Newcastle United tax probe: High Court rules in favour of HMRC

Newcastle United football club has lost a challenge in the High Court over the legality of HMRC’s seizure of documents as part of raids of club premises in April.

The taxman obtained search and seizure warrants as part of the its investigation into the club’s suspected income tax and National Insurance fraud, with HMRC officer Lee Griffiths stating the club had “systematically abused” the tax system. The club contended that HMRC had no reasonable grounds to suspect tax fraud.

Lord Justice Beatson and Mrs Justice Whipple ruled: “The warrants were lawfully issued.”

In the raids HMRC seized business and financial records as well as computers and mobile phones belonging to the club. A court order for interim relief has thus far prevented HMRC from examining the seized material.

What is the alleged fraud?

In an investigation called “Operation Loom”, HMRC is probing whether Newcastle United claimed inflated VAT refunds and evaded income tax and National Insurance Contributions (NICs) in relation to “payments made to and via football agents”.

It is alleged that the club “secretly” paid players and agents during transfers by funneling payments through unlicensed agents, thereby avoiding income tax and NIC payments.

Court documents specifically outline the transfer of player Demba Ba in 2011 from West Ham as an example, in which a payment of £1.9m was recorded to Simon Allan Stainrod Ltd, as the agent said to be acting for NUFC, and £136,500 paid to Alexandre Gontran, as the agent acting for the player. The bulk of Stainrod’s £1.9m sum was distributed by Stainrod solicitors amongst several parties, apparently for work done in the transfer. Stainrod was left with a balance of only £136,500.

HMRC officer Lee Griffiths said: “I believe that the contractual arrangements are a sham and do not reflect what actually happened.”

“By using purported clubs agents as intermediaries to conceal the payments to players and their agents, the players and the club were able to evade IT and NIC respectively by not treating payments to players’ agents on behalf of players as taxable benefits enjoyed by the player.”

Griffiths stated he believed this was done with “full knowledge” of the club, and that the particular transfer of Ba would have generated estimated liabilities for income tax and NIC of £1,160,383.

He added that the club was also able to reclaim the input VAT on the agents’ services that were said to be applicable to the club. If the services were in fact for the player, VAT should not have been reclaimed.

Demba Ba’s transfer is just one amongst several under the suspicion of HMRC, and this is being viewed as a pattern by which the club operated, with several contracts under scrutiny.

What does the High Court judgement pertain to?

In April HMRC raided several locations including the club’s St James’ Park office premises, Darsley Park training ground, and the home of club managing director Lee Charnley, who was among several senior officials arrested and then released as part of HMRC’s crackdown on tax evasion in the football industry.

Newcastle United denied any wrongdoing and challenged HMRC’s obtaining of search and seizure warrants as having no reasonable grounds.

Defending the raids, Griffiths put forth his belief that “none of the parties would voluntarily provide evidence of a suspected criminal conspiracy and that advance notice would be likely to result in evidence being destroyed or removed.”

The judges sided with the taxman.

A spokesperson for Newcastle United said in a statement: “We are disappointed with this decision given the court’s findings.”

“We are considering all of our options with our advisers, including whether to pursue an appeal.”

HMRC will now be able to continue with the investigation and examine seized documents.

Mike Smith, Director of Company Debt commented: “The ruling is likely to give a few sleepless nights to managers and directors. N.I. contribution evasion can be a criminal offence in itself and if those same funds have been taken for personal use the culprit can be made personally liable. In fact, the personal liability notice (PLN) was designed specifically for this purpose by parliamentary ruling.”

“Any named individual/officer of the company can be held accountable personally under Section 64 of the Social Security Administration Act 1998.  Tax evasion, similarly, if proven to be a criminal offence can have serious consequence for anyone involved.”

A pertinent problem in the industry

Chris Nott, Founder and Senior Partner at Cardiff and London based firm, Capital Law said: “The football industry is infamously creative in the way it goes about structuring the huge amount of money it pays to bang average players, and has been for many years.”

“It’s widely known that HMRC will outlaw all of the edgier practices – and it’s clear, by now, what’s acceptable, and what’s not.”

Nott noted that this case was unsurprising as Newcastle United is owned by the same person who owns Sports Direct, which was embroiled in a VAT evasion case earlier this year.

HMRC is likely to be galvanized to take action against tax evasion in the football industry, following a landmark Supreme Court case earlier this year that ruled in favour of HMRC in a tax case relating to the remuneration of Rangers Football Club employees through an employee benefit trust.