Draft guidance outlining when image rights payments fall within the scope of new employment tax legislation has been released by GOV.UK, setting out the framework for how payments related to an individual’s employment will be treated under Section 226F ITEPA 2003 when the rules take effect.
HMRC Draft Guidance Classifies Direct and Facilitated Payments
- Direct Employer Payments: Any image rights payment made by an employer or a connected company is automatically treated as taxable employment earnings, regardless of whether it stems from the employment contract or a separate agreement.
- Facilitated Arrangements: Payments from third-party brands are captured under the tax charge if the employer arranges, negotiates, or receives financial consideration for facilitating the connection.
- Independent Deals: Payments remain outside the scope of Section 226F only if the employment is merely an incidental cause, such as when an athlete signs an external sponsorship deal without club involvement or branding crossover.
Scope of Section 226F and Employment Connections
The draft guidance published in GOV.UK’s Employment Income Manual details the operational mechanics of Section 226F of the Income Tax (Earnings and Pensions) Act 2003. The legislation targets image rights payments tied to an individual’s employment. This includes payments issued directly by an employer or a connected entity, as well as third-party disbursements arranged, negotiated, or otherwise facilitated by the employer.
For payments not directly originating from the employer, the crucial legal test rests on whether the payment is made “by reason of the employment.” Drawing on established interpretations under EIM20501 and EIM20503, the employment must serve as an operative cause of the payment. An individual being pursued by an unconnected brand simply because they maintain a high public profile through their job does not automatically pull the payment into the tax net.
| Payment Origin | Involvement of Employer | Tax Treatment under Section 226F |
|---|---|---|
| Employer or Connected Company | Direct payment to employee | Chargeable to Income Tax and Class 1 NICs (Section 226F(2)(a)) |
| Third-Party Brand | Club negotiates terms or receives a fee | Chargeable as facilitated earnings (Section 226F(2)(b)) |
| Third-Party Brand | No club involvement, permission granted | Outside scope if employment is incidental (Section 226F(2)(c)) |
Employer Involvement Triggers Tax Charges on Third Party Transactions
The distinction between independent commercial endorsements and employer-facilitated arrangements forms a core focus of the regulatory guidance. Merely supplying an employee’s direct contact details to an inquiring brand, or granting contractual permission for an external deal, does not trigger the employment tax charge on its own.
However, the threshold is crossed if the employer receives financial consideration for providing permission, selects or recommends the individual, or actively negotiates on the employee’s behalf. In scenarios where a professional sports club negotiates contract renewals by shifting standard salary obligations onto club sponsors via reduced fees and redirected image payments, those sums are treated as earnings under Section 226F(2)(b) and subjected to Income Tax and Class 1 National Insurance contributions.
Contraindications and When to Consult a Tax Professional
Individuals and organizations handling complex endorsement structures should avoid assuming that separate contractual agreements shield image rights payments from employment taxes. Employers and talent should seek formal tax counsel if sponsorship arrangements feature shared visual branding, club color themes, or organizational involvement that could be interpreted by tax authorities as an operative cause of the payment.
Draft Text Precedes Official Implementation in 2028
The published text remains in draft form to provide early clarity to taxpayers, employers, and legal advisors. The final guidance is scheduled to be formally incorporated into HMRC’s Employment Income Manual when the underlying legislation formally comes into effect on 6 April 2028. HM Revenue and Customs has noted that the draft material remains subject to potential revision before its official publication date.
References
- GOV.UK – Draft guidance: tax treatment of image rights payments under the new legislation
- HMRC Employment Income Manual – EIM20501: Employment income: scope
- HMRC Employment Income Manual – EIM20503: Employment income: by reason of the employment
- Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) – Section 226F
