Portsmouth FC tax saga highlights Premiership debt
In a contribution to our sister site Finance Week, Rachel Fielding reviewed the structural problems that underpin the high-profile winding-up orders looming over several of the country's football clubs.
HMRC is pursuing £7.5m of unpaid tax from VAT and PAYE which has risen to £11.5m since it filed a winding-up petition against the club. The scheduled hearing on Wednesday was adjourned for a week, giving Portsmouth until Friday 19 February to provide the court with details of its finances.
Football's biggest debtors
- Chelsea £711m
- Manchester United £649m
- Arsenal £318m
- Liverpool £300m
- Newcastle United £245m
Figures are net debt at end of 2007/08 season. Source: Deloitte football finance survey 2009
Despite owing millions, Portsmouth is likely to deploy the argument that football is a special case, enshrined in the Football League's rule that no team can gain an unfair advantage if all clubs pay their debts in full.
HM Revenue & Customs argues that the league's stipulation amounts to unfair preferential treatment. Since the Enterprise Act 2002 removed HMRC’s preferred creditor status, the department objects to any creditor enjoying priority that is not firmly established in legislation. So far, however, the controversial super creditor rule ensuring that football creditors - clubs and millionaire players - are paid in full while other creditors go unpaid has survived High Court challenge and appeal.
Super creditor priority was a feature in several other club rescues. But teams struggling to reach the promised land of the Premier League, or setting their sights on the riches of European football, are incurring such high wage costs and transfer fees that the super creditor rule could make rescue impossible unless football creditors are willing to compromise.
Carl Faulds of Portland Business Recovery argues that the football industry is overheated, rather like the housing market. “The business model for football clubs is unsustainable,” he says. But when the business objective is something as intangible as ‘chasing the dream’, club chairmen, managers and supporters are deaf to sensible business advice.
Carl Faulds believes that by insisting that football creditors be paid in full, the Football League is sending out the wrong message to clubs. “It gives them a false sense of security. If you stop clubs giving credit to each other, they will only buy players they can afford. It’s up to the Football League to impose rules to encourage better financial management.”
David Acland, regional managing partner at Begbies Traynor, speculates: “I think the Government will step in and ownership rules need to be tightened up. But the truth is, it’s a reckless business. If you behaved like that in any other industry, they’d shut you down.”
*RELATED NEWS: Former Portsmouth manager Harry Redknapp and Milan Mandaric, the club's previous chairman, appeared at Westminster Magistrates' Court on Thursday morning (11 February) for a preliminary hearing to answer two charges of cheating the public exchequer. The defendants confirmed their names during the 10-minute session, which was then adjourned until a plea and case management hearing on 14 April to be held at Southwark Crown Court.