HMRC loses football creditor rule court battle

by Rachael Singh

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25 May 2012

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High Court London

THE HIGH COURT has dismissed the taxman's challenge against a controversial football insolvency rule.

At the Royal Courts of Justice, judge David Richards dismissed HMRC's latest attempt to overturn the football creditor rule.

An HMRC spokesman said: "We are naturally disappointed with today's judgment.

"Our view remains that the football creditor rule is unfair to all other unsecured creditors who are forced to make do with much smaller returns – if anything – on monies owed to them by football clubs which enter administration.

"We will carefully consider the detail of the judgment before deciding whether an appeal is in the public interest."

The taxman had filed a legal claim against the Football League in May 2010 claiming its Football Creditor Rule (FCR), which prioritises some creditors over others, was unlawful.

The taxman was battling to have the football creditor rule overturned because it believes the rule – which prioritises payments to creditors such as players, managers and clubs in the event of an administration – is "unlawful". If a club enters administration, all football creditors are paid in full with remaining funds then divided among creditors.

HMRC and the Football League began their legal battle on 30 November 2011 with residing judge Mr Justice Newey allowing the Premier League permission to "intervene" and fight its corner in the proceedings because both leagues enforce the same rule.

The case was originally postponed for several months to allow both the Premier League and HMRC to wade into a different legal argument involving collapsed bank Lehman Brothers administrators and a consortium of investors.

The two sides made written submissions to the court, in which Lehman Brothers' administrators were battling to defend the insolvency principle that creditors should be treated equally.

However, the Supreme Court specifically mentioned that it did not want to pre-judge the HMRC and the Football League case.

A Football League spokesman said: "The judgment confirms that the Football League's rules and insolvency policy do not breach the principles of existing insolvency law.

"The judgment recognises that a league has the right to insist upon insolvent clubs meeting their financial obligations to the rest of the game as a condition of continued membership.

"Had this principle been ruled unlawful, the most likely condequence would be insolvent clubs being expelled from the Football League altogether, as clubs would be unwilling to compete against teams that have defaulted on debts to their fellow clubs."

The spokesman also confirmed the Football League and HMRC have co-operated over the implementation of a monthly PAYE reporting mechanism which should reduce tax liabilities in the future.

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