11 December 2006

Michael Simkins

http://www.simkins.co.uk

Football Clubs Face Bill for VAT on Agents' fees

The Toon Army's fortunes are beginning to revive in the Premiership, but not off the pitch. Newcastle United has recently been hit with a substantial tax bill in connection with player transfers and contract renewals negotiated by footballers' agents (see Newcastle United plc v The Commissioners for HM Revenue & Customs [2006] UKVAT V19718). In a landmark ruling, the VAT Tribunal broadly dismissed the Club's appeal against an HMRC assessment, finding that VAT paid by the Club when paying agents' fees was not recoverable.

Under VAT legislation, a VAT-registered entity can reclaim input VAT paid on services purchased in connection with its business. In general, where a supplier to the business charges VAT and the VAT is paid by a third party, that third party cannot recover the VAT. If, however, services are provided to two parties, one of whom pays for the services, the paying party can recover the VAT (see Commissioners of Customs & Excise v Redrow Group plc [1999] STC 161).

The majority of the player-related deals considered by the Tribunal involved only one agent, who provided services solely to the player under a written exclusive agency contract. FIFA's Players' Agents Regulations require that agents can only represent one party when negotiating a player's transfer and must do so under a written contract.

The Club had argued that the agents were engaged on an oral basis to act for the Club in respect of the fee payable by the Club on completion of the transaction, while continuing to act in all other respects exclusively for the player. Forms submitted by the Club to the FA demonstrated that the agents had acted in the relevant respect for the Club, not for the players.

The Tribunal rejected this argument, finding that, where an agent had previously been engaged by a player, FIFA's Regulations prevented the agent from acting for the Club, as did the nature of the agent's exclusive agency arrangement and the agent's fiduciary duty to the player. The forms submitted to the FA were therefore incorrect. There was only a supply to the party to whom the service was being supplied, irrespective of which party provided the consideration. The fact that the Club derived benefit from the agent's engagement was irrelevant. Since the agents' services were supplied solely to the players, the VAT paid by the Club was not recoverable.

The Tribunal therefore dismissed the appeal, except in relation to certain invoices (totalling around £72,000). The Club must now repay the balance to HMRC - around £475,000. It remains to be seen whether the Club can mount a successful appeal to the High Court.

The decision will, unless successfully appealed, have a significant impact on football clubs. It has been a widespread practice for clubs to reclaim input VAT when paying agents' fees. Those clubs now face the prospect of VAT bills for backdated tax over the past three years. For example, earlier this year, HMRC requested Arsenal to repay £700,000 of previously recovered VAT.

Clubs that are prepared to pay agents fees may have to bear VAT on agents' fees as a real cost to the business which cannot be offset against output VAT. This would especially affect clubs with high transfer activity, where the fees and related VAT amounts are substantial. For instance, agents' fees paid by Chelsea have been estimated at around £16 million during the past three years.

Euan Lawson
288

This update is © Michael Simkins LLP. It is for general guidance only. Legal advice should be sought before taking action in relation to specific matters. Where reference is made to Court decisions facts referred to are those reported as found by the Court.

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