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! Football Finance

HMRC v. The Football Creditors Rule

Posted by John Beech on June 2, 2010

It has emerged that HMRC are to mount a legal challenge against the Premier League and the Football League in an attempt to overthrow the Football Creditors Rule (1).

Until September 2003, the Crown, and hence the Internal Revenue (IR) and Customs & Excise (C&E) who subsequently merged to form Her Majesty’s Revenue and Customs (HMRC), enjoyed the legal status of ‘preferred creditor’ – they got paid in full before any remaining money was divided between the remaining creditors.  Because of football’s Football Creditors rule, there was a clear priority on who had claims against an insolvent company:

  1. The Crown
  2. Football creditors (e.g. other clubs, players)
  3. The rest

With the loss of its legally-enshrined preferred status, the Crown then fell behind football creditors in the pecking order.

Accountancy Age summarises the current situation well:

Currently if a club enters administration they are bound by the football creditors rule, meaning some creditors such as players and managers will be paid in full from the administration and the remaining payments divided between the unsecured creditors including HMRC.

The rationale for having the rule is that football clubs need the certainty that they will receive funds for the sale of a player to another club – without the rule, the transfer market would collapse, with selling clubs losing out to defaulting buying clubs.

You can see their point, but there are plenty of other situations in which failing to pay debts in full is problematic.  An obvious example is St John’s Ambulance, who recently got worse treatment than football creditors from Portsmouth and Crystal Palace (in both cases, fans, to their credit, rallied round and paid the debts).  Small businesses who end up being offered 20p in the pound(at Portsmouth) or even 1p in the pound (at Crystal Palace) by Adminstrators find it hard to stomach that clubs such as Chelsea or Manchester City are guaranteed priority in receiving a full pound in the pound.

According to legal expert David Roberts as reported on the Sporting Intelligence website, HMRC have a good chance of having the Football Creditors rule declared unlawful, citing two principles of insolvency law:

  1. The pari passu principle
    This is the principle is that creditors should be treated on an equal basis, being paid pro rata what they are owed.
  2. The anti-deprivation principle
    This is the principle that a legal entity should not be deprived of its assets by reason of insolvency.
    This seems to my unqualified legal eye to be particularly pertinent in the case of VAT, which already belongs to Crown, having been collected on the Crown’s behalf by the club.

If the case is strong, why has HMRC not tried before?  Back in 2004 they did try, but took action against a club, Wimbledon, rather than the League.  The situation was a complex one, with Wimbledon in Administration and in the process of morphing mysteriously into ‘the Franchise’ (aka MK Dons).  Indeed in his judgement Lord Justice Neuberger in the Court of Appeal refers to “the very unusual facts of this case” (2).

To me this suggests why HMRC should now take action against the Leagues rather than against, say, Portsmouth.  Each club’s CVA might be seen as a unique set of circumstances, requiring HMRC to fight each case individually.  If they can succeed in getting the Leagues’ Football Creditors rule declared unlawful – end of story.

If they do turn out to be successful, it will have a major impact on the way transfers are conducted.  Clubs will actually have to consider whether other clubs they are selling players to are credit-worthy.  Clubs seen as credit risks will find it hard to buy new players.  A bit like every other business sector really.  Now there’s radical.


17 Responses to “HMRC v. The Football Creditors Rule”

  1. Allan Brown said

    I understand they’re acting against the PL as by withholding the TV payments due to Pompey and diverting them to existing UK football creditors, they’re depriving the club of incomes and assets and preventing creditors being paid; in other words, by doing this, they’re a party to the FCR, as opposed to previous cases which have been laid against the club making the FCR payments and for good or ill (the judgement in 2004 is a bit odd) have run their legal course.

    I’m sure you’ve seen this, but it’s a cracker.

    • John Beech said

      Perhaps the days of Premier League cognitive disonance are finally going to end. Some chance.

      Another cracker here, with Jez Moxey of Birningham City arguing that “(They want) to create some artificial mechanism under the pretence that we are trying to look after the finances of football and create a situation where in reality the status quo is maintained forever“. Oddly enough, he’s not referring to the Premier League and the Football Creditors rule!

  2. Mike Thomas said

    This blog suggests that the Crown were able,prior to 2003, claim all sums owed to
    them on a preferential basis this was not the case.
    Quite simply the only way to deal with over spending is to have a uniform rule throught football stating that any club entering an insolvencey event will be subject to two relegations.

    • John Beech said

      No, they had a claim on a preferential basis in law. They could only get the money if it was there.

      Double relegation following insolvency would be a) a second punishment, and a sporting one for a financial misdemeanor, b) a punishment against the club rather than the directors, who after all were those responsible for the insolvency and c) in most cases a punishment landed on a new board who had nothing to do with the insolvency. And the evidence is that relegation is not effective as a deterant.

      I’m afraid there is no one simple way to deal with over-spending. A strict enforcement of the Financial Fair Play protocol, and not with sanctions restricted to UEFA’s remit, probably comes nearest.

      • Haywain said

        Points a, b and c have already happened, specifically to Luton Town and, partially (item a at least) to Leeds United, AFC Bournemouth and Rotherham United. However, I’d have to disagree with the idea that there are sporting punishments for financial misdemeanours. In most cases the whole purpose of the misdemeanour is to finance sporting success, so the punishment is appropriate.

      • John Beech said

        You’re quite right, I should of course have written ‘is’ rather than ‘would’ – there are certainly other examples.

        The problem I have with your argument about sporting/financial punishment is that there is no sporting punishment for what is called ‘financial doping’ – the blatant subbing of clubs by benefactors. This ranges from the obvious examples of Chelsea and Manchester City right down the pyramid, for example to Eastwood Town, where owner Rob Yong is obviously perfectly comfortable to announce “I personally pay the players’ wages and any other money that comes in from the fans through gate money and the like goes straight into the club.” (1).

        Of course there is a difference – having or not having the funds to do this. The absence of funds leads to Administration and the clear sanction that the owner loses control of the club.

        If the system needs changing (and I think it certainly does), it is to strengthen the financial sanction against the owners, not the clubs – confiscation of a bond for example. The bonding system is for example standard practice in another sector which has been plagued with financial failure – tour operators.

  3. […] HMRC v. The Football Creditors Rule « Football Management […]

  4. […] This post was mentioned on Twitter by John Beech, Edd McArdle, Ed Malyon, Martin Searle, Bill Lord and others. Bill Lord said: RT @JohnBeech: #footballfinance HMRC v. The Football Creditors Rule […]

  5. Keith Long said

    I can’t see why IR/HMRC have never challenged the Football Creditors rule since 2003.

    PAYE (tax and National Insurance Contributions) are deducted by the employer from the employee to be paid to (Revenue/Treasury/Exchequer)supposedly every month.

    In the past, IR would use the Theft Act to prosecute employers who had regularly failed to pay over tax and NIC deductions on the argument that the money had been taken from the employee but kept by the employer (i.e. stolen from the employee).

    But then, football has always been a law unto itself. In the mid-eighties the IR observed a 3 year embargo on inspecting the PAYE records of league clubs because of the intransigence of a certain director of a certain club.

  6. […] HMRC v. The Football Creditors Rule « Football Management […]

  7. I made a suggestion back in January that would satisfy the taxman – Include them on the list of Football Creditors. Most people would presume that the Football Creditors just covers clubs and players, but as we’ve seen in the Portsmouth case, it doesn’t cover foreign clubs. In fact the FA Definition of Football Creditors is very clear – a football creditor is:

    * The Association and any Holding Company of The Association and any Subsidiary Company of that Holding Company or The Association;
    * The FA Premier League, The Football League, The Football Conference, The Northern Premier League, The Southern League, The Isthmian League;
    * any member club of any of those leagues
    any full-time or part-time employee of a member club, or former full-time or part-time employee of such a member club, in respect of sums due to such person by way of arrears of remuneration or expenses;
    * the Professional Footballers’ Association;
    * The Football Foundation;
    * any Affiliated Association; and
    * any other affiliated clubs or leagues,

    The employees part of the rule covers non-footballing members of staff too, so that they do not lose out – so there is no reason why HMRC could not be considered a Football Creditors – except for those owners who feel that tax is an inconvenience, of course.

    • John Beech said

      Many thanks for this Rob. Readers are recommended to click through to see Rob’s five point plan.

      As for making HMRC football creditors, we can only draw the obvious conclusion as to why such such a simple and effective idea has not already been implemented.

  8. Mike Thomas said

    As I pointed out earlier not all Crown debts prior to 2003 were treated as preferential indeed in the case of PAYE/Nic I think I am right in saying the pref element was restriced to the debt that had accumulated in the 12 months prior to the insolvencey event. It is perhaps a worry that it takes more than 12 months for HMRC to complete the process but as we saw in the case of Portsmouth the time delays were in part due to by the court process.

    I disagree that two relegations would be double punishment. I think more along the lines that the threat of this would be far more of a deterent than a points deduction. Of course it would mean that 10 point deductions would be no more but all too often we have seen clubs who have gone into administation suffer points deductions and despite the loss of the points still manage to survive in the same league.

    • John Beech said

      I certainly agree that time delays due to the court process are, as you phrase it, a worry.

      Going into Administration is a punishment against the owners of the club – they lose control of their business. Points deduction or enforced relegation, whether one or two tiers, is a punishment against the club, and frequently affects new owners rather than the miscreants. In the case of points deduction, it may have no effect whatsoever (Arsenal won the old Division 1 a couple of decades ago in spite of points deduction) or it may enforce a relegation. It’s like using Russian Roulette as a punishment – the outcome varies from a scare to something rather more final. I do not see how this can be a disciplinary system that is fit for purpose.

      If you haven’t seen it, I have published a Working Paper on how dysfunctional deducting points is as a disciplinary sanction – downloadable here.

      I can see why you might argue that enforced relegation, whether one, two or three tiers, might be expected to act as a strong deterrent – after all, it removes the gamble of points deduction as a sanction! It does however assume that the directors who are prepared to take risks with their clubs would be responsive to deterrents. My fear would be that as the punishment would hit the club, probably under new owners, rather than them, they would not see it as a deterrent. Clearly Administration is no deterrent, and that after all affects them personally and immediately.

  9. Mike Thomas said

    Isnt that the whole point that its the club that should be punished. Hard maybe and whilst I accept your arguement that the individuals who take charge following on from an insolvencey event are not guilty of the overspend my belief is that not only have to look at the insolvent club you have to be fair on those that cut their cloth.

    • John Beech said

      Those that cut their cloth avoid the punishment of Administration.

      I would also point out that clubs that ‘spend the money they haven’t got’ are hardly guaranteed to gain from their ‘unfair advantage’.

      Where I suspect we would agree is that the present sanction system is dysfunctional. I’ve argued in the Research paper that a sanction system needs to:

      a) punish
      b) the person or entity that deserves to be punished
      c) in a way that is considered to be appropriate
      d) to an extent that its imposition acts as a deterrent
      e) consistently and equitably.

      Furthermore it must
      f) be seen to be doing so.

      The present system does not score well against such benchmarks. Mandatory double relegation has its pluses, but, to me, fails on point b.

      • Mike Thomas said

        Agree to an extent but I feel that point b is hit 100% the entity being the club.I have read your paper and applaud the research but sorry not the conclusions.

        What is clear is that where we are is far from effective so off the wall thinking needs to be applied.

        Football needs to be accountable and as I keep telling my daughters with their actions comes accontability.

        Its good though to have the debate.

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