HMRC Go For The Jugular, And The Clubs Only Have Themselves To Blame

HMRC Go For The Jugular, And The Clubs Only Have Themselves To Blame

By on Jan 8, 2010 in Finance, Latest | 8 comments

The cold air that is whistling through football isn’t solely as a result of the recent wintry weather. HMRC are on the move, and their aim is to recoup taxpayers’ money from football clubs that haven’t been paying their bills. They have been busy since the start of the season, having already extinguished Kings Lynn, agreeing a last minute payment plan with Rochdale and forcing a change of ownership at Accrington Stanley, where over £300,000 had to be found – new owner Ilyas Khan, at the last minute, paid £110,000 and stood as guarantor for the remainder. HMRC have also been after a number of non-league clubs, although Kings Lynn were the only terminal casualties.

Why, though, are they behaving like this and are they right to do so? The answer in this question lies partly in changes to the law and partly in the truculence of the football authorities. The root cause of the taxman’s zero tolerance of football clubs is The Enterprise Act of 2002. This new law changed HMRC’s status in cases of insolvency. Prior to it, they had “preferred creditor” status, meaning that they were paid out in full if companies went into administration and entered into Company Voluntary Arrangements. After it, they had to line up with all other creditors and, if a majority (75% pro rata by amount owed) vote in favour of the agreed dividend – which can be as low as 5% of the amount owed – then tough. They’re acting now because it forces clubs into a corner. The January transfer window gives clubs a potential source of ready cash through player sales. There is a better chance of securing payment in full at this time of year than at any other point during the season.

“Football debts” also have the status that would be enjoyed by a preferred creditor. Under FA rules, football debts have to be settled in full and cannot be included in any CVA package. There is, as discussed on here, no legal basis for this. It is a rule of the game, and it is one that clubs cannot avoid. There is a reason for it – to protect competitive balance. The rule is in place to prevent clubs from signing players, entering into administration and only paying a fraction of the agreed transfer fee. HMRC, however, is believed to be very unhappy that, while the taxpayer loses out as millions of pounds worth of tax debts are written off. Their hardline attitude comes from the apparent belief of football clubs that paying tax is optional and that money should be spent on players and their wages rather than meeting one of the most basic of their obligations.

The Christmas period has seen a flurry of winding up orders issued against clubs with outstanding tax debts. Portsmouth, Notts County and Cardiff City are the latest to find themselves facing a date in court. The club described itself as “shocked and surprised” by their order, although there is no reason for anybody to believe that the situation at Fratton Park is anything other than chaotic at present. The players have not been paid on time three times in four months, and they were only paid for last month yesterday after the club missed a self-imposed a deadline.

Notts County, meanwhile, may (or may not) have paid off the amount required to stave off their winding up order, but it is reported that this money is from money for a sponsorship deal that is due to start next season which doesn’t exactly sound healthy. It is believed that the club’s total debt is upwards of £1.5m. The sale of the club to Peter Trembling continues to raise more questions than it answers. Why was it completed so quickly? Was the £1 that Trembling paid that absolute most that could have been realised from the sale? How much of his own money – if any – has Trembling put in? These aren’t questions that have been satisfactorily answered, and it seems unlikely that they ever will be.

Cardiff City are the latest to join the winding up order party, having been petitioned over a reported tax bill of £2.7m. Currently occupying a play-off place in the Championship, they almost certainly haven’t been reigning in their spending on players’ wages. The club has raised £3m through an initiative that persuaded 10,000 people to buy season tickets for next season on the promise that they would be refunded if the club got promotion into the Premier League and that the money would be spent on players during the January transfer window. Even now, the club insists that it has the money to pay its tax bill as well as buying new players, all of which begs the question of why they didn’t pay it before. Why exactly should HMRC have to petition the winding up of the company that owns the club in order to secure the return of our money? This, of course, is another question that probably won’t ever be satisfactorily answered.

All of this brings us back to the question of whether it is right that HMRC should pursue football clubs this aggresivlely, and the answer to this is, of course, “yes”. Football seems to continue to exist in a world in which all that ever matters is what happens on the pitch. Even now, clubs seem fundamentally immoral in their financial dealings. Why should Portsmouth pay hundreds of thousands of pounds per week on players’ wages and not settle their tax bill? Why should Cardiff do the same? And the ultimate responsibility for this sort of fiasco lies with the authorities that run the game. They have it within their power to make it compulsary that all clubs settle all of their debts in full each month before they even start thinking about signing new players or even starting to pay the ones that they already have. It’s their choice. The fact of the matter remains a stark one: one of these days, HMRC will catch up with another Kings Lynn, who can’t settle their bill in full, and that club will close. Just like that. In the middle of the season. And everyone will be shocked that it has happened, when the bitter truth of the matter is that the biggest surprise of all is that it hasn’t happened already.

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    8 Comments

  1. The football authorities had the chance to nip this nonsense in the bud with franchise, Exeter, Leeds, Chester etc. but they declined to do so because they dislike the taxman as much as everyone else.

    It’s not the most mature attitude to take for a supposedly “big business” and is bound to come back to haunt them and the whole sport.

    Martin

    January 8, 2010

  2. The question has to be asked why the government themselves removed the HMRC’s preferred creditor status? Doesn’t HMRC work for the government collecting tax on their behalf? A bewildering decision which doesn’t seem to make any sense and has led to HMRC blocking all football CVA’s on principle.

    Micky F

    January 9, 2010

  3. I’d echo Mick’s comment – an open invitation for businesses (not just football clubs) to abuse the tax system. It also leaves HMRC with the expensive and time-consuming option of having to go to court. Bewildering is the word.

    Excellent, article, btw. Don’t expect anything to happen, however.

    NottyImp

    January 10, 2010

  4. Thanks for this interesting article!

    Good point and I do agree : “All of this brings us back to the question of whether it is right that HMRC should pursue football clubs this aggresivlely, and the answer to this is, of course, “yes”. Football seems to continue to exist in a world in which all that ever matters is what happens on the pitch.”

    Here’s a supplementary article about HMRC as well : HMRC most likely to wind up firms –> http://freelancesupermarket.com/news/2010/1/14/hmrc-most-likely-to-wind-up-firms.aspx

    M Smith

    January 14, 2010

  5. So the football clubs are arranging to give priority the football debts once a club goes into administration to protect the ‘competitive balance’?

    How is this ‘competitive balance’ maintained by allowing clubs to pay millions more in wages than they have by going into debt and then writing it all off again for a 10 point deduction. I just can’t see how this is competitive or fair for clubs that do live within their means. If you only spend what you have you are at a distinct disadvantage.

    It really rankles to see clubs that have gone into administration return stronger and leave the clubs that lived within their means in their wake having written off millions in debts – especially when it is public money.

    Chris

    January 15, 2010

  6. Chris, that is a very narrow view of the situation. 10 points is only the punishment for going into Admin, most clubs have also been deducted points for coming out without a CVA due to HRMC blocking these on principle. Leeds got 15 points, Rotherham & Bournemouth 17 points and Luton got 20 points. Hardly a light punishment, especially for Luton as their deductions have cost them two relegations and their place in the Football League.

    The only 2 clubs who have got round this recently have been Stockport & Darlington, both of whom are now floundering at the bottom of their divisions. I don’t think you could argue that they returned stronger from Administration.

    Yes, it is unfair for clubs to spend beyond their means but these days no club gets off scot free like they used to just a few years back. Remember Leicester getting promoted to the Premier League whilst in Admin? Then there was Ipswich who wrote off 30 million in debt without suffering a single point deducted. Despite this David Sheepshanks had the nerve to sit on the panel that decided to hand Luton their 20 point penalty.

    The current system might not be perfect but you can’t say that any club gets away with wiping out debt without wearing some punishment these days.

    Micky F

    January 18, 2010

  7. I think it’s worth pointing out that in non-league, if you exit without a CVA (ie liquidate and reform), it’s an automatic 2 division minimum demotion. It’s regularly questioned whether even that is enough – but I think it’s even more galling when the team reforms in the same division they were in, as happens in League football!

    League clubs taking a harder line on themselves though? Won’t happen until someone goes bust mid-season IMO.

    I’m all for HMRC being a preferred creditor again. If not legally, then make it a FA rule.

    oftenscore6

    January 19, 2010

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