Tax Returns

By on Nov 29, 2008 in Finance | 0 comments

It’s probably safe to assume that Donal Macintyre isn’t that much of a football fan. Not because he gives the impression of being someone that hates football, even though his previous dalliance with the game was an expose of the “Chelsea Headhunters” for the BBC. I say this because, if he was familiar with the peculiar way in which football finances work, he would have known that very few people within the surprised at the fact that football clubs sinking into a mire of debt are getting millions of pounds worth of tax money written off as they enter into Company Voluntary Arrangements (CVAs) to save off the threat of liquidation.

Macintyre’s “shock” revelation isn’t that much of a shock at all. More than £25m has been written off by HMRC (for our foreign viewers, that’s the taxman) over the last eight years. No part of this is a shock. A CVA is a legally binding agreement between an insolvent company and its creditors to pay off a proportion of its debts and stave off closure. Creditors receive a guarantee of a proportion of their money back – money that would be lost if the company closes. The company gets a guarantee of no further legal action from creditors and the opportunity to get some breathing space to improve its cashflow and get its house in order. Forty-two football clubs have had spells in administration over the last eight years, and Football League rules insist that a club can only exit adminstration with a CVA in place, as Leeds found out to their cost the summer before last.

Where, then, does the taxman come into this? After all, if you or I decide not to pay our tax for a couple of years, the chances are that we will be sent to prison. Of course, it’s different in the case of limited companies, for whom the directors (as the name suggests) have only a limited liability for any debts incurred. In the case of companies that fall into financial difficulties, however, it used to be that HMRC had “preferred creditor” status, meaning that they had no obligation to accept reduced offers of payment. In cases in which football clubs hadn’t been paying their tax bills, they would reject any offer in a CVA that didn’t involve them being paid in full. They lost this status, however, in 2003, and their position has been seriously weakened as a result. This means that HMRC now takes a much harder line when dealing with insolvent companies of all hues.

The problem that this causes is that a critical FA rule is the one that still treats all football debts as preferred creditors, which have to be paid in full. The FA’s rationale for this is simple: without this rule, there is nothing to stop clubs spending heavily on players that they have no intention of paying for. Contractual obligations towards would mean that clubs left out of pocket would, theoretically, have no way of getting their money or their player back. It does, in a manner of speaking, make some sort of perverse sense. It doesn’t, however, seem to make much of a difference in the sense of the number of clubs that seem to be insolvent.

Unfortunately, MacIntyre misses the target, and he misses it because the real problem is not the fact that taxpayers have lost £31m over the last eight years. With all due respect to the average British taxpayer (of which I am one myself), that’s nothing. In terms of the amounts of money that the HMRC deal with. The problem isn’t even really with what happens when clubs enter into CVAs. Dividends on CVAs and IVAs (the equivalent arrangement for an individual) have been plummeting for years. The average dividend used to be between 50% and 70% of the total owed to creditors, but this has fallen to around a third of that level and are heading lower. When Leeds United tried to enter into a CVA last year, they offered just 1p in the pound as a dividend. This offer was eventually increased to 11% and was accepted. The point is this: how do they get themselves into this state in the first place? Why don’t they just pay their tax bills on time?

The answers to these questions are fairly simple too, if also unpalatable. Clubs are short-termist, badly run and spend too much money chasing hollow dreams. The morals of the modern club don’t extend much beyond spending as much money as they possibly can on players and, well, bugger everything else. Even taking into consideration the argument that football clubs are unusual in that the players are both the wage bill and, ultimately, the product, the figures of between fifty and ninety per cent of their average annual turnover on their wage bills. By the time that clubs are applying to enter into CVAs or calling in the administrators, it’s too late. This is precisely why we should be applauding attempts to regulate football’s finances, even if there is more to the stories in the press than you might think. Hell, they wouldn’t even let the FA audit their books to check that money given to them for youth development was being spent correctly.

There have been tentative moves towards regulation, further down the ladder. The Blue Square Premier now insists on seeing the books of its member clubs and will issue against sanctions against clubs that are acting improperly. They have introduced a salary cap. It’s a start. However, until the game is properly regulated to prevent clubs from getting into such a state that they have to call in insolvency practitioners in the first place, nothing much will change. It is a reflection of MacIntyre’s apparent lack of understanding of the game that he doesn’t seem to appreciate in his evaluation of the situation regarding HMRC, but this doesn’t excuse the clubs, who may have to need to be forced to take a responsible attitude towards their finances.

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