Football stars plan to dodge 50p tax rateThe Press Association are reporting the 'new' story as leading to a "Crackdown on top rate tax loophole". As the Sunday Times report though HMRC have been trying to do this for years.
Scheme being considered by Manchester United, Arsenal and Liverpool means players can get salaries as interest-free loans
Sunday, January 16, 2011
Tax tease: Inaccurate Footie Tax story resurrected as 'news'
The headline in today's Sunday Times is "Top footballers dodge millions in income tax". And that "Rooney pays 2% on some earnings." Other footballers are then mentioned too.
The report seems to simply confirm the predictions of a very similar story the Times published in May 2009.
The footballers are using two tax avoidance schemes. One involves their clubs paying large chunks of their earnings as 'image rights' rather than as employment income. The other scheme involves the footballers taking loans rather than salaries or dividends from companies they own. I need to debunk a key element of this part of the story to make clear that it's not as effective as the press reports suggest.
For the avoidance of doubt I'm no fan of this tax avoidance. Regular readers of the TaxBuzz blog may recall I mentioned this in the context of the 7th of my '8 fallacies that undermine the UKuncut tax protests' last month.
When someone, a footballer or otherwise, takes a loan from their company they initially pay very little income tax. Instead of being taxed on the full amount they only pay tax on the interest they should have been charged.
In 2009 the Times suggested the tax would be as little as 2.5%. It now seems to be just 2%. The reports miss the key point though that this tax is paid every year for as long as the loan lasts. So the longer the loan lasts the more tax is paid. If the loan lasts for ten years and interest rates rise the total tax paid could end up being more than the tax they hoped to avoid.
Eventually the company will at some stage have to pay salaries or dividends to the footballer to clear the loans. This income will be taxed at the top rate - in addition to the tax already paid on the 'beneficial loans'.
I mention all this to help discourage anyone from thinking that it's always tax effective to take loans rather than salaries or dividends from their company. It seems to be attractive for footballers as long as they do NOT own the company and as long as they will leave the UK permanently before the loans need to be repaid.
When your own company lends you money the company is required to (effectively) also lend money to HMRC. This reduces the cash available in the company. And this loan to the taxman is only repaid when the loan to which it relates is repaid.
Most people trying to copy the footie players' tax avoidance scheme will also have to pay a fortune to close down their companies using complex (and expensive) schemes without paying back the loans. When that happens they will still face years of sustained challenges from HMRC who will argue that the loans were a sham and subject to tax as earnings.
Can't say I have any sympathy for the footballers though.