Aside from providing a topic for frequent articles in the Sunday press, ‘image rights’, predominantly in the sports and entertainment worlds, also appear to be something of a ‘challenge du jour’ for the taxman. So, where or how do image rights currently stand in the UK?

Legally, the answer is nowhere, as they are (still) not technically recognised by UK law. This means that an individual who wishes to protect his or her rights to control how identity, image and even distinctive personal attributes are commercially exploited, can only do so to a limited extent by relying on an unsatisfactory hotch-potch of copyright and trade mark laws. Even if successful, the individual claimant is more likely to end up with a moral rather than a commercial victory: just ask Eddie Irvine (In 2002 former Formula One driver Irvine sued talkSPORT radio for using an unauthorised doctored picture of him in an advertisement).

However, image rights are recognised for tax purposes (cue happy taxman), but generally as capital assets in respect of which income tax and NICs (national insurance contributions) are not applicable (cue less happy taxman). To gain this capital tax treatment however, there are a number of hoops to be jumped through, perhaps the most important of which is keeping the income payable to a sportsperson by his employer club as separate to, and distinct from, any amounts payable under contractual arrangements relating to the exploitation, by the club, of his image.

This gave rise to ‘image rights companies’ (IRCs) established by sportspersons, to allow them to enter into separate agreements (relating to the use of such person’s image) with potential sponsors, and in the footballing and rugby worlds, with the clubs engaging the services of the footballer/rugby player in question.  Such arrangements have had the dual effect of providing a source of funds not subject to employment taxes for the individual, and a potential lucrative saving for clubs in respect of NICs. As IRCs are often located in a jurisdiction with, shall we say, a generous tax regime, then the tax efficiencies for both the IRC and its shareholding sportsperson can be even greater.

The taxman does not like IRCs and appears convinced that they are simply a nefarious means of reducing the earnings of (and accordingly, employment taxes payable by) sportspersons. This argument has formed the backbone of many of the challenges raised by the taxman not only against the clubs contracting with an IRC, but also certain sportspersons. It has also led many of the governing bodies of sports (in which IRCs are common), to become involved in negotiations with HMRC (HM Revenue & Customs) to try and agree some type of settlement in response to all the challenges launched.

So, should existing IRCs be wound up and/or new IRCs avoided? Well, at the moment, no.

The fact remains that, provided any IRC is properly advised, is correctly established and furthermore that any contracts (re use of image rights) between any such IRC and club are legitimately and correctly entered into for fair values, then it will be difficult for HMRC to mount a successful challenge that any amounts payable under such contractual arrangements represent the taxable earnings of the sportsperson in question.

To frustrate the taxman even more, recent developments in Guernsey (which will see the creation of an ‘image rights register’ on the island, enabling certain ‘qualifying’ personalities to register their respective ‘image rights’), may give rise to an increase rather than a reduction in the number of IRCs, especially when one considers the range of tax efficient corporate entities (such as protected cell companies) already available in Guernsey.

The taxman is a wily creature though, so watch this space...