EIM64124 | Tax treatment of benefits matches and testimonials given to sportspersons: meaning of ‘customary’

EIM64121 explains that the charge to tax provided for by section 226E ITEPA 2003 does not apply to any sporting testimonial where there is a contractual right or a customary expectation that the sportsperson will receive one. This is because payments in those circumstances already fall within the charge to tax as earnings, and do not need to be treated as earnings by section 226E.

The exemption from income tax that can be allowed for the first £100,000 of sporting testimonial payments by section 306B ITEPA 2003 (see EIM64122) only applies to amounts treated as earnings by section 226E. It will therefore only be available if the testimonial is both non-contractual (see EIM64120) and non-customary.

Broadly, a testimonial is non-customary if the sportsperson could not reasonably expect that he or she would receive one.

This might be because the club has not previously arranged benefit matches for its players, or where it is customary for the club to arrange a benefit match only under specific circumstances and the match in question is held outside of those circumstances.

If the club is known to “automatically” arrange a testimonial for departing players then those testimonials would be customary.

The concept of a customary payment is not unique to sporting testimonials. EIM12977 discusses situations where a termination payment made without legal obligation will be chargeable as earnings because it is customary to make it.

Example 1

A cricket club arranges a benefit match for a sportsperson for the first time in its history.

There is no established custom or expectation, so for that player the testimonial is non-customary. If it is organised by an independent third party such as a testimonial committee, any proceeds will fall to be taxable under s226E ITEPA 2003 rather than as general earnings and the first £100,000 will be exempt from Income Tax provided the conditions set out at EIM64122 are satisfied.

It is less important how long the practice has been in place than whether it is an automatic part of that employment.

Where it is clear that an employer intends to follow a particular path in the future, a practice can come into being very quickly. So, this first testimonial – even as an isolated event – may be sufficient to establish a custom for subsequent players.

Example 2

As in Example 1, a cricket club arranges a benefit match for a sportsperson for the first time in its history.

However, that club has recently been promoted from a division in which benefit matches are not routinely held to the next division, in which they are much more common.

Due to the particular circumstances, the sportsperson might now expect to receive a benefit match. That testimonial might therefore be customary, depending on the individual facts of the case.

Example 3

A football club has a policy or ‘custom’ of only holding a testimonial where the sportsperson’s departure from the club represents their leaving professional or club-level competition in that sport.

A player leaves that club to join a bigger side, but during her time at the club she has established herself as a very popular person in the local community though various charity work that she was under no obligation to perform. This has reflected very positively on the club and helped to raise its profile. To recognise this, the club decides to hold a benefit match for that player despite that not being its usual custom. The testimonial is non-customary.

HMRC might argue that any subsequent testimonial arranged in recognition of a player demonstrating similar qualities will be customary if that given to the earlier player has created an expectation for her successors. Ultimately however, this would hinge on whether the giving of a testimonial in such circumstances has become a normal part of the employer-employee relationship at that club.