Football Management

Commentary on the management of over 160 English football clubs by Dr John Beech, winner of the FSF Writer of the Year Award 2009/10 Twitter: @JohnBeech Curator of Scoop.it! Football Finance

The Portsmouth verdict…

Posted by John Beech on August 6, 2010

… or the Great Escape thanks to an own goal.

As a Pompey fan, not surprisingly my first reaction to the verdict of Mr Justice Mann was one of relief, a feeling no doubt shared by all Pompey fans, and especially by those members of the club’s non-playing staff for whom the threat of further redundancies will have been eased.  Creditors, I would argue, should at least been not displeased with the result, as the real threat of liquidation would have left them with even less.

The judgment was based, of course, on narrow but precise points of law, the full details of which have yet to be published.  Matt Slater, who was in court, provides an excellent account of the proceedings on the final day here.  He writes of Mr Justice Mann’s pronouncement:

So HMRC’s arguments about the iniquity of football’s millionaires-first repayment rules, the general iffiness of clubs making “tax efficient” image rights payments to players with dubious “brand value” and the serial nature of Pompey’s antics were irrelevant. This case, in Mann’s opinion, boiled down to one key question.

Was the vote to decide how Pompey get out of this mess (with an agreement to pay creditors a reduced amount of the monies they are owed) organised correctly?

The judgement was an unequivocal ‘Yes’.  Mr Justice Mann found that “none of the five heads of attack by HMRC amount to unfair prejudice nor have they been materially affected.  In my view, HMRC will not be worse off by the situation left by the CVA bearing in mind what the alternatives could be for the club… There is no worthwhile way of money coming into the club other than by the CVA (1).  The reasons for his ruling were “This case turned on commercial validity and not the football creditors rule. This is not the right place to decide whether creditors rules are fair or not. There is no way in which any worthwhile solvency can flow into the club other than the CVA” (2).

One way of viewing this is that HMRC’s fight to get the Football Creditors Rule overthrown scored an own goal yesterday.  I had argued a few weeks ago (3) that HMRC were making a tactical mistake in pursuing this line, but it gives me little pleasure to see them beaten.  The Football Creditors Rule is an absurdity.  If I had a pound for every occasion over the last couple of weeks that I’ve been asked to explain it to non-football followers, well, I wouldn’t have been able to make any impact on Pompey’s tax bill, but I could dine out modestly.  Invariably the reaction has been one of shock, disgust and almost disbelief.  ‘Why should football clubs and players not have to pay their taxes like any other business and its employees?’ is the inevitable question that follows.

The argument the leagues put up, and it is of course their rule, not Portsmouth’s, is that without it the integrity of the transfer market could not be sustained.  Without it, it is suggested that the financial collapse of Portsmouth might have brought down Watford.  I have to say that I just do not think this argument stands up to scrutiny.  It is tantamount to saying that as a club you should be guaranteed payment for a when selling a player whether your customer, the club buying your player,  can afford it or not, that the simple expediency of checking credit ratings is not for you.  What it allows is an unnaturally high level of transfer fee, and this at the expense of HMRC.  Of course normal taxpayers can’t see the sense in this!  As for the ‘Watford argument’, I would argue that, had they collapsed as a result of Portsmouth’s collapse, there would have been significant other factors contributing to that collapse.

There is too the issue of image rights, which now have added legitimisation as a means of tax avoidance,  i.e. within the law, as opposed to illegal tax evasion.  Hardly a good result for HMRC.  (Incidentally, an interesting story on image rights here.)

In a nutshell, a good result for Portsmouth, and a bad result for HMRC.  Hurray and boo respectively!  It was, in the bigger football picture, also a bad result for football.  There seems to a creeping myopia that the specificity of sport should somehow place its participants in a special category which avoids paying the taxes which everyone else pays.  Sam Allardyce’s call yesterday, “If Cameron is listening, drop the tax bracket will you? Then we can get the best players in the world to play in the best league in the world.” (x) seems to me to be singularly ill-timed and out of step with public opinion.

The leagues are beginning to address the reform agenda, but I fear it is ‘too little, too late’.  Given that a consultation process is taking place about the collection of taxes from companies (see Bubbling away in the background), and in the context of the ‘Great Deficit’, the leagues are moving towards their last chance to scrap the Football Creditors Rule before they too face HMRC in court.  Let’s hope they have not been buoyed in their intransigence by yesterday’s ruling.

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9 Responses to “The Portsmouth verdict…”

  1. http://www.guardian.co.uk/football/2010/aug/06/balram-chainrai-portsmouth-nothing-promises known in some circles as “doing a Bates”.

    • John Beech said

      An inevitable comparison as there are obvious similarities. One difference is that Ken Bates wanted with a passion to own Leeds United throughout – Balram Chainrai became the owner when a loan was defaulted on, and has so far been less than clear about wanting to own the club, either before entering Administration or now.

    • John Beech said

      It’s just occurred to me that’s there’s an odd historical resonance between the two clubs; Leeds United is a resurrection club, formed after the demise of Leeds City amid accusations of financial irregularities; Portsmouth is a resurrection club, formed roughly twenty years previously after the demise of Royal Artillery amid accusations of financial irregularities.

  2. Paul G said

    “The argument the leagues put up, and it is of course their rule, not Portsmouth’s, is that without it the integrity of the transfer market could not be sustained. Without it, it is suggested that the financial collapse of Portsmouth might have brought down Watford”.

    Well, yes; but there is a very practical alternative for clubs who are concerned about the financial probity of those they deal with – ask for the cash up front. Who knows, over time this might even bring some sanity back to the levels of transfer fees ……..

  3. Ernest Howlett said

    Well done – referring back to my comment on your earlier ‘Portsmouth’s continuing purgatory’ article – you were right.
    I agree with you that this is a bad result for football generally. Interestingly, even some Portsmouth supporters seem to agree, a few even reacting with the view that it was a bad result for their club: the thread entitled “A hollow victory” on the “Pompey Fans Message Board” shows that (presumably) non-expert, ordinary fans are (pace the BBC report to which you refer) quite capable of seeing through the widespread triumphalist reactions.
    I wonder why HMRC messed it up? Which seems to have been, in part at least, what explains the outcome of the appeal.
    I look forward to seeing the full judgement, including the judge’s interpretation of the “materially secure” football creditors voting in the CVA.

    • John Beech said

      Thanks Ernest. Do you, or any other reader, know what precisely the ‘five heads of attack by HMRC‘ were?

  4. Ernest Howlett said

    The full judgment is now available at http://www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWHC/Ch/2010/2013.html&query=Portsmouth+and+Football&method=boolean
    To my surprise, the judge states: “In my view this is a case which, in the circumstances, had to turn on the commercial realities, and not the validity of the football creditor rules.” This would mean, I suppose, that Matt Slater’s summary remark – “This case, in Mann’s opinion, boiled down to one key question. ‘Was the vote to decide how Pompey get out of this mess (with an agreement to pay creditors a reduced amount of the monies they are owed) organised correctly?’ – turns out not to be quite right. See the judgement.
    Reading it, one wonders again (for the umpteenth time) about the principles of juridical reasoning. Thus the judge states that the Administrator’s decision to exclude at the CVA the extra £13m of debt claimed by HMRC is not to be disallowed, because though a different decision would have been “justified”, Andronikou’s decision was “justified” too, as one of a number of different decisions that would have been “justified”. And the Chairman – the Administrator – has discretion. What standards need to be met in order for a discretionary decision to be justified is unclear. For the judge then remarks that a different decision – “allowing the claims but making a discount to reflect the fact that they might not succeed in whole” – might have been “more justifiable”. At this point the logician (which I happen to be on a professional basis) may react that we are in the realm of enthymemes, as we often are in the law.

  5. Mike T said

    Having read the full ruling a couple of times I find some of the comments within somewhat suprising.

    Portsmouth may well have won the day but football will have to deal with the fallout for what is clear now is that HMRC will be coming after clubs re image rights,trusts and of course the football creditor rule.

    Whilst I would expect the impact on the top four/five clubs will hurt it will be nothing like the same as it will in middle to lower clubs who like Portsmouth have had to use this approach to attract certain players and the commercial benefit to the clubs in signing these middle ranking,costly and not well known players is marginal.

    The way in which clubs have operated PAYE/NIC will not reveal additional liability so formal assessments will without doubt follow at a pace. This of course is unless the footballing authourites can come to some sort of agreement with HMRC.

    If I were HMRC I would look again at using their alternative routes of enforcement of exposed PAYE/NIC/VAT and be looking to secure and in continued absence of full payment disposing at auction any defaulting clubs moveable assets to force the point. I accept that it may well see vunerable clubs ceasing to trade but football has brought whatever happens on itself.

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