NON-RESIDENT SPORTSMAN – whether the foreign entertainers provisions are limited to payments made by persons with a UK presence – no; whether the Income Tax (Entertainers and Sportsmen) Regulations 1987 apply on the facts – yes; whether professional tennis player receiving payments from a non-resident company for endorsing sportswear was carrying on a trade within the UK – yes

THE SPECIAL COMMISSIONERS

(1)	MR Set, (2) MISS DUCE, (3) MR BALL	Appellants

	- and -

	S. ROBINSON
	(HM INSPECTOR OF TAXES)	Respondent

		Special Commissioners:	DR JOHN F AVERY JONES CBE
						THEODORE WALLACE

Sitting in public in London on 8 and 9 July 2003

Patrick Way instructed by Tenon Media for the Appellant

Bruce Carr instructed by the Solicitor of Inland Revenue for the Respondents

© CROWN COPYRIGHT 2003

ANONYMISED DECISION

1.	These are appeals by Mr Set, Miss Duce and Mr Ball against amendments to self assessments for the years 1998/99 (Set), 1997/98 and 1998/99 (Duce), and 1997/98, 1998/99, and 1999/2000 (Ball).  They raise various issues relating to the taxation of non-resident sportsmen which we are asked to deal with in principle.  The Appellants were represented by Mr Patrick Way and the Inspector by Mr Bruce Carr.
2.	There were agreed statements of facts relating to each of the Appellants as follows:
MR BALL
(1)	The Appellant is an international tennis player who is resident, ordinarily resident and domiciled outside the United Kingdom.  In relation to the years under enquiry and the subject of this appeal (years ended 1997/1998, 1998/1999 and 1999/2000) (“the relevant tax years”) he was a resident of South Africa.
Relevant Contracts
(2)	On 1 April 1993 Ball Enterprises Limited (“Ball Enterprises”) and Net International Limited (“ Net International”) entered into a contract pursuant to which payments of endorsement income have been made to Ball Enterprises on behalf of the Appellant in the relevant tax years.  [Although not included in the agreed statement of facts there was also a further contract dated 24 August 1998 covering the period 1 May 1998 to 30 April 2001.]
(3)	On 5 June 1996 Linesman USA (“ Linesman ”) and the Appellant entered into a contract pursuant to which certain payments of endorsement income have been made to the Appellant in the relevant tax years.
(4)	Net International is a company resident in the United Kingdom.
(5)	Linesman is a company resident outside the United Kingdom.
(6)	The Appellant has appealed in relation to payments made by Net International and Linesman for the years 1997/98, 1998/99 and 1999/2000.
Self assessment returns
(7)	On 16 June 1999, the Appellant submitted a UK tax return for the tax year ended 5 April 1998 which showed a UK net profit of £28,863 based on a gross UK income of £60,837 made up as follows:
-	UK prize money					£40,301
-	UK tournament bonus					£  3,042
-	Share of world-wide endorsement income
-	Net International: US $13,363 (£8,129)
-	Linesman: US $15,395 (£9,365)
							£17,494
						Total:		            £60,837
(8)	On 29 January 2001, the Appellant submitted a UK self-assessment tax return for the tax year ended 5 April 1999 which showed a UK net profit of £31,628 based on a gross income of £55,184 made up as follows:
-	UK prize money					£44,220
-	Share of world-wide endorsement income
-	Net International: US $1,428 (£865)
-	Linesman : 	US $16,524 (£10,009)
							£10,964
						Total:		            £55,184
(9)	On 23 April 2001, the Appellant submitted a UK self-assessment tax return for the tax year ended 5 April 2000 which showed a UK net profit of £28,598 based on a gross income of £45,210 made up as follows:
-	UK prize money					£19,889
-	UK appearance fees					£12,346
-	Broadcasting income					£  4,200
-	Share of world-wide endorsement income
-	Net International:	 US $1,431 (£890)
-	Linesman: 		US $12,682 (£7,885)
						£  8,775
					Total:		            £45,210
Revenue Enquiry
(10)	The Revenue opened enquiries under section 9A TMA 1970 in relation to the Appellant’s returns for all the relevant tax years.
(11)	On 12 October 2001, the Respondent issued closure notices under section 28A(5) TMA 1970 for the tax years 1997/98 and 1998/99 based on the following calculations:
1997/98
-	UK prize money					£40,301
-	Tournament bonus					 £ 3,042
-	Share of endorsement income			            £48,207
					 Total:	            £91,550
1998/99
-	UK prize money					£44,220
-	Share of endorsement income			            £26,512
					 Total:	            £70,752
(12)	On 23 April 2002, the Respondent issued a closure notice under section 28A(5) TMA 1970 for the tax year 1999/2000 based on the following calculations:
1999/2000
-	UK prize money					£19,889
-	Appearance fees					£12,346
-	Broadcasting income					 £ 4,200
-	Share of endorsement income				£19,019
					Total:			£55,454
(13)	The closure notices issued by the Respondent calculated income tax charges as follows:
1997/98 -	£5,276.33
1998/99 -	£2,027.87
1999/2000 -	£2,244.65
Appeal by the Appellant
(14)	The Appellant appealed against the notices of amendment and made postponement applications as follows:

Year of Assessment	Date of Appeal	Postponement requested	
1997/98	6 November 2001	£5,276.33	
1998/99	6 November 2001	£2,027.87	
1999/2000	10 May 2001	£2,244.65	

(15)	The Appellant also requested that his appeals be determined before the Special Commissioners.
ISSUES FOR DETERMINATION
(16)	On the basis of the Statement of Case submitted by the Appellant, the following issues arise for determination:
The payments made by Linesman 
(1)	Does the fact that both the Appellant and Linesman are resident outside the United Kingdom prevent application of the provisions of Chapter III Part XIII Taxes Act 1988 and the Income Tax (Entertainers & Sportsmen) Regulations SI 9187 No.530?
(2)	Are payments received by the Appellant from Net International   chargeable to tax by virtue of section 18 Taxes Act 1988, as amplified by the provisions of Chapter III Part XIII Taxes Act 1988 and the Income Tax (Entertainers and Sportsmen) Regulations SI 1987 No.530?
The payments made by Net International
To what extent are payments received by Ball Enterprises on behalf of the Appellant from Net International taxable by virtue of section 18, as amplified by the provisions of Chapter III Part XIII Taxes Act 1988 and in particular by what method are such payments to be apportioned for the purpose of determining the extent of chargeable income.
(17)	Whilst the Respondent is content for the list of issues to be formulated in the order set out above in relation to the Linesman contract, the Revenue’s primary case is that the relevant charging provision is section 18 Taxes Act 1988 as opposed to Chapter III Part XIII of the same Act.
MR SET
(18)	The Appellant is an international tennis player who is resident, ordinarily resident and domiciled outside the United Kingdom.  In relation to the year under enquiry and the subject of this appeal (year ended 5 April 1999) (“the relevant tax year”) he was a resident of the USA.
Relevant Contracts
(19)	On 1 January 1995 Mr Set Inc and Server Inc (“Server”) entered into a contract pursuant to which payments have been made by Server to Mr Set Inc on behalf of the Appellant in the relevant year.  
(20)	On 1 January 1999 Mr Set Inc and Lob AG (“Lob”) entered into a contract pursuant to which payments have been made by Lob to Mr Set Inc on behalf of the Appellant in the relevant year.
(21)	Neither Server nor Lob are resident in the United Kingdom.
(22)	The Appellant has been assessed to income tax in relation to the payments (“the Payments”) made by Server and Lob in the year ended 5 April 1999.
Self assessment returns
(23)	On 15 November 1999, the Appellant submitted a UK self-assessment tax return which showed a UK loss of £63,869 based on a gross income of £54,601 made up as follows:
-	UK prize money					£11,640
-	Share of world-wide endorsement income
-	Lob: US $11,897 (£7,206)
-	Server: US $59,032 (£35,755)
							£42,961
				Total:			£54,601
Revenue Enquiry
(24)	On 6 December 1999, the Revenue opened an enquiry under section 9A TMA 1970.
(25)	On 17 April 2000, the Respondent issued a closure notice under section 28A(5) TMA 1970 based on the following calculation:
-	UK prize money					£11,640
-	Share of endorsement income
-	Lob:	 US $39,212 (£23,750)
-	Server: US $168,663 (£102,158)
						          £125,908
						Total:		          £137,548
(26)	The closure notice issued by the Respondent calculated an income tax charge of £27,520.40 and a notice of Revenue amendment under section 28(4) TMA 1970 and in accordance with the above figures was issued on 2 June 2000.
Appeal by the Appellant
(27)	The Appellant appealed against the notice of amendment on 26 June 2000. A postponement application was received by the Revenue on 24 July 2000 requesting a postpone of tax in the amount of £25,310.40. The Appellant also made a request for his appeal to be heard before the Special Commissioners.
ISSUES FOR DETERMINATION
(28)	On the basis of the Statement of Case submitted by the Appellant, the following issues arise for determination:
(1)	Does the fact that neither the Appellant nor Server or Lob are UK resident prevent the application of the provisions of Chapter III Part XIII Taxes Act 1988 and the Income Tax (Entertainers & Sportsmen) Regulations SI 1987 No.530?
(2)	Are payments received by Mr Set Inc. on behalf of the Appellant from Server and Lob chargeable to tax by virtue of section 18 Taxes Act 1988, as amplified by the provisions of Chapter III Part XIII Taxes Act 1988 and the Income Tax (Entertainers & Sportsmen) Regulations SI 1987 No.530?
(29)	Whilst the Respondent is content for the list of issues to be formulated in the order set out above, his primary case is that the relevant charging provision is section 18 Taxes Act 1988 as opposed to Chapter III Part XIII of the same Act.
MISS DUCE
(30)	The Appellant is an international tennis player who is resident, ordinarily resident and domiciled outside the United Kingdom.  In relation to the years under enquiry and the subject of this appeal (years ended 1997/1998 and 1998/1999) (“the relevant tax years”) she was a resident of the USA.
Relevant Contracts
(31)	On 24 May 1993 the Appellant and Match Ltd (“ Match”) entered into a contract with the Appellant. On 28 July 1995 this contract was assigned to Courtside Inc. pursuant to which payments of endorsement income have been made to Courtside Inc. on behalf of the Appellant in the relevant tax years.
(32)	On 29 July 1995 Server Inc (“Server”) entered into a contract with Courtside Inc in relation to which payments of endorsement income have been made to Courtside Inc on behalf of the Appellant in the relevant tax years.
(33)	Neither Match nor Server are resident in the United Kingdom.
(34)	The Appellant has been assessed to income tax in relation to payments (“the Payments”) made by Match and Server in the years 1997/98 and 1998/99.
Self assessment returns
(35)	On 26 November 1998, the Appellant submitted a UK tax return for the tax year ended 5 April 1998 which showed a UK net profit of £64,630 based on a gross UK income of £111,620 made up as follows:
-	UK prize money					£21,295
-	Share of world-wide endorsement income
-	Match: 	US $50,910 (£30,968)
-	Server: 	US $97,575 (£59,357)
							£90,325
						Total:		          £111,620
(36)	On 7 October 1999, the Appellant submitted a UK self-assessment tax return for the tax year ended 5 April 1998 which showed a UK net profit of £48,777 based on a gross income of £104,484 made up as follows:
- 	UK prize money						£44,958
-	Share of world-wide endorsement income
-	Match:		 US $31,111 (£18,843)
-	Server: 	US $67,171 (£40,683)
							£59,526
					Total:		          £104,484
Revenue Enquiry
(37)	On 22 December 1999, the Revenue opened enquiries under section 9A TMA 1970 in relation to the Appellant returns for both the relevant tax years.
(38)	On 14 July 2000, the Respondent issued a closure notice under section 28A(5) TMA 1970 based on the following calculations:
1997/98
-	UK prize money					£21,295
-	Share of endorsement income			          £283,877
					 Total:	          £305,172
1998/99
-	UK prize money					 £44,958
-	Share of endorsement income			           £140,310
					 Total:	          £185,268
(39)	The closure notices issued by the Respondent calculated income tax charges of £98,712.80 for the tax year 1997/98 and £48,034.40 for the tax year 1998/99 and notices of Revenue amendment under section 28(4) TMA 1970 and in accordance with the above figures were issued on 1st September 2000.
Appeal by the Appellant
(40)	The Appellant appealed against the notice of amendment on 26 September 2000. Postponement applications were received by the Revenue on 24 July 2000 requesting a postponements of tax in the amount of £81,186.80 for the tax year 1997/98 and £32,313.50 for the tax year 1998/99. The Appellant also made a request for her appeals to be heard before the Special Commissioners.
ISSUES FOR DETERMINATION
(41)	On the basis of the Statement of Case submitted by the Appellant, the following issues arise for determination:
(1)	Does the fact that neither the Appellant nor Server and Lob are UK resident prevent application of the provisions of Chapter III Part XIII Taxes Act 1988 and the Income Tax (Entertainers & Sportsmen) Regulations SI 1987 No.530?
(2)	Are payments received by Courtside Inc. on behalf of the Appellant from Match and Server chargeable to tax by virtue of section 18 Taxes Act 1988, as amplified by the provisions of Chapter III Part XIII Taxes Act 1988 and the Income Tax (Entertainers & Sportsmen) Regulations SI 1987 No.530?
(42)	Whilst the Respondent is content for the list of issues to be formulated in the order set out above, his primary case is that the relevant charging provision is section 18 Taxes Act 1988 as opposed to Chapter III Part XIII of the same Act.
3.	During the hearing further facts relating to Mr Ball were agreed as follows
(1)	At all relevant times (6 April 1997 – 5 April 2000) Mr Ball was based in South Africa.
(2)	Mr Ball :-
a.	had no office in the United Kingdom at all relevant times;
b.	had no property in the United Kingdom at all relevant times;
c.	had no base of operation in the United Kingdom at all relevant times;
(3)	Mr Ball signed no endorsement contracts in the United Kingdom during the relevant times.
(4)	Mr Ball played tennis throughout the world during the relevant times from his base in South Africa.
(5)	At all relevant times Mr Ball’s home was in South Africa and he principally practised tennis outside the United Kingdom.
(6)	Mr Ball spent, in each of the years which follow, the number of days shown in the United Kingdom.
1997/98	 18 days	 Wimbledon 10
 Battersea 6
 Practice 2	
1998/99	 33 days	 Practice 14
 Wimbledon 12
 Battersea 7	
1999/2000	 17 days	 Queen’s 6
 Wimbledon 2
 Practice 9	

(7)	Net International required the personal attendance of Mr Ball for the use of the services as Net International might require within the United Kingdom at no time in the period between 6 April 1997 and 30 April 1998.
(8)	Between the 1 May 1998 and the 5 April 2000 Mr Ball did not make himself available at the request of Net International for the purposes of photography for the advertising material for Endorsed Products or for making promotional appearances on behalf of Net International within the United Kingdom at any time.
4.	The essential facts are that the Appellants are all non-resident professional tennis players who play in the United Kingdom for a limited number of days each year, principally at the Wimbledon Championships.  The arguments at the hearing were based on Mr Ball’s case in which Ball Enterprises, a company controlled by him, a Jersey company managed from Monaco, has granted endorsement rights to a United Kingdom resident company, Net International, and he has personally granted endorsement rights to a non-resident company, Linesman .  In the case of the other two Appellants each of them, or non-resident companies controlled by them, has entered into endorsement contracts with non-resident companies.  
5.	Mr Way contends in relation to all three Appellants that income from non-resident companies falls outside the non-resident entertainers and sportsmen provisions in Chapter III of Part XIII of the Taxes Act 1988.  In relation to Mr Ball he also contends that income of Ball Enterprises from the Net International contract falls outside the Regulations made under Chapter III, and the income received personally from the Linesman   contract falls outside Case I of Schedule D.  
6.	Mr Carr, for the Inspector, contends that the residence of the payer is irrelevant and that a proportion of all the income from endorsement contracts with non-resident companies is taxable under Chapter III, and in relation to Mr Ball the company’s income from the Net International contract falls within the Regulations under Chapter III and the income received personally from the Linesman  contract is taxable under Case I or II. 
Whether income paid by a non-resident to a non-resident company falls within Chapter III
7.	We shall deal first with the taxation under Chapter III of income from a non-resident paid to a non-resident company controlled by the Appellant which depends solely on the construction of what is now sections 555 and 556 of the Taxes Act 1988, of which the relevant portions are set out below:
Section 555
“(1) Where a person who is an entertainer or sportsman of a prescribed description performs an activity of a prescribed description in the United Kingdom (‘a relevant activity’), this Chapter shall apply if he is not resident in the United Kingdom in the year of assessment in which the relevant activity is performed.
(2) Where a payment is made (to whatever person) and it has a connection of a prescribed kind with the relevant activity, the person by whom it is made shall on making it deduct out of it a sum representing income tax and shall account to the Board for the sum.
(3) Where a transfer is made (to whatever person) and it has a connection of a prescribed kind with the relevant activity, the person by whom it is made shall account to the Board for a sum representing income tax.
(4) The sums mentioned in subsections (2) and (3) above shall be such as are calculated in accordance with prescribed rules…. 
(5) In this Chapter—
(a) references to a payment include references to a payment by way of loan of money; and 
(b) references to a transfer do not include references to a transfer of money but, subject to that, include references to a temporary transfer (as by way of loan) and to a transfer of a right (whether or not a right to receive money).
 (6) This section shall not apply to payments or transfers of such a kind as may be prescribed.
…
(8) Where in accordance with subsections (2) to (7) above a person pays a sum to the Board, they shall treat it as having been paid on account of a liability of another person to income tax or corporation tax; and the liability and the other person shall be such as are found in accordance with prescribed rules.

Section 556
(1) Where a payment is made (to whatever person) and it has a connection of the prescribed kind with the relevant activity, the activity shall be treated for the purposes of the Tax Acts as performed in the course of a trade, profession or vocation exercised by the entertainer or sportsman within the United Kingdom, to the extent that (apart from this subsection) it would not be so treated.
 This subsection shall not apply where the relevant activity is performed in the course of an office or employment.
(2) Where a payment is made to a person who fulfils a prescribed description but is not the entertainer or sportsman and the payment has a connection of the prescribed kind with the relevant activity—
(a) the entertainer or sportsman shall be treated for the purposes of the Tax Acts as the person to whim the payment is made; and
(b) the payment shall be treated for those purposes as made to him in the course of a trade, profession or vocation exercised by him within the United Kingdom (whether or not he would be treated as exercising such a trade, profession or vocation apart from this paragraph).
(3) Regulations may provide--
(a) for the deduction…of expenses incurred by other persons in relation to the payment;
(b) that any liability to tax (whether of the entertainer or sportsman or     of another person) which would, apart from subsection (2) above, arise in relation to the payment shall not arise or shall arise only to a prescribed extent.
(4) References in this section to a payment include references to a transfer.
…
(5) This section shall not apply unless the payment or transfer is one to which section 555(2) or (3) applies, and subsections (2) and (3) above shall not apply in such circumstances as may be prescribed.”
The Income Tax (Entertainers and Sportsmen) Regulations 1987 (the Regulations) made under section 558 to give effect to Chapter III came into effect on 1 May 1987.
8.	Section 555 provides a collection mechanism for payments to non-resident sportsmen.  Section 556 deems the sportsman’s activity to be performed in the course of a trade exercised within the United Kingdom to the extent that it would not otherwise be the case.  An obvious example of a payment not being part of the profits of the sportsman’s trade is a payment to a controlled company, which for the moment we can assume is a payment having a connection of the prescribed kind with the relevant activity.  
9.	By virtue of subsection (5) section 556 applies only to payments or transfers to which section 555(2) or (3) apply.  The main dispute between the parties turns on the meaning and effect of section 556(5).  Mr Way contends that section 555(2) has an implied territorial ambit, and that it applies only where the payer can be made to deduct tax, which is where the payer has a “tax presence” in the United Kingdom, meaning residence or a branch, see Clark v Oceanic Contractors Inc (1982) 56 TC 183.  He points out that under Regulation 12 any tax so deducted is set against the taxpayer’s tax, thus linking the collection mechanism with the liability:
  “12(1) Where under these Regulations there is accounted for and paid to the Board an amount of tax which is—
(a)	in respect of a connected payment or connected transfer…
that amount shall, subject to this regulation, be treated as a payment of tax on account of the tax liability (of whatever person) in respect of the connected payment or connected transfer concerned.”
10.	Mr Carr contends that any territorial limitation is a matter of construction of the section, as stated by Lord Wilberforce in Clark v Oceanic at p.227H:
“In my opinion this contention” [that the PAYE mechanism was not intended to apply to a non-resident making payments outside the United Kingdom] “is erroneous, because it is based upon a mistaken application or understanding of the ‘territorial principle.’  That principle, which is really a rule of construction of statutes expressed in general terms, and which as James LJ said a ‘broad principle’, requires an inquiry to be made as to the persons with respect to whom Parliament is presumed, in the particular case, to be legislating.”
In construing the section he contends that one should bear in mind that the normal charge to Schedule D on a non-resident under section 18 is not limited to payments from United Kingdom persons, so, he asks, why should this deemed charge under Schedule D be so limited?  He also contends that any territorial limitation is on what can be enforced, rather than what is chargeable.  Clark v Oceanic is a case where this distinction was made; it was conceded that the employment income was taxable (see p.217C) and the only issue in the case was whether the PAYE collection mechanism applied.  He also draws attention to the possibility of payments being excluded by being prescribed under section 555(6), so that the effect of the cross-reference to section 555(2) has the effect of excluding such prescribed payments from section 556.
Reasons for our decision
11.	We start by repeating section 556(5):
“(5) This section shall not apply unless the payment or transfer is one to which section 555(2) or (3) applies….”
We also repeat sections 555(2) and (3): 
“(2) Where a payment is made (to whatever person) and it has a connection of a prescribed kind with the relevant activity, the person by whom it is made shall on making it deduct out of it a sum representing income tax and shall account to the Board for the sum.
(3) Where a transfer is made (to whatever person) and it has a connection of a prescribed kind with the relevant activity, the person by whom it is made shall account to the Board for a sum representing income tax.”
12.	The question is accordingly: to what payments does section 555(2) apply?  The following are possible answers:
(a)	The “case” to which the subsections apply: a payment or transfer made to whatever person having a connection of a prescribed kind with the relevant activity;
(b)	The “legal subject” and “legal action” of the subsections: the person by whom the payment is made in fact deducts tax and accounts to the Board, or where the person by whom the transfer is made in fact accounts to the Board for tax;
(c)	A variation of (b) but applying where the person should deduct and account for tax (payments), or account for tax (transfers), whether or not he does so;
(d)	Payments or transfers within subsections (2) and (3) taking into account the other relevant provisions of section 555, namely the inclusion of loans in references to payments (and temporary transfers and transfers of a right, but not transfers of money, in references to transfers) in subsection (5), and the exclusion of prescribed payments and transfers in subsection (6).  (The remainder of section 555 does not seem to be relevant as it concerns the content of regulations or the treatment of the “sum” i.e. the tax.)
13.	At first sight the interpretation in paragraph 12(a) is the most likely as it describes the payments and transfers to which subsections (2) and (3) apply.  However, both the operative provisions of section 556 contain the same case (although drafted in terms of payments, by subsection (4) references to a payment include references to a transfer):
“(1)  Where a payment is made (to whatever person) and it has a connection of the prescribed kind with the relevant activity…
(2)  Where a payment is made to a person who fulfils a prescribed description but is not the entertainer or sportsman and the payment has a connection of the prescribed kind with the relevant activity…”
There would be no need for the draftsman to limit section 556 by reference to section 555 when he has included the same limitation within section 556.  We therefore discount this interpretation.
14.	The interpretation in paragraph 12(b) links the deeming of the activity to be a trade in section 556 to the operation of the deduction and accounting mechanism in section 555.  At first sight the answer to the question “to what payments does section 555(2) apply?” is unlikely to be found in the part of the subsection specifying who does what on making the payment.  However section 555(8) requires the Board to treat the sum as paid on account of a liability of another person and Regulation 12 treats it as a payment of tax on account of the tax liability (of whatever person) in respect of the connected payment or connected transfer concerned.  Where the liability to account for the tax can be enforced against the payer this interpretation ties the two provisions together.  
15.	Where, on the other hand, the liability to account for the tax cannot be enforced, for example where the payer has no “tax presence” (to adopt the words of Lord Scarman in Clark v Oceanic at page 223E) the effect of this interpretation of section 556(5) is that an activity is deemed to be a trade exercised within the United Kingdom and is therefore taxable only if the collection mechanism can be enforced against the payer. This is quite different from the situation in Clark v Oceanic where it was conceded that the employment income was liable to tax and the only issue was whether the application of the PAYE collection mechanism was limited to a person with a United Kingdom presence.  
16.	It is also the case that if there is an actual trade carried on within the United Kingdom by the sportsman there is no requirement that the receipts of the trade should be paid by persons with a tax presence in the United Kingdom (see paragraph 37 below for the taxation of a non-resident exercising a trade within the United Kingdom).  In the light of this it would be odd for Parliament to deem a trade to be carried on within the United Kingdom only where the receipts derived from a payer with a United Kingdom tax presence.  The result is particularly anomalous where, as in the present cases, the Appellants have made self-assessments.  It would mean that where the taxpayers were taxable only by virtue of Chapter III, for example, on payments made to companies controlled by each of them receipts included only those paid by a person with a United Kingdom tax presence, when receipts of an actual trade included receipts from person not having such a tax presence.  This interpretation adopts an implied territorial limitation.  One may ask why, if the draftsman wanted to incorporate a territorial limitation, he did not do so expressly; he had referred to the non-residence of the sportsman in section 555(1).
17.	The interpretation in paragraph 12(c) contains no separate limitation since deduction and accounting for tax applies to all payments and transfers to which subsection (2) or (3) applied.  We therefore discount this interpretation.
18.	The interpretation in paragraph 12(d) applies a different approach to the interpretation, looking at the whole of section 555 rather than for something in subsections (2) and (3) themselves.  It brings in the limitation of subsection (6):
“(6) This section shall not apply to payments or transfers of such a kind as may be prescribed.”
This approach does not, however, have any effect in relation to the inclusion of loans and the equivalent for transfers by section 555(5) because the incorporation of these is for the purpose of the whole of Chapter III and so references to payments or transfers in loans section 556 automatically include such loans:
“In this Chapter [our italics]—
(a)	references to a payment include references to a payment by way of loan of money; and
(b)	references to a transfer do not include references to a transfer of money but, subject to that, include references to a temporary transfer (as by way of loan) and to a transfer of a right (whether or not a right to receive money).”
If the only effect of section 556(5) is to exclude payments of a kind as may be prescribed, why did not the draftsman merely refer to section 555(6) instead of subsections (2) and (3)?  This is particularly so when the immediately following part of section 556(5) deals with a prescribed exclusion:
 “…and subsections (2) and (3) above [i.e. of section 556] shall not apply in such circumstances as may be prescribed.
19.	At this point we have considered four possible interpretations, discarded two of them and found neither of the remaining two particularly convincing. Although the parties did not refer us at the hearing to the pre-consolidation legislation in Schedule 11 to the Finance Act 1986, it was included in our bundle of documents and we consider that there is sufficient ambiguity in section 556(5) to entitle us to look at it in accordance with the principles in R v Secretary of State for the Environment ex p. Spath Holme Ltd [2001] AC 349.  Lord Cook at p.400D regarded a provision as ambiguous if reasonably open on orthodox rules of construction to more than one meaning.  We consider that this is the case here.  The equivalent pre-consolidation provision is paragraph 6(2) of Schedule 11:
“This paragraph [corresponding to section 556] shall not apply unless the payment [which by paragraph 6(4) includes a transfer] is one to which paragraph 2 [corresponding to section 555] applies.”
20.	In other words, it is equivalent to a cross reference in the current legislation to a payment or transfer within section 555, rather than to subsections (2) and (3) of section 555.  This is a further indication that the possibilities set out in paragraphs 12(a), (b) and (c), which concentrate on subsections (2) and (3), are not intended, and that paragraph (d) which looks at the whole of section 555 is to the preferred.  The pre-consolidation wording also removes the force of our objection that it would have been easier for the draftsman to have referred to section 555(6) instead of subsections (2) and (3).  Originally he merely referred to the whole of what is now section 555.  While still finding it odd that the draftsman did not refer to the exclusion of prescribed payments and transfers by section 555(6) this is the less bad of the two remaining interpretations, and so we adopt it.
21.	On this basis, section 556 applies to payments made by non-residents to non-resident companies, which is the only issue of principle in the appeals of Mr Set and Ms Duce.  We shall deal with the issue of apportionment later.
Mr Ball: payments under the Net International contract
22.	Since Net International is a United Kingdom resident company the issue previously considered does not arise, but Mr Way contends that such payments are not caught by the Income Tax (Entertainers and Sportsmen) Regulations 1987 (the Regulations).
23.	We can summarise the relevant parts of the contract dated as of 1 April 1993 between Net International and Ball Enterprises as follows
(1)	The contract recites that Net International desire to obtain the right to use the name, likeness, and endorsement of Mr Ball in connection with the advertisement and promotion of Net International Products (defined to mean tennis racquets, grips, racquet thermo bags and tennis balls).
(2)	By clause 2 Ball Enterprises grants the exclusive right and license to use the Ball Identification (defined to mean any words or symbols or photographic or graphic representations or combinations thereof which identify Ball including without limitation, Ball’s name, likeness, signature, initials, statements and endorsements) throughout the world during the period of the contract (1 April 1993 to 31 March 1998) in connection with the manufacture, distribution, sale, advertisement and promotion of Products.
(3)	Clause 5 provides for an annual retainer which is subject to reduction by various percentages related to his ATP ranking if it falls below 20, with provision for renegotiation if his ranking falls below 70 and termination if the parties fail to reach agreement.
(4)	Clause 6 provides for a bonus if he is the winner, runner-up or in the semi-final of various tournaments (including Wimbledon), and a further bonuses of varying amounts for achieving an ATP ranking of between 1 and 8.
(5)	Net International are to supply Ball with Endorsed Products (those Products promoted in connection with the Ball Identification) for his own use, and he will use them while competing, practising, playing and coaching.  They will also provide new models of racquets for testing by him with a view to their being adopted in place of the existing model.
(6)	Ball Enterprises will procure his personal attendance for the purpose of advertising and promoting the Endorsed Products for a maximum number of days, but there is to be no reduction in the payments if the whole time is not used. (It is an agreed fact that he was not required to do so in the United Kingdom in the years under appeal.)
(7)	Payments are reduced under clause 17 if he is unable to compete in tournaments for three consecutive months, with greater reduction if he is unable to play for five consecutive months with a right to renegotiate if it extends to six consecutive months.
(8)	There is a reduction if he fails to play in at least one tournament in each of Japan, the Far East and Australia with different percentage reductions for each of them.
24.	A further contract was made on 24 August 1998 between the same parties for the period 1 May 1998 to 30 April 2001 (for some reason April 1998 does not seem to be expressly covered by either contract).  While there are differences it is materially the same as the earlier contract.
25.	The relevant parts of the Regulations are as follows.  Regulation 2 defines entertainer to include sportsman
“‘entertainer’ means any description of individuals (and whether performing alone or with others) who give performances in their character as entertainers or sportsmen in any kind of entertainment or sport; and ‘entertainment or sport’ in this definition includes any activity of a physical kind, performed by such an individual, which is or may be made available to the public or any section of the public and whether for payment or not;” 
Regulation 6 defines relevant activity:
“6—(1) Subject to this regulation, any activity performed in the United Kingdom by an entertainer (whether alone or involving others) of any of the descriptions in paragraph (2) is an activity of a prescribed description (‘relevant activity’) for the purposes of [section 555 of the Taxes Act 1988] and these Regulations. 
(2) A relevant activity to which paragraph (1) refers is an activity performed in the United Kingdom by an entertainer in his character as entertainer on or in connection with a commercial occasion or event and includes— 
(a)  any appearance of the entertainer by way of or in connection with the promotion of any such occasion or event; 
(b) any participation by the entertainer in or for sound recording, films, videos, radio, television or other similar transmissions (whether live or recorded). 

(3) A commercial occasion or event to which paragraph (2) refers includes any description of occasion or event— 
(a) for which an entertainer (or other person) might receive or become entitled, for or by virtue of the entertainer’s performance of the activity, to receive anything by way of cash or any other form of property; or 
(b) which is designed to promote commercial sales or activity by advertising, the endorsement of goods or services, sponsorship, or other promotional means of any kind. 

(4) For the purpose of this regulation— 
 ‘film’ includes any record (with or without sound), however made, of a sequence or series of one or more visual images, which is a record capable of being used as a means of showing part or all of that sequence or series as a moving or still picture, and ‘record’ in this definition includes video.” 
Regulation 3 defines those payments that have a connection with a prescribed kind with the relevant activity:
“3. This regulation applies for the purposes of and subject to the provisions of paragraph [section 555 of the Taxes Act 1988] and these Regulations. 
(2) Subject to paragraph (3) a payment or a transfer made for, in respect of, or which in any way derives either directly or indirectly from, the performance of a relevant activity, has a connection of a prescribed kind with the relevant activity. 
(3) The following are descriptions of payments to which paragraph (2) shall not apply— 
(a) a payment out of which a sum representing tax is or falls to be deducted under the Taxes Act apart from [Chapter III of Part XIII] or these Regulations; 
(b) 

(i) a payment (to which paragraph (ii) applies) made to a person who is resident and ordinarily resident in the United Kingdom, not being a person who is connected with or an associate of the entertainer concerned; 
(ii) a payment to which paragraph (i) refers is a payment— 

(a) which falls to be made for the provision of services ancillary to the performance of a relevant activity, and 
(b) which is of an amount or value which does not exceed what would be reasonable for that provision between persons dealing with each other at arms’ length; 

(c) any payment made to an entertainer in respect of the proceeds of sale of records deriving from a sound recording made by the entertainer, being payments calculated by reference to those proceeds or payments on accounts of those proceeds.” 
26.	Mr Way contends that payments under the Net International contract do not fall within Regulation 6(2)(a) because when Mr Ball plays at, say, Wimbledon, although Wimbledon is a commercial occasion, he is not promoting Wimbledon.  Secondly, while he agrees that Regulation 6(3)(a) would include winnings at Wimbledon whether paid by Wimbledon or as a bonus under the Net International contract, Regulation 6(3)(b) would not include any other payments because Wimbledon is not an occasion “designed to promote commercial sales or activity by advertising, the endorsement of goods or services, sponsorship, or other promotional means of any kind.”  
27.	Mr Way also puts forward an alternative argument that one should first identify the total amount paid to Ball Enterprises in the years under appeal; secondly exclude payments that relate to purely passive amounts, being payments for the Ball Identification (see paragraph 23(2) above); thirdly, remove payments for the service of testing new models of racquets; lastly, apply a formula of the number of days connected with tennis (whether playing or practising) spent in the United Kingdom over the total playing and practising days in the year (330 days allowing for holidays).  Expenditure is deducted from the final figure.
28.	Mr Carr concentrates on the opening words of paragraph 6(2):
“A relevant activity to which paragraph (1) refers is an activity performed in the United Kingdom by an entertainer in his character as entertainer on or in connection with a commercial occasion or event and includes…”
and paragraph 6(3):
“A commercial occasion or event to which paragraph (2) refers includes any description of occasion or event…”
without the words of inclusion which are designed to extend the definitions.  He contends that playing at, for example, Wimbledon is clearly (a) an activity (b) performed in the United Kingdom (c) by a [sportsman] in his character as [sportsman] and (d) on, or in connection with, a commercial occasion or event.  Accordingly it is a relevant activity.  One then goes to Regulation 3 to see whether the payment has a connection of a prescribed kind with such activity: 
“Subject to paragraph (3) [which excludes payments from which tax falls to be deducted under other provisions, and, broadly, payments to unconnected persons] a payment or a transfer made for, in respect of, or which in any way derives either directly or indirectly from, the performance of a relevant activity, has a connection of a prescribed kind with the relevant activity.” 
Mr Carr accordingly contends that the relevant question is to ask whether the payments from Net International are in respect of, or derive directly or indirectly from, the relevant activity of playing at Wimbledon (or elsewhere in the United Kingdom).  He contends that clearly they are because in particular: (a) the payments are connected with playing in that under clause 5 the annual retainer is reduced if his Association of Tennis Professionals (ATP) ranking falls below 20 and the contract can be renegotiated or terminated if his ranking falls below 70; (b) under clause 6(a) the company receives a bonus payment for his being the winner, runner-up or in the semi-final at Wimbledon; (c) under clause 6(b) the company receives a bonus if his ATP ranking is in the top 8, which will be affected by his performance at Wimbledon; (d) under clause 16 he could be asked (but was in fact was not in the years under appeal) to make a personal appearance in the United Kingdom to promote products; (e) under clause 17 deductions in the payments are made if he is unable to compete in tennis tournaments; (f) under clause 10 he must play with endorsed products.  In all these cases there is a connection between playing, and accordingly playing in the United Kingdom, for example at Wimbledon, and the amount of the payments.
29.	We agree with Mr Carr’s analysis.  We consider that it is clear that the activity falls within the opening words of paragraph 6(2) without needing to consider the words of inclusion in the rest of sub-paragraph (2), or in sub-paragraph (3).  Playing at Wimbledon (and similar activities in the United Kingdom) is therefore in our view a relevant activity.  We also agree with Mr Carr that the payments under the Net International contract have a connection of a prescribed kind with that activity for the reasons contended for by Mr Carr.  They are in respect of, or derive directly or indirectly, from playing at Wimbledon since the amounts are connected with playing generally, and therefore with playing in the United Kingdom either directly, in the bonus for performance at Wimbledon, or indirectly in that performance at Wimbledon affects his ATP ranking.
30.	On Mr Way’s alternative argument, Mr Carr did not accept the deductions for passive activities as he contended that all the payments were connected with playing.  We agree, having decided that all the payments derive directly or indirectly from the relevant activity.  We deal next with the method of apportionment.
Apportionment 
31.	Regulation 16 provides for apportionments to be made of payments or profits “as is just and reasonable.”  Accordingly we have to determine what proportion of the payments and expenses under the Net International contracts, in relation to Mr Ball, and similar contracts, in relation to the other Appellants, are liable to tax in the United Kingdom.  
32.	Since Mr Way argued that on the interpretation of section 556 and the Regulations no amount was taxable he did not really address the question of apportionment, although as an alternative he did put forward in relation to Mr Ball and the Net International contract an apportionment based on playing days (including practising) in the UK to all the days in the year excluding holidays (330 days).  The Inspector had made the apportionment based on days of UK tournaments out of days of all tournaments (whether or not, in each case, he played on all days of the tournament).  
33.	Mr Carr argued that since the Appellants had not put forward arguments against the Revenue’s apportionment they were bound by the Inspector’s apportionment as the “assessment stands good.”  
34.	Since Mr Way did put forward an alternative apportionment for Mr Ball and alternative figures for all the Appellants, even though he did not develop it much, we consider that the method of apportionment was in issue and was difficult for Mr Way to develop in the course of an argument that the payments were not taxable at all.  Having decided the interpretation of section 556 and the Regulations in favour of the Inspector in principle, we consider that it is right, in spite of Mr Carr’s submission, to invite further submissions and evidence as to apportionment if the parties cannot agree the figures.  
35.	We would comment that we consider that Mr Way’s formula is not comparing like with like and ignores travelling days.  The Revenue’s formula does compare like with like but may suffer from the objection that if an Appellant is say knocked out in the first round of Wimbledon, why should the rest of Wimbledon count into the UK proportion, although the same will be true of the figure for all tournaments in the denominator of the fraction.  It could be that an apportionment based on the number of days played in tournaments might be a better measure but we are not deciding this as we did not hear any argument on it.  It may also be that different formulae give a just and reasonable to different players.  We leave open for discussion whether practice days should be included.  If agreement cannot be reached, we shall arrange a further hearing at which we shall consider it as part of determining the figures.
Mr Ball: Linesman  contract
36.	The contract of June 1996 between Linesman and Mr Ball is different from the contract with Net International in that Linesman is a non-resident payer and payments are made to Mr Ball personally.  Under the contract Mr Ball endorses Linesman    sportswear.  A charge under Schedule D takes precedence over Chapter III because section 556(1) provides that:
“the activity shall be treated for the purposes of the Tax Acts as performed in the course of a trade, profession or vocation exercised by the entertainer or sportsman within the United Kingdom, to the extent that (apart from this subsection) it would not be so treated.”
37.	Section 18 of the Taxes act 1988 provides that:
“Tax under this Schedule [D] shall be charged in respect of—
(a)	the annual profits or gains arising or accruing—
…
(iii) to any person, whether a Commonwealth citizen or not, although not resident in the United Kingdom from any property whatever in the United Kingdom or from any trade, profession or vocation exercised within the United Kingdom….
38.	The issue is whether Mr Ball is exercising a trade within the United Kingdom, which is a question of fact.  Mr Way submitted that Mr Ball was based in South Africa, played tennis throughout the world, had no base of operations in the United Kingdom and received no income in the United Kingdom pursuant to the Linesman    contract.  Playing tennis in the United Kingdom was not in itself sufficient; that was akin to trading with, rather than within, the United Kingdom.  Mr Carr submitted that the right question was not whether wearing Linesman sportswear established that he is trading, but whether, when he is playing in the United Kingdom, he is exercising his trade of a professional tennis player.  He submits that the correct test is (in the words of Atkin LJ in Smidth & Co v Greenwood 8 TC 193, 204) “where do the operations take place from which the profits in substance arise?”  His answer is in Wimbledon when he is playing there.
39.	We agree with Mr Carr.  When playing at Wimbledon he is exercising his trade within the United Kingdom.  A proportion of the payments under the Linesman    contract are accordingly part of the receipts of that trade.
Double taxation agreements
40.	We should mention that it is common ground that the double taxation agreements with the United States (in relation to Mr Set and Ms Duce) and South Africa (in relation to Mr Ball) do not prevent any of the charges to tax on the Appellants.
41.	We should also mention that Mr Carr showed us the April 2002 Commentary to article 17 of the OECD Model Tax Convention (there do not appear to be any changes to the Commentary to article 17 between this and the current January 2003 version) and asked us to deduce from it that advertising and sponsorship income was within the charge to tax in the state where the activity takes place.  Quite apart from the fact that the relevant parts of the Commentary have been changed since the legislation, we do not think that it is a proper use of the Commentary to interpret internal law, and accordingly do not take this into account.
Result
42.	Accordingly we dismiss all three appeals in principle and leave the parties to endeavour to agree the apportionment and the resulting figures.

J F AVERY JONES

THEODORE WALLACE
SPECIAL COMMISSIONERS

SC 3091/02 (Set), SC 3101/02 (Duce), SC 3102/02 (Ball)

Authorities referred to in skeletons and not referred to in the decision:
Sulley v Attorney-General 2 TC 149
Grainger and Son v Gough 3 TC 467