Net gain to UK taxman as Agassi is served bill for £27,000

Tennis star Andre Agassi was counting the cost of his most damaging British defeat yesterday when a judge ruled that he must pay tax on income earned from endorsements in SW19 - even though neither he nor the companies involved are based here.

Losing in Britain has never come naturally to Andre Agassi, who won his first Grand Slam title at Wimbledon 12 years ago and has been cheered on to the semi-finals or beyond on five occasions in the past nine years. But he was counting the cost of his most damaging British defeat yesterday when a judge ruled that he must pay tax on income earned from endorsements in SW19 - even though neither he nor the companies involved are based here.

In a ruling which has implications for Britain's many highly-paid touring sports and showbusiness stars, a judge at the High Court in London said Agassi had to pay a total of £27,500 in tax on income paid by Nike and Head Sports to his US-based company Agassi Enterprises Inc.

The case centred on the player's tax liability for 1998-99, a year in which Agassi's presence was more fleeting than many in his long career - he was knocked out in the second round. His British self-assessment tax return had shown a loss of more than £63,000 and lawyers argued that the 33-year-old from Las Vegas could not be taxed in Britain on his endorsement earnings.

But the Inland Revenue viewed things differently. Agassi, whose portfolio of multimillion-pound endorsements include lucrative deals with American Express and Estée Lauder, assessed his tax liability to be £27,500.

Mr Justice Lightman ruled that under sections 555 and 556 of the 1988 Taxes Act relating to entertainers and sportsmen, tax was due on income connected with activities in Britain, even if the paying and receiving companies had no tax presence here. The judge dismissed Agassi's appeal against a decision by special tax commissioners in favour of the Revenue, which had argued that his endorsement of Nike and Head Products while playing in the UK was a "relevant activity" connected with the overseas payments. It would be "absurd" to construe the Act so as to allow tax liability to be avoided by the simple expedient of channelling payments through a foreign company with no presence here, said the judge. "If this were the case, the tax would effectively become voluntary," he said.

For commercially-minded stars such as Tiger Woods, Michael Schumacher and the Williams sisters, the outcome of what has been known in tax circles as the "game, set and match" case shows that two-week appearances in the UK for the Open, the British Grand Prix or Wimbledon can carry a heavier tax cost than they imagined. To some tax experts the outcome was a surprise. Miles Dean, of the London tax consultancy Interfis, said: "The feeling was that the Revenue did not have a chance of winning because this would have such an impact on so many stars."

But the Revenue has had its eyes on sport's big earners for some time. Two similar appeals - nicknamed the "set" and "deuce" cases - were lodged last year by American tennis players, and both also failed. The players argued over how much tax was calculable on the grounds that the length of time players are still in the tournament should be a key consideration. Agassi's approach was far more fundamental. He simply argued that no tax was due.

The ruling is sure to affect other cases, according to the corporation tax specialist Maryvonne Hands from the Browne Jacobsen law firm. "The Revenue are trying to extend the tax base in this area and this [ruling] will undoubtedly be very persuasive in the future," she said. "No one is surprised that when the Revenue starts hearing about these huge pots of money they get their antennae working."

Four years ago, the stars' capacity to avoid tax payments was enhanced when Dennis Bergkamp, Arsenal's £40,000-a-week Dutch star, and the England under-21 manager David Platt, won a crucial tax case against the Revenue which left players free to continue having image rights money paid to a company outside the country.

To make the scheme watertight, players must be able to demonstrate that the image rights money really is paid because of their image and not for actually playing the game. But the lack of legislation in the field of image rights made the players' case difficult to defeat.

British football players are also known to channel promotional payments into private company accounts. That means that instead of a player paying 40 per cent income tax and 12 per cent national insurance, the fees will be treated as company profits and face a much reduced rate. For some players this can be as low as 19 per cent, but in certain instances the millionaire stars will pay less because they can claim a string of expenses. For the big earners, the fight may not be over. Mr Justice Lightman offered them a shaft of light in court when he said that the act in question seemed to impose the obligation to deduct and hand over the tax on the parties making the payments - in this case, Nike and Head. That duty imposed on two foreign companies "may prove unenforceable", he said.

And then there is the difficult issue of how to calculate the tax, since the ruling does not represent an immutable legal precedent. "If the facts are different, people will always have a go and take on the Revenue," said Ms Hands. "It is by no means the end of the story."

Agassi is presumably preparing his arguments for future approaches by the British taxman. He will almost certainly be able to argue that he has been on court for less time as age starts to take its toll in the next few years. And the benefits of marriage may also start to kick in: when the taxman starts eyeing his $10m (£5.5m) Deutsche Telekom endorsement, he can reveal that it is a joint deal with Steffi Graf, his wife.

GAME, SET AND CASH: HOW ENDORSEMENTS BENEFIT SPORTS STARS

Tiger Woods

Four days at the Open might seem a brief encounter for the taxman but the endorsement list is endless: a £22m deal with Buick, £10m from Accenture, an undisclosed amount from Tag Heuer watches, £10m from Upper Deck entertainments and £46m from Nike - to name but five of at least 10 deals.

Michael Schumacher

Hardly the most popular overseas sportsman to appear in Britain and not in Tiger Woods' league, but his day at the British Grand Prix brings massive exposure for his sponsors, headed by Shell (£2.8m), Mercedes (£2.8m) and Nike (£2.8m). There's also McDonald's, Omega watches and Dekra cars.

Serena Williams

She's a huge earner, even by tennis standards and a rich source of money for the taxman. Her Nike deal alone (£33m) is positively eye-watering, along with £5.5m from Avon. There are also joint deals with her sister Venus, just to make life tricky for the Revenue: £3.3m from Wilson and £5m from Wrigley.