Tax treatment of Esports
Because we've discussed gaming and the metaverse previously, it would also seem appropriate to cover the tax treatment of Esports and the potential tax issues that might arise in this sector.
What are Esports?
Esports have become a global phenomenon which has taken standard video gaming to a whole new level where the stakes can be very high. They are competitive (human-vs-human) and usually have an engaging spectator element to it - like traditional sports.
An Esports tournament typically consists of amateur or professional gamers competing against one another. These tournaments can prove to be highly lucrative with cash prizes potentially worth £millions. For a successful top tier Esports player the earnings can amount to £millions.
Given the global revenue from Esports is predicted to reach nearly $3 billion in the next few years, invariably the tax treatment of Esports players needs to be considered.
The main sources of income from Esports
Perhaps the most obvious earnings are from playing as a professional, in tournaments either individually or as part of a team. If you are a professional Esports player operating individually you may be considered as operating as a sole trader. Conversely, if you are part of a professional team, this could either be structured as a trading partnership, or you could be considered to be an employee of the team.
When it comes to competing as a team in tournaments etc, whether or not the individual is taxed as a self-employed partner or an employee, will depend on the nature of any formal agreement in place and how the team operates procedurally on a day to day basis.
It's important to consider the employment status of each member of the team. If their earnings are subject to tax and national insurance under PAYE then you will need to determine who is responsible for accounting to HMRC for these deductions. Matters can be further complicated where players are located outside of 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 in much the same manner as those who are professional athletes, footballers etc. Coca Cola, Gillette and HP are just some of the major brands involved with Esports.
Additionally, Esports players may also receive fees for media appearances and image rights. However you should consider very carefully whether or not to use a UK limited company for image rights. This type of business structure is likely to be challenged by HMRC as has been the case for professional footballers previously.
Streaming income from online platforms
Another source of income for Esports players is streaming income from online platforms like YouTube. Esports players can potentially receive revenue from these activities in much the same way as online influencers or media celebrities who may receive donations from followers or income from advertising.
Whilst payments for streaming might be in the form of cryptocurrency or even flagged as donations, they are nevertheless likely to be regarded as taxable income by HMRC.
Winnings from participation in tournaments
As this is a burgeoning market with potentially $billions of global revenue and high profile corporate sponsors involved, unsurprisingly the prize money available at tournaments has increased dramatically. For example, last year a British Esports team won in excess of £7 million as winning finalists of 'Defense of the ancients 2', or DOTA 2 for short if you're a hard core gamer.
The receipt of prize money will either be taxed as income from a trade (as a sole trader or partnership) or employment income. To reiterate what has been mentioned in this post earlier, the tax treatment will ultimately depend on the nature of any formal agreements in place for the Esports player.
Where a UK tax resident Esports player earns prize money from outside the UK, or from a non-UK based digital platform, they will need to consider potential non-UK withholding tax issues. Many non-UK countries deduct withholding tax at source on earnings. Whilst it may be possible to obtain relief for overseas tax suffered against UK tax liabilities, any potential reduction in overseas withholding tax, should be considered at an early stage in order to avoid double taxation.
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