Football Finance: The tax man cometh

IN the fourth part of our series on Football Finance, TheBusinessDesk.com, in association with law firm Hammonds, analyses the often fractious relationship between clubs and the taxman.

IT’S often an unhappy marriage, but a marriage which is impossible to break.

The relationship between Her Majesty’s Revenue and Customs and the football world is one riddled with frequent spats, fall-outs, finger pointing and uneasy truces.

HMRC is often seen as the villain of the piece, accused of making unfair demands on football clubs and, in some cases, threatening their very existence by serving clubs with winding up orders over unpaid tax bills.

Another worry is that winding up orders can raise false speculation about some clubs’ financial situations when they would argue they are solvent.

There is consensus within the game at present that HMRC is taking a tougher line in general with football clubs and that their actions are often disproportionate to monies owed.

This is a claim HMRC vehemently denies, arguing that it is simply aiming to recoup taxpayers’ money from football  clubs which haven’t been paying their bills.

However, HMRC is protesting against ‘football creditors’ being paid out in full when a club goes into administration or enters a  Company Voluntary Arrangement.

HMRC argues that it loses out, often receiving a small percentage of every pound it is owed as a ‘regular creditor’.

Commenting on HMRC’s challenge to the Football Creditors Rule in the High Court, a spokesman said: “HMRC‘s view is that there is nothing in insolvency legislation that provides for unsecured debts due to ‘football creditors’ to be paid in preference to other unsecured creditors such as HMRC.

“Our view is that that the practical application of the so called ‘Football Creditors Rule’ may be unlawful. We are acting in the  interests of all those creditors who are not in the football industry.

“We don’t think it’s right that they are offered a tiny percentage of a debt owed to them, against full repayment to all others in the industry.”

But there can be no doubt that the downturn has led to many professional clubs feeling the pinch, and coupled with HMRC  chasing PAYE and National Insurance payments, some have been forced to enter complex negotiations with the taxman to preserve their very existence.

Some non-league clubs, such as Chester City and Northwich Victoria have not been so lucky and have gone out of business.

Championship club Preston North End has been served with several winding-up orders and looks set to be taken private by major shareholder Trevor Hemmings in the aftermath of the financial problems the winding-up order exposed.

Sheffield Wednesday was served with a winding up order by HMRC in July over an unpaid tax bill and earlier this month was given 28 days to settle its debts.

The club asked for the adjournment of the petition after saying money from the sale of players had been used to reduce the  outstanding PAYE balance of £550,000.

More money is owed by the Npower League One club, which has reported debts of around £26m, but it is understood Sheffield Wednesday is planning to make the next payment shortly.

Other clubs, including Portsmouth, have managed to survive despite HMRC chasing debts. Cardiff City have been served with  a winding-up order previously while Crystal Palace recently exited administration. 
 
Mark Lawn, joint chairman of Npower League Two side Bradford City, said: “Clubs should pay what they owe but HMRC should stand in line with other creditors.

“The same rules and regulations should be afforded to a limited company as it would do to everyone else.”

Prof Tudor Rickards, of Manchester Business School, said: “The situation at Portsmouth is a very interesting test case. My  impression is there is some examination of the rules relating to football clubs going on.

“My feeling is the Government, through HMRC, is trying to change the system in terms of image rights payments and, more  importantly who is a preferential creditor if things go wrong.”

The HMRC spokesman said that it treats football clubs the same as any other business, and expects tax to be paid in full  and on time.

He said: “Ensuring tax is paid on time should be at the centre of any football club’s business strategy. Anyone thinking they  can get away with not paying what they owe would be mistaken, as all those who don’t pay or otherwise engage with HMRC, face legal enforcement action.

“Not all clubs fail to meet their tax obligations by any means but, as a sector, football clubs have a long history of not paying  their tax debts on time.

“HMRC only initiates administration, winding up or bankruptcy action where it believes this is the best course of action to  protect the interests of the Exchequer in respect of a particular debt and in fairness to other taxpayers.”

Patrick Ford, Manchester-based tax partner at Hammonds said: “The continued economic uncertainty coupled with budget cuts on consumer and corporate spending could mean tough times ahead for football as the new season gets underway.

“We know from last season, that HMRC is quicker to act against clubs on the late payment of tax particularly if it has happened more than once.

“HMRC is also cracking down on image rights paid to players because it views it as income rather than an opportunity to deposit supposed royalties in offshore accounts. This isn’t an issue for smaller clubs but it is for the larger clubs, who commonly use this sort of payment structure.”