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HM Revenue and Customs (HMRC) seems more interested in football than the average punter. There are currently challenges to agents’ payments (both for VAT and PAYE), to image rights structures and to testimonial receipts.
However, at present the challenge that is making the most news is to the football creditor rule. Over the past few years the Revenue has simply petitioned for the winding-up of clubs if they fail to pay their taxes on time. Some may say that is quite right too but it does appear that the Revenue is making an example of football when compared with other industries.
What is the football creditor rule? Basically, if a club undertakes a formal insolvency procedure (usually administration), its membership of or share in the league is suspended. This suspension will not be lifted until certain creditors of the club are settled in full.
As we have seen at Portsmouth, even if there’s no formal insolvency procedure, the league can deduct monies due to the club from central funds, comprising television monies and the like, to settle those creditors.
Why does the rule exist? It is all to do with ’the integrity of the competition’. All clubs are members of a league, a company in which each club has one share. The league’s respective constitutions contain a duty for its members to act in good faith to each other, so it is felt that to allow one club to ’buy’ a player from another but not pay for him or not actually pay him, distorts that competition.
Since the Enterprise Act, the Revenue has lost its status as a preferential creditor and joined the ranks of unsecured creditors in an insolvency situation. It believes the rule gives those creditors ’super creditor’ or ’pre-preferential’ status and that all creditors defined as unsecured creditors under insolvency legislation should get paid the same. When read in isolation, the rule seems unfair to many, including HMRC. However, it is only one part of the league’s regulations and the Football League has an additional insolvency policy too.
The policy and regulations actually seriously benefit HMRC. First, the league has introduced ’HMRC Reporting’ for PAYE. So if a club gets behind in paying its PAYE, the league places an embargo on that club that stops it spending on more players and compounding its financial problems.
Second, the Football League, where all the football insolvencies have been to date, also insists that any club going into administration or receivership has to either pay all its non-football creditors in full or arrive at a compromise with them.
This hands ’power’ to the Revenue where it holds more than 25 per cent of the unsecured votes cast. Basically it will look to block any arrangement where the football creditors are paid in full and the Revenue is not. It has put those clubs in an impossible position. Either do not pay football creditors but face losing their share in the league (although to date the sanction has been an additional points deduction), or face having the compromise solution blocked by HMRC.
Third, with the normal administration exit in football being a sale of the oldco’s business and assets to a newco, the players (and other employees) and their arrears transfer to newco under TUPE. So in the main the football creditor rule acts to stop one club acquiring players from another without paying for them, and to protect against a ’domino effect’ within the game.
All in all, the football authorities have done their best to keep the playing field level for all, including the Revenue. They have also given the Revenue additional protection. But all that said, the Revenue will have the last laugh as the 50 per cent tax looms.