image rights, please also see our blog post about our panel discussion on this topic at our recent sports law seminar. If you require any advice in relation to anything mentioned in this article, please contact Ellie Milner.

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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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