Having produced an esports tax guide for UK-based streamers, YouTubers and people working in esports, we’ve now put together a separate one especially for minors aged under 16.
What should youngsters and their parents be aware of when receiving payments, how can they fill in a tax return if they don’t have a National Insurance Number, and what if they get paid in a different currency? We enlisted the help of legal experts Chris Paget from Sheridans and David Lloyd from Saffery Champness to give us the answers.
What should under 16s working in esports be aware of around different legalities and tax, and what should their parents be aware of?
David Lloyd: It doesn’t matter if you’re 14 earning a certain amount a year, or 18 and above, you still need to pay tax on it.
It also depends on individual scenarios. We look after a lot of Fortnite gamers – Epic deducts 30% off the winnings in withholding tax, before they pay out. The problem is now, where gamers are minors, publishers and other businesses don’t pay prize money to the gamers, they pay the gamers’ parents. However, the gamer is the one subject to tax on the income and can take a tax credit if possible.
There’s also the point around US tax whereby US tax is only due on prize money where the event was physically held in the US. So where Epic is withholding 30% tax in the US, gamers can submit US tax returns to get a refund of that amount, if they have not participated in any competitions in the US. Obviously their UK tax liability will increase because they haven’t got the US tax credit against it. So it’s a number crunching exercise to assess whether the refund from the US, less our fees for filing the US tax return, actually is financially worthwhile.
We took on a 15-year-old Rocket League player recently, and there’s something around employment law whereby his contract with his team has to be an employment relationship (but this is Chris’ domain). He has been set up as an employee of his team, so we’ll do a tax return for him on top of his prize money and he’ll get a deduction from PAYE when it comes to it. This is just an example of how the individual scenarios can differ.
It sounds like parents and young esports talent could lose out if they’re not sure of the options around this, for example if they try to fill in a tax return themselves.
David Lloyd: They could lose out (as explained in the ‘what should they consider’ section below). If you’re seeking a federal refund from the US, you have three years to do it from the deadline of submission. For 2017, the original deadline would have been June 15th 2018, so you have until June 15th 2021 to claim for that year, and so on, annually. We’ve had some people coming to us saying they had this issue, and we’ve filed double US tax refunds for them.
We’ve seen some players earn $3,000 in prize money and have $900 of withholding tax, and at that level it’s not worth considering, because it’s going to cost £1,500 to get a return filed. But if we’re talking about a much higher amount in prize money, then it’s worthwhile. It’d be easier if Epic didn’t withholding on those playing in the UK or Europe or anywhere outside the US.
Paying tax and having a bank account if you’re under 16
David Lloyd: The advice in British Esports’ comprehensive tax guide is correct: ‘If you are aged under 18 and earn more than £12,500 in a single year, you will need to pay tax on this. If you’re not sure how to pay tax yourself, you can get someone else to submit a tax return on your behalf, acting as an agent or accountant for you. Ultimately, you’re still responsible for keeping records of your total income and expenditure, as that’s the information you’ll need to submit a tax return, or provide to someone else to do so on your behalf.’
The youngest person we helped was 13 years old. Their mother received the money and transferred it to the personal account of the gamer, who had his own personal account at a young age.
Some parents set up a separate account for prize money their children have made. This would be set up in the parents name but technically it’s the gamer’s money and tax would still be due on it.
Generally, you have to be at least 11 years old to open your own bank account, though it depends on the bank, as the minimum age may be higher for some. Some banks will have different accounts depending on the account holder’s age, for example there are more types of accounts available to those aged 16+.
How can you submit a tax return if you don’t have a National Insurance (NI) Number?
David Lloyd: You get one at 16 years old. You can still register to declare tax without an NI number, to get a Unique Taxpayer Reference (UTR) number, but it takes longer and is more difficult.
You have to fill in an SA1 form to register with HMRC (online is easiest and more likely to be processed quicker than any postal form). There will be a box that says ‘if you have no NI number, please explain why’, and you say you’re under 16. So you can get a UTR this way, but you’re at HMRC’s disposal around this and can’t easily chase it up.
What should they consider when declaring tax – will they need an agent?
David Lloyd: Your existing tax guide covers a lot here, so I’d advise referring to that.
If someone earned less than £50,000, they will pay 20% tax in the UK on £37,500, after the personal allowance and before any expenses. But if they’ve had a full 30% of that £50,000 withheld, it’s a specific situation where you have at least a 10% of the withholding tax that cannot be claimed in the UK and this creates a mismatch, where it’s beneficial to get a US tax refund.
Income/expenses can be the usual – high speed internet, gaming chair, equipment, like a standard self-employed taxed person. But I’d recommend getting an accountant or someone’s advice around that kind of US piece and withholding taxes, if they’re being paid by someone from outside of the UK.
What’s the law for under 16s when signing contracts?
Chris Paget: In English law, the age of majority (i.e. the age in which you are deemed mature enough to be able to enter into contracts and legal relationships of your own volition) is 18. The only caveat for that are contracts for necessaries, which are education, food and shelter/accommodation (and potentially apprenticeships in some circumstances if it’s your livelihood). Anything else outside of that is voidable at the child’s discretion. That can cause a headache in esports and wider entertainment spaces because a lot of talent are aged under 18, which is why parents/guardians are often asked to sign on behalf of children.
What that does, if structured correctly, is it creates two forms of legally binding relationships. One – a relationship between the parent to ensure that their child complies with the terms of the contract, so you enforce the contract through the parent or the guardian. The second is that if done correctly, with the child on reaching the age of 18 (as the contract will provide that the parent will ensure their child ratifies the contract when attaining the age of 18 i.e. attaining legal majority).
The law is that if a contract is entered into by a minor, under the age of 18, they can still choose to void it after the age of 18, provided they don’t delay unreasonably in doing so. It’s why you want people to be ratifying contracts upon reaching the age of 18.
Do you have any general business advice for them and their parents – what should they bear in mind when signing a contract?
Chris Paget: For parents, you need to be aware of the risks you’re taking on. You are effectively contractually agreeing to ensure that your child performs the terms of that contract. You don’t as a parent have the ability to ensure that’s going to happen, so the parent is effectively taking on the legal risk. It’s important, as with every contract that both child and parent understand what the risks are, what the terms of the contract say and what the obligations of them are before they enter into the contract.
What are the laws for under 14s, how do they differ with under 16s?
Chris Paget: When we’re talking about esports, the reality is it’s unlikely to be different, because the basic premise still stands: 18 is the age of majority. However, there are certain things that can happen at 14 and 16, for example apprenticeships and employment because 16 is the age you can leave education.
You can take on part time work under 16, as well as be employed to do ‘light work’ (work that is unlikely to be harmful to the child’s safety, health or development, to their school attendance or participation in work experience), but over 16 you can go into full-time employment.
The reality is that in UK esports, you’re unlikely to be employed under 16. In the UK at least, there won’t be that many teams that will work on an employer/employee basis, most people will be contractors with freelancers agreeing to provide services, as a streamer or player for example. And it’s also likely to be the case that there aren’t many under 16s at the top of elite esports competition. So there’s always that to bear in mind.
Broadly speaking, those contracts will still be voidable at the minor’s discretion. It comes back full circle to the parents having to guarantee the performance of those contracts.
Many freelance contracts won’t be long-term so the risk will be mitigated.
Advice will of course vary per team. Advice when signing for a top pro team would be very different for a grassroots amateur org.
David Lloyd: Ages don’t matter. You pay your tax if you’ve earnt your money. You’re either over 16 or under 16.
The whole US tax refund piece is a number crunching exercise and depends on each individual’s circumstances. The only other thing I’d say is that some of the young guys that do earn a lot more money might set up companies, but again, this depends on individual circumstances.
What’s the ability for under 16s to register or be a part of a limited company? Or should they stick to being a sole trader?
Chris Paget: In essence, anybody can hold shares in a company, but the same contractual law around necessaries still applies.
In a company, you have shareholders and you have directors. Nobody under the age of 16 can be a director of a company, but an under 16 can be a shareholder. However there are a number of risks to the company moving forwards on that basis, because of the law of necessaries and that holding shares are not deemed to be necessary.
If shares are being held for the benefit of the child, it’s either that a trust owns those shares or a parent or adult owns it, because the benefit is there for the child. That’s why the law of trust comes in.
The reality is unless you’re uber successful, you’re not going to want to register a company and contract through a company. Yes there are legal benefits to doing so (given companies are recognised legal entities), but arguably that benefit isn’t helpful if you’re under 18 anyway, because the company is bound because it’s the company, not an individual child who’s contracting. Practically speaking, you’re unlikely to be earning enough money to make it worthwhile from a tax perspective to go through the rigmarole of doing it (but this is David’s domain)!
If you’re a streamer under 16, it may make more sense to run as a sole trader, from a tax, cost and complexity perspective, but always seek tax advice before entering into any arrangement.
From my experience, the most popular or successful young streamers or players will tend to have companies set up, as they may be earning significant amounts of money. The money stays within the company and can be drawn out at a later date. But it’s complicated – and advice should always be sought.
David Lloyd: You can be a shareholder if you’re under 16, but you can’t be a director until you’re over 16. A minor’s parents or guardians, presumably, will be directors.
Any dividends or salaries will go to the shareholder, obviously. We have set up companies for players and it can be worth doing if you have high income. As a rough example, based on income of £50,000, after personal allowance, the income tax rate of 20% and NI at 9% on £50,000, compared to a corporation tax rate of 19%, you’re technically going to pay less tax going via a company. But then you have the issue of income tax being due on extracting funds from the company (via salary or dividends) as well as additional costs of company accounts and tax returns so you are going to be better off self-employed at this point.
The company piece is very much dependent on the individual’s circumstances so it wouldn’t be something I would suggest that’s widely thrown around – as Chris has alluded to above. It’s been useful for those very successful (in the Fortnite space in our experience, but applies to all gamers) where prize money has been in the hundreds of thousands but it’s not a one size fits all piece of advice.
Companies can be worthwhile but it is based on individual circumstance and proper advice should be taken.
This article does not constitute legal advice, so please do not rely on it. Always take advice specific to your situation and the relevant facts and circumstances. If you have a specific question, contact an expert for legal advice or HMRC for any tax-related issues.
About the interviewees:
Chris Paget is a specialist sports and esports solicitor and Partner at Sheridans. Visit the Sheridans website or contact Chris directly on Twitter @chrispaget_ or at [email protected] for more information.