Analysis: HMRC tackles football creditor rule

by Rachael Singh

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20 Oct 2010

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Enough is enough as far as the taxman is concerned and early next year it is hauling the Premier and Football Leagues to court over football creditor rules in football administrations.

Currently any club that is part of the top leagues and enters administration is bound by the football creditor rule (FCR) meaning some creditors – such as players and other clubs – are paid in full, and the remaining money divided between the unsecured creditors, including HMRC.

Many in the profession believe the taxman is right in its attempt to rid the football world of the preferential creditor status. However, does HMRC have a shot at hitting its target?
The taxman has a strong practical argument. Why should a football club be treated differently to any other business in the UK? Regardless of how big or small a business is, they must all adhere to insolvency legislation, all except one of the largest industries in the country – football.

The taxman believes the rule is “unlawful” and puts creditors involved in football insolvency on an unequal footing. One way the league could find itself in danger of losing in court is through parachute payments made to the clubs, said Tom Withyman, partner at law firm Lawrence Graham LLP.

The leagues collect revenues on behalf of clubs for their image rights, distributed at the end of each season. But in an administration, leagues have in the past paid out some of these revenues mid-season to football creditors, ringfencing the funds away from other creditors.

Others are concerned about the current rules, including Accountancy Age readers who are supporting the taxman – if comments left on our web site are anything to go by. Some said the Premiership and Football Leagues are creating their own cartel, while others have labeled the rules as “indefensible” and encouraging reckless financial behaviour from clubs.

The overarching question put forward by the profession is, why should taxpayers suffer when football is the richest game in the world? Although the taxman has some support for a change, its track record in challenging the controversial rule is woeful.

In 2004, HMRC challenged Wimbledon’s company voluntary arrangement (CVA), an agreement to repay a percentage of the debt, which creditors agree on. The CVA included honouring the football creditor rule. The case was taken to the High Court and Appeal Court. However, on both occasions, HMRC challenged the CVA and its inclusion of the preferential creditor treatment rather than challenging the rule directly.

The taxman tried to mount a similar claim this year against the Portsmouth and asked the judge to look at its inclusion. However, Mr Justice Mann said he would not “consider” the football creditor rule in the absence of the football authorities. The lawyers said they were unable to attend due to the short notice of the hearing – three weeks from the launch of the appeal to the hearing.

Philip Long, partner in corporate recovery and insolvency at PKF, said HMRC now had a better chance of tackling the rule through a direct challenge to the League, rather than previous challenges where it had focused on the whole insolvency process.

Included in the claim by HMRC is also a challenge on membership rules which the taxman labeled a “deprivation principle”. Membership rules in clubs mean ownership of player contracts revert back to the league if a club enters liquidation, severely reducing money left to be divided between creditors.

HMRC believes this rule is in “breach of the principle that the assets of an insolvent estate should be preserved for the benefit of creditors”.

Despite support in HMRC’s corner, the Premier and Football Leagues will not go down without a fight. A source close to the case told Accountancy Age it is likely the leagues will seek to have the challenge thrown out. However, a trial window is set for 15 February for both sides to give their arguments in court on why the case should go to trial or be thrown out.

Further reading:

UHY called to help fight football creditor rule

HMRC v Premier League insolvency battle set for 15 February

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