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Football creditor rule still under attack

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29th May 2012
Sports finance reporter
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HMRC has been on the losing side twice in quick succession to the football industry, following the High Court’s recent decision not to overturn the football creditor rule, reports Alex Miller.

The blow for the taxman follows the decision to clear Tottenham manager Harry Redknapp of tax evasion charges in February.

Legal action against the Premier League and the creditor rule was initiated in May 2010. The rule means that certain football industry creditors receive preferential treatment when a club becomes insolvent and may be paid in full.

HMRC lost preferential creditor status when the 2002 Enterprise Act became law in 2003. Since then it has been forced to receive highly reduced rates - losing millions of pounds in the process as a number of clubs have gone bust.

Those involved in football insist the rule ensures that all clubs deal fairly with each other and that there is a layer of protection for players. When the rule was introduced, the intention was to help financially safeguard players, specifically those on smaller salaries with lower league clubs.

However, that is no consolation to HMRC. Between 2000 and 2010, there were 53 incidents of clubs in England entering administration. Official leaked HMRC documents describing the figures in 21 of those cases enable us to see the figures involved.

The document shows 15 clubs owed a total of £40.26m to the taxman when they went into administration (several clubs have been in administration more than once) - and that more than £39.5m of that amount has never been paid or remains unaccounted for in those cases alone.

In 2009, Darlington paid just £3.64 after they’d previously committed to paying £1,596 of a £215,631 tax bill in 2003.

The biggest tax debtor on the list is Portsmouth, from their first administration (not the current one), when £17.3m was owed. Informed sources have revealed that although Pompey agreed to pay 20% of that amount back over time, not a penny has actually been paid.

Leeds United agreed to pay 2.2% of a £7.7m tax bill in 2007, shedding more than £7.5m tax liabilities in the process.

But at the High Court, Mr Justice David Richards was not swayed during the five-day trial by HMRC’s arguments that the rule violated the fundamental principles of insolvency law. The two planks of the tax department’s case were based on the anti-deprivation and pari passu rules. The anti-deprivation rule is designed to prevent withdrawal of asset on bankruptcy or liquidation or administration to the detriment of creditors. The principle of pari passu holds that statutory provisions for pro rata distribution may not be excluded by a contract which gives one creditor more than its proper share.

But the judge decided that the Football Leagues articles and insolvency possible were not rendered void by the anti-deprivation rule or pari passu on a point of principle.

But the matter is not necessarily finished. MP Damian Collins was a member of the House of Commons' Culture Media and Sport Committee, which looked at ways to improve the running of sport, including football, in the UK.

One of its recommendations was to remove the football creditors rule. The Folkestone MP says he will now move to legislate to remove the rule by targeting changes to the 1986 Insolvency Act.

Meanwhile HMRC may appeal. A spokesman said after the verdict: "Our view remains that the football creditor rule is unfair to all other unsecured creditors who are forced to make do with much smaller returns - if anything - on monies owed to them by football clubs which enter administration.

"We will carefully consider the detail of the judgment before deciding whether an appeal is in the public interest."

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Replies (12)

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By andrew.hyde
30th May 2012 11:35

Looks like this one will go to extra time...

...but hopefully not penalties.

I'd like to think that there is no connection between this situation and football stars being paid £100K a week.  But I'm not at all sure.

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By ksagroup
30th May 2012 11:40

Football creditors Rule

I think this one will be solved by legislation not case law.....  Trouble is that if during transfers fees are not paid by insolvent clubs the whole league suffers.  It is in effect a closed market.  I think the players should perhaps take a hit occasionaly

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Replying to bernard michael:
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By SteveRadcliffe
30th May 2012 12:04

Football club ethics

I also think footballers should take a hit (or at least for there to be the potential for them to lose out). It may force them to consider whether to join those clubs offering wages beyond their means.

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By Simon Sweetman
30th May 2012 12:35

and others

The worst consequence of this rule has been for small creditors, local small businesses, ST Johns ambulance and the rest. For instance, someone who offered B&B accommodation for young players got burned whrn my local club went into administration.

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By The Black Knight
30th May 2012 12:56

Then HMRC

Should not allow these amounts to build up and take action immediately as they do with many small companies.

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By SteveRadcliffe
30th May 2012 13:05

Football club ethics

If clubs find it difficult to sign players because there is a chance they will lose out financially, it may force these clubs to live within their means.

That includes in their dealings with the wider community, creditors etc, where they should demonstrate being 'socially responsible'.

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By Steve-EBL
30th May 2012 13:53

Looks like everyone gets financially shafted by their involvement with football clubs not just the fans.

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By andrewdiver
30th May 2012 17:41

Simple

I believe this rule is ludicrous.  But if you don't give HMRC at least equal rights as football creditors then quite simply they will have to close down more clubs.    

It is disgusting that £39.5m of £40.26m tax debts were unpaid.  I am a football supporter and have seen my club in administration and also struggle with unscrupulous owners.  HMRC must now view football clubs as high risk areas and if there is a single default on payment seek full recovery through winding up procedures if necessary. In no way can they allow arrears to build up as they have done before.  HMRC is the largest creditor in most of these cases.  If they can't quantify the liabilities because returns haven't been prepared then they need to take action early.  I think it is amazing Rangers FC didn't pay any PAYE/NI in the time their previous owner was in place.  Est. £9m debt wasn't it? 

Who loses out when the likes of Leeds United or Portsmouth go into administration?  The players? the other clubs? no, the people who lose out are unsecured creditors like HMRC and like the sub-contractors who water the pitch, do the signs, provide catering for corporate hospitality, St John's ambulance etc.

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R Price
By rpricea
31st May 2012 11:46

Trying to Put Their House in Order

The Football Conference is from 2012/13 joined by the Football League in using a wages cap by which the total wages budget can not exceed 65% of an agreed projected turnover based on the previous year's figures.

In addition the Conference have a quarterly reporting system by which its clubs have to submit to the secreatariat an accurate  list of all creditors, failing which they suffer a points deduction. They are also not allowed to owe more than three months PAYE & NI , 

 

 

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By dunhamsjd
31st May 2012 13:56

Some more context

English football contributed almost £1.2bn to the Exchequer in the 2010/11 season, a not insigificant sum and procedures are in place to place penalties on those clubs who do not keep their payments & records up to date with HMRC.

Also the introduction of Financial Fair Play, both at a national level by UEFA and on an internal level by the Premier League and Football League, should see more onus placed on managing costs within football.

It's not all 'one way' traffic!

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Replying to Harrison88:
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By mikewhit
31st May 2012 23:42

Football revenue

"English football contributed almost £1.2bn to the Exchequer in the 2010/11 season" - doesn't most of that come from Sky subscribers ?

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By mikewhit
31st May 2012 23:40

Reminds me a bit of the Greece/Euro situation

Talk of living beyond your means, taking a hit, too big to fail, creditors losing out on a default ...

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