tax planning for the rich and famous

By David Barry, accountant/tax adviser

I remember that at the time I was studying to be an accountant the lecturer in tax asked the question "do we want a Labout or Conservative party in government as accountants/tax advisers? Of course, we all put up our hands and with one voice said out loud " a conservative party." "Not so," said the teacher. "It is better to have a labour government as there is more opportunity to engage in tax planning with the resultant highe fees payable as labour governments inevitably put up tax rates (does anybody remember Dennis Healey the former labour party Chancellor of the Exchequer who said "tax them to the pips squeak."

I reproduce an article below that at present writes the tax planning opportunities for the rich and famous. It is not intended to be by partisan but instead writes tax planning opportunities that are availaible.

22% for limited companies versus very high rates of personal tax; taking interest free loans from the limited companies at 2% instead of salaries/dividends with their corresponding high rates of personal tax.

I also reproduce readers replies 39, 43, 53,55,60,65,75 and 82 with thought provoking comment as well as additional tax planning ideas.

Footballers pay 22% tax thanks to loophole

By Daily Mail reporters

17 January 2011

Reader comments (85)

Top Premiership footballers like Wayne Rooney and Gareth Barry are avoiding millions of pounds in tax through a loophole which means they can pay 22% on wages.


Sriking it rich: Wayne Rooney is one of the footballers taking advantage of the gap in tax rules.

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They are using complex tax avoidance schemes that allows them receive earnings from image rights into a 'shell' company, where they pay business, rather than personal, tax rates.

The Sunday Times has uncovered 55 players who are taxed at just 22% because they get a large proportion of their total earnings from their image rights companies.

The newspaper said that Manchester United star Rooney has saved almost £600,000 over the past two years by using the tax loophole.

Manchester City's Barry took home £135,000 more than if he had paid income tax at 40%.

Now the taxman has demanded the clubs pay £100m on behalf of their players as HM Revenue & Customs (HMRC) investigates how to stop the arrangement.

The players uncovered as taking advantage of the gap in the tax rules include England and Chelsea defender Ashley Cole, former husband of singer Cheryl, Manchester United's Rio Ferdinand, and his team-mate Michael Owen whose company Owen Promotions owns 11 racehorses.

Arsenal's Theo Walcott has TJW (Promotions) while David James, the former England goalkeeper has Toocoo.

Scores of top footballers launched their own companies eligible to take image rights payments after Labour Chancellor announced the 50p top rate tax.

The players have two contracts with their clubs. They get a salary as a player and the other is for 'image rights' - earnings from shirts and other merchandising. These royalties are paid into a company which is only liable for 28% corporation tax rather than the 50% income tax.

And players can take out loans from their companies where they only pay 2% tax on the sum because it is regarded as a benefit in kind.

Investigations by the Sunday Times showed the £200,000-a-week Rooney, Barry and Chelsea's Daniel Sturridge took advantage of this tax loophole. HMRC have confirmed they are looking at players' companies as part of their probe into image rights and tax avoidance.

They have demanded the money from the soccer clubs to make up for the shortfall in tax revenues after they overstated the proportion of players' income that was coming from image rights.

The practice is also used in other well-paid industries that are exposed to higher tax rates, such as banking and IT. The practice was highlighted by This is Money in 2009.

39.

I think this article is technically inaccurate. Any company owner can do the following:-

1. Pay themselves a base salary which is normally in the lower tax rate bracket. For this they'd pay 22% income tax (as the article suggests) but also employer n.i. (12.8%) and employee n.i (12%). So they'd pay 46.8% on this portion of their money if you forget about the personal tax threholds. The rest is normally paid out in dividends. They'll pay 28% corporation tax plus 12% income tax (40-28) on this amount. So they're paying 46.8% on a small segment of their money (whilst a normal employee wouldn't have to pay the employer n.i so would be better off, and 40% on the rest, which is where the tax avoidance comes in (they're avoiding an additional 10% tax on any income over £150,000) plus the employee n.i of 12.8% (up to £42k) and 1% above that. Their club is also avoiding the employer n.i. of 12.8% which they'd normally have to pay. The club is actually avoiding more tax than the players.


43. How do ManU pay Rooney his £7m per year without first receiving an invoice from his company? And,if Rooney's company earn that turnover it MUST by law be registered for VAT as a service provider. Thereafter, surely no director can just extract cash from his company tax free! can it? In addition to those comments, no company can just pay large wads of cash to offshore companies without a connection to the offshore company.

None of this makes sense to me having been a company secretary for 25 years before I retired.

If the Inland Revenue have been letting football clubs(which are all limited company's) get aWay with presenting their annual returns in this way, then HMRC have been acting negligently, and someone should be taking responsibility to examine the Tax office efficiency in these cases. Step forward George"we are all in this together" Osborne


53. The tax issue is more serious. Using a service company to avoid tax has been done for years. Originally by golfers and tennis stars,these things are promoted by cynical accountants who reinforce the greed ethos.


60. For your information one of the first action of this Goverment was to OK a loan by the Cayman's. The same Cayman's that a lot of companies and rich people have been using to pay less tax in the UK. So they have taken action that makes it easy under pay UK tax.

DC has told us one thing and them made the poor tax the taxes the rich are not.

Last week on Sky, Jeff Randell was report to have said the Cayman's are costing this country £40B every year. Much more that the VAT rise, but the problem with VAT it puts up RPI so in three years it is all gone due to high walfair payments.


65. How sad is it that you all have to find someone to have a go at, i myself run a large company and believe in tax cuts for the wealthy.its easy to sit on here and slate us but i started with nothing built 2 companies turning over millions, got charged huge fees buy accountants banks and all the rest wanting to put there hand in my pocket. after putting my life my family aside to build this, i provide employment for over 100 people,i suffered through recession and now where growing again after everything i have contributed to this country in tax, jobs, and time there are people that think when the cash finally hits my pocket i should give the same up as a guy that rolls in at 9am and goes at 5pm why. amongst the brighter out there a wealth creator should have loop holes to exploit as 20 percent of 500k is 100k and 20percent of 25k is 5k therefore i pay 20times the tax the 25k earner is yet this is deemed not enoth as you want 200k. ???????? why should I!!!!!


75. This is a total non-story and no 43 is the only correct comment. There is no legal way of directors/ employees permanently extracting cash from a UK company without paying income tax. In the short term you can borrow it (hence the "low" rate of tax you're all getting worked up about), but it has to be repaid. When you do take money out permanantly by salary or dividends, you will have a personal tax liability at your highest personal tax rate. Till then, the company can't set the loan against its profits so it will also be paying tax at up to 28% as well which it won't get back. I do wish that this kind of story was properly researched and run past a tax expert before being published.


82. It is perfectly acceptable for anyone to use the scheme. These players are taking there earnings through their own personal companies and corporation tax is around 22%, however as soon as these players take this money out of the companies they will be liable to pay income tax which would take them

Up to 51% tax. This scheme is common in entertainment industries as most people would not require direct access to such large sums of money. they will still be paying the full amount of tax just not all at once.
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