Tax treatment of Esports
We've covered gaming and the metaverse previously and because their interconnected it makes sense to cover the tax treatment of Esports too. This post covers the potential tax issues that might arise in this sector.
What are Esports?
Esports have become a global phenomenon elevating standard video gaming to a competitive and highly lucrative level. They involve human-vs-human competition and usually include an engaging spectator element to it. This is similar to traditional sports.
An Esports tournament typically features amateur or professional gamers competing against one another. What's more, these tournaments can be highly lucrative with cash prizes potentially worth £millions. For top tier Esports players, the earnings can amount to £millions.
Given the global revenue from Esports is predicted to reach nearly $3 billion in the next few years, the tax treatment of Esports players needs to be considered.
The main sources of income from Esports
Team earnings
One of the primary sources of income is team earnings. Professional Esports players earn money by competing in tournaments, either individually or as part of a team. If a player operates individually, they might be considered a sole trader.
Conversely, if part of a professional team, the structure could be a trading partnership, or the player might be considered an employee. Therefore the tax treatment of Esports players in a team depends on their employment status and the nature of formal agreements in place.
It's crucial to determine who is responsible for accounting to HMRC for tax and national insurance deductions under PAYE. This can be complicated if players are located outside the UK, as payroll deductions may need to be accounted for in the player's country of tax residence.
Income received from endorsements and sponsorship
Esports players receive sponsorship contracts and one-off appearance fees, similar to professional athletes. Moreover brands like Coca-Cola, Gillette, and HP are involved in Esports sponsorship.
Additionally, Esports players may receive fees for media appearances and image rights. However, using a UK limited company for image rights can be risky, as HMRC may challenge this structure, as seen with professional footballers.
Streaming income from online platforms
Another significant income source for Esports players is streaming income from platforms like YouTube. Therefore, Esports players can earn revenue similar to online influencers or media celebrities.
They may receive donations from followers or income from advertising. Although payments for streaming might be in cryptocurrency or flagged as donations, HMRC is likely to regard them as taxable income.
Winnings from participation in tournaments
As the Esports market grows, the prize money at tournaments has increased dramatically. For example, last year, a British Esports team won over £7 million as finalists of 'Defense of the Ancients 2' (DOTA 2). The tax treatment of Esports players' prize money will depend on whether it is considered income from a trade (as a sole trader or partnership) or employment income. The nature of any formal agreements in place will ultimately determine the tax treatment.
International aspects
UK tax resident Esports players earning prize money from outside the UK or from non-UK based digital platforms need to consider potential non-UK withholding tax issues.
Moreover, numerous countries deduct withholding tax at source on earnings. While it may be possible to obtain relief for overseas tax against UK tax liabilities, players should consider any potential reduction in overseas withholding tax early to avoid double taxation.
Summary
In summary, the tax treatment of Esports players involves various income sources and complex considerations. What's more, understanding the tax implications of team earnings, endorsements, streaming income, and winnings is essential for effective tax planning. By addressing these issues early, Esports players can manage their tax obligations efficiently.
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