E-Sports Players - tax matter to consider

The growth of E-Sports in recent years has been meteoric and all the signs are that this trajectory will continue. According to a study by Statista, the global revenue for E-sports is due to hit USD 2.9 billion by 2025 and the earnings of those involved in the sport, particularly at the top end, are growing exponentially. Just recently a UK E-sports team won £7.4 million at The International 2022 a World of War Warcraft contest in Singapore.

With greater financial rewards and commercial opportunities, comes increased regulatory scrutiny. Tax authorities around the world, including HMRC in the UK, are quickly getting up to speed with the varied sources of E-Sports income and looking at the tax affairs of those involved.

From streamers playing at home for ‘donations’, to the top international professional players, professional E-Sports players usually start very young. Yet, if successful, they can quickly earn significant amounts of money. But be under no illusions, tax applies whatever the age of the player and, as a player’s career develops, the types and sources of income they receive may expand – adding complexity to their tax affairs.

The basics

The first step is for a player to consider whether they need to register with HMRC and submit a tax return. In other sports, such as football, the only source of a player’s income at the start of their career is usually employment income (from the club) and any self-employment income comes later (e.g. sponsorship income). Employment income is usually taxed at source, under PAYE. However, self-employed income is not usually taxed at source and it is the individual’s responsibility to declare this to HMRC.

While E-Sports players may well be employees of teams, in many cases they will have at least some sources of “non-employment” income. Once such income exceeds the £1,000 “trading income allowance” for a year, it becomes taxable and the player may need to submit a personal tax return (depending on the level of their other income). Failure to do so and “notify” HMRC can lead to penalties and interest charges on top of any tax payable (even public ‘naming and shaming’ if HMRC judge you to be a “Deliberate Defaulter”). So it is usually sensible to get advice and support from a professional tax adviser at an early stage to keep your tax affairs in order.

Key sources of income and their UK tax impact

1. Playing for teams

   Teams often engage E-sports athletes to play in tournaments. Any remuneration that the player receives from these teams could be either be treated either as self-employment or employment income depending on the contract and the practical arrangements. The tax rules are complex but the distinction between “employment income” and “self-employed income” (your employment status) is important as it affects who is primarily responsible for declaring and accounting for tax and National Insurance Contributions (NIC) liabilities to HMRC.

   Teams themselves must be particularly careful to consider the employment status of their players – this is a major focus area for HMRC. If the players are employees, the teams will be responsible for operating PAYE (and paying Employer’s NIC). This becomes even more complex where teams have players on their books from several different countries.

2. Tournament Winnings

   With rapidly growing viewing figures (175 million hours of viewing for the 2021 League of Legends World Championship), high profile sponsors are now involved and increasing prize money is on offer.

   In some cases, the prize money will be paid to the team, and any amounts paid out to players may be employment income. However, E-sports players must carefully consider the tax treatment of any winnings they receive, particularly winnings received directly.

   Whether or not the income is taxable depends upon whether the E-Sports player is “carrying on a trade”. In practice, HMRC will often contend that most E-Sports players are carrying on a trade, particularly those who play at professional tournaments, so any prize money received should usually be declared on their tax return as trading income.

   Particular care should be taken when a player earns prize money outside the UK. Many countries deduct withholding tax at source on earnings. This may be deductible against UK tax liabilities – however again, the position is not straight-forward and early professional advice should be sought to mitigate the risk of "double taxation".

3. Sponsorship and endorsement income

   As in most sports, leading brands will often offer players sponsorship contracts, or may pay them one-off appearance fees. Players may also receive fees for media appearances. There are also growing opportunities for E-Sports players to commercialise their image and enter into similar arrangements as their peers in more “traditional” sports.

   The usual position is that any such income will be taxable as self-employment income and should be included on the player’s tax return. However, in other sports, most notably football, players often hold their image in an image rights company (IRC). If so, any profit arising will be taxed at the Corporation Tax rate (19% in 2022/23) rather than Income Tax rates (up to 45% in 2022/23).

   This approach is potentially problematic in the UK: unlike many other countries, in the UK there is no legal concept of an "image right". In other sports, HMRC often regularly challenge such arrangements, and we understand HMRC is already looking into the image rights arrangements in E-Sports.

4. Streaming income

   Where the earnings of E-Sports Athletes differs markedly from those in other sports is streaming income – in particular, from platforms such as Twitch and YouTube.

   Here, E-Sports athletes are more akin to influencers and other online celebrities. The income players may earn in this way could be payments, for example from YouTube, based on the number of views, or in the case of Twitch from direct “donations” from followers (by card or PayPal (or similar), or virtual currency). Yet even where payments are badged as "donations", it does not mean they are exempt from tax: in the UK they will usually be taxable.

5. International Players

   Non-UK E-Sports players who play tournaments in the UK may fall within the Foreign Entertainers tax rules. Broadly, where a sportsperson (or anyone with a media profile) performs, or gets paid for a personal appearance in the UK, they may be taxable on the proportion of their earnings which are deemed to have been generated by their activity in the UK.

   The position is clearcut where a player physically attends a tournament in the UK. However, it is more complex if the player is playing remotely in a tournament hosted in the UK or is earning endorsement or sponsorship income which it could be argued has a UK source: HMRC may argue that UK tax applies. Equally, UK resident players may have tax liabilities in other countries in which they play or from which they generate income.

6. Summary

   These are the key UK tax considerations for E-Sports players but this is far from an exhaustive list and the position is evolving rapidly as HMRC and other tax authorities around the world get to grips with the unique tax challenges in this industry.

   BDO is a leading tax adviser in sports working with professional players and businesses to manage all the tax risks and compliance obligations that they face and in resolving disputes that have arisen with HMRC. BDO International also operates in 164 countries and we can assist with international taxation matters.

For help and advice, whatever career stage a player is at, please contact Claire McGuigan, Karen Doherty and Lorraine Nelson.