EFL Clubs & The Urgency of The Tax Trap

by | Oct 16, 2020

Since the collapse of Project Big Picture a couple of days ago, a vaccuum has appeared regarding what professional football in this country might look like in the future. The FA, who’d painted themselves as being the saviours of the soul of the game over the previous 72 hours, have already been revealed to have been nothing of the sort with the revelation that chairman Greg Clarke had been one of the prime movers behind a report that advocated the introduction of Premier League B teams and a Premier League 2, earlier this year.

A more optimistic vision of what the game here could be more like has been presented by Lord Bernstein and others, but while this deals with governance in a manner that would be agreeable to many, it doesn’t address the immediate cashflow crisis that the lower divisions currently face. We’ll come back to that in a litttle more detail at a slightly later date, but with the EFL having rejected the £50m rescue package that was offered to League One and League Two clubs, we are as much in the dark over what the game might look like in a year’s time as we were this time last week. For all the pyrotechnics, nothing has actually changed yet.

All of which leaves us wondering how many EFL clubs are, in the strictest sense of the word, solvent at the moment. Insolvency can be a complicated and contradictory state of affairs. In one sense, it might be defined as an “inability to meets one’s financial obligations as and when they fall due” or “when a company’s assets no longer cover its liabilities.” Under such definitions, with no income of substance, talks to bail them out having come to nothing so far, and ongoing financial obligations falling due on a daily basis, it would be surprising if there were many EFL clubs that aren’t functionally insolvent at the moment.

But there is an extra spanner in the works concerning all of this that seems to have been overlooked – publicly, at least. It is reasonably well-known that football clubs in financial difficulty have long had difficulties maintaining their PAYE and other tax obligations, and that HMRC – whose job it is to collect these monies – have long held an aggressive stance towards football clubs that have not been paying tax. This position has come about because of the ‘football creditors rule’ , which protects all debts related to the game itself from being written off as a result of insolvency.

This, however, is about to change. When a football club enters into administration, the pathway to recovery pivots upon the successful implementation of a Company Voluntary Arrangement (CVA) to do so. To achieve this, clubs have to have the approval of 75% of creditors (pro rata, according to what they’re owed) to do so, usually through agreeing a vastly reduced amount of money in return. HMRC routinely vote against such proposals, but there have in the past been plenty of occasions when they have not had enough of a vote to block a CVA from being passed, regardless of their feelings on the matter.

New regulations brought in earlier this year, however, are set to readically alter this very specific but very important set of circumstances. After years of lobbying, HMRC have finally got what they wanted – from the 1st December 2020, they will regain preferential creditor status for PAYE, VAT, employee National Insurance Contributions and Construction Industry Scheme (CIS) deductions. This date is now highly unlikely to be put back any further, since it was originally due to come in on the 6th April, but was postponed.

This change radically changes how HMRC can view the outstanding taxes in relation to football clubs, as they these debts will – just as debts secured against property already are – be excluded from any insolvency proceedings brought from the 1st December on. And at a time when football clubs of all hues are facing serious income difficulties, this puts clubs in a tricky situation. After the 1st December, they will not be able to crowbar through CVAs which offer HMRC just a few pennies for every pound that they’re owed. Those debts will have to be paid in full by new club owners, should a club be brought out of administration. It also means that, should HMRC issue winding up proceedings against a club, the club will not be able to put itself into administration to protect itself from the claim.

The next six weeks, then, take on considerable significance for any business that is currently struggling with tax debts. If a football club needs that debt to be written down a few pennies in the pound, it doesn’t have long to do so, and this may well push some – or perhaps more than some – clubs – to consider that declaring insolvency now would make more sense than trying to cling on for a few months. After all, if no bailout were to come through, wouldn’t delaying declaring insolvency be bordering on reckless? (And that’s before we get onto the fact that “trading while insolvent” comes loaded with risks for any company directors concerned.)

All of this makes one particular deleted Tweet from yesterday afternoon most fascinating. At five to five yesterday afternoon, the Daily Telegraph’s sport account tweeted a headline which read, “League One clubs threaten mass administration as ‘nuclear option’ as they seek to apply pressure over bail-out cash.” It didn’t stay up for very long and the story to which the Tweet linked, by the time we got to it, made no reference whatsoever to a ‘mass administration’ event of any sort, but perhaps it shone a little light on Peter Ridsdale’s comments to the BBC that, “My guess is there are at least half a dozen (clubs) that when it gets to Christmas and there’s no solution, a number of them may well fold or go into administration.”

Shocking though this type of synchronised insolvency across the game would be, it wouldn’t be the first time that such an idea has been mooted. In the slipstream of the collapse of ITV Digital in 2002, the view that all Football League clubs should declare insolvency at the same time in order to would give them a legal get-out clause for many player contracts, so allowing a huge cut in wage costs” did gain some traction, although it never did come to pass. Fifteen Football League clubs had spells in administration in the four years following this particularly ill-thought out TV contract, but it didn’t cause the closure of any clubs, directly. Furthermore, it couldn’t be used to cut wage costs now as it could in 2002, as football debts now also enjoy ‘preferred creditors’ status under the game’s current insolvency rules.

And there are huge risks associated with such a strategy regardless of even this. Declaring insolvency and entering into administration isn’t, of itself, a silver bullet that will cure these clubs’ problems. Are we seriously expected to believe that, say, AFC Wimbledon and Brentford would declare insolvency when they are just about to move (or already have moved) into a brand new shiny stadium? Or any other clubs that might not be completely at breaking point at the moment? And on top of this, there are no guarantees that all would come through such an event unscathed. Every different club’s situations are different to each other. To apply such a blunt force to the current crisis would be stupid, and short-sighted.

This, however, isn’t to say that this particular countdown to the 1st of December isn’t already ticking, so it wouldn’t be a big surprise if more than one club did avail themselves of this final opportunity (for the foreseeable future) to jettison their outstanding tax bills for pennies in the pound. If nothing else, this little curio should serve to remind us that there are two simultaneous issues within the gam that need to be addressed. The first of these, the coming financial apocalypse, needs to be addressed as a matter of urgency.

The second, the total reformation of governance and financial distribution within the game, is arguably even more important than this in the long-term, but it doesn’t need to be rushed. A full and frank, cards on the table style approach would be helpful in allowing the assessment of what needs to be spent in order to keep all 72 EFL clubs alive until some semblance of normality returns to the club finances. The threat of mass insolvency would be a knee-jerk reaction with serious – and likely wholly unpredictable – ramifications for those involved. But we should be aware that some clubs may well be looking at this imperilled path as one of their options. Declaring insolvency should always be a last-gasp option for businesses with serious cashflow issues. Let’s hope that these issues are tied up in time to render insolvency an irrelevance.