1 Mar 2012

Taxing times for football

Neil Smyth, restructuring and corporate recovery partner at law firm Taylor Wessing, has advised the board of Plymouth Argyle, a secured creditor of Portsmouth FC and the board of another Championship club in the past year. He writes on why HMRC is taking a firm stance on football

Neil SymthIn recent years we have seen increasing numbers of high profile football clubs entering into administration, these include Rangers FC and Portsmouth FC - the first Premier League club to enter administration.

Lower league clubs, such as Crystal Palace and Plymouth Argyle have also faced similar fates.

Whilst the amounts paid to the top players seem far removed from this country’s current financial difficulties, football like every other sector or industry, is not immune to economic hard times as the leisure pound becomes harder to come by.

In addition to the normal economic pressures that all industries face, football has an additional pressure, HMRC credit control. All businesses pay tax, but the football industry is unique in that it has the “football creditors’ rule”.

This provides, in respect of the insolvency process of a football club, that certain creditors connected to football including players’ wages, agents’ fees and transfer fees, are paid in priority to other unsecured creditors.

Not only therefore have HMRC lost the preferential creditor status that they once enjoyed as a matter of statute before 2003, but as regards football clubs, HMRC also rank behind football creditors’ claims in the repayment stakes.

Having twice unsuccessfully tried to overturn this rule through the challenges of company voluntary arrangements proposed by Wimbledon FC and Portsmouth, HMRC are now taking a much anticipated harder line on credit control, in conjunction with further proceedings challenging the football creditors’ rule.

These are due to be determined this Spring.

In that case, counsel confirmed that HMRC have presented 25 winding up petitions against Football League clubs seeking their liquidation, in the past two years, with some clubs being repeat offenders.

HMRC’s policy is clear, if tax remains unpaid by football clubs, then a winding up petition will follow.

The reason for that is the well known points’ deduction that a Premier or Football League club will suffer if it goes into administration.

In addition, if a football club goes into liquidation, a liquidator does not have the power to trade and fulfil fixtures and the club is expelled from the relevant league. Chester City (now Chester Football Club) is a recent example of a Conference club that is now plying its trade in the Northern Premier League Premier Division following its liquidation and the club’s demotion down the leagues.

The presentation of a winding up petition therefore carries the prospect of points’ deduction or possibly even the failure of the football club and, from HMRC’s perspective, curtails the non-payment of sometimes substantial amounts of tax that will never be recovered in full, or at all, in an insolvency process.

Unless the football creditors’ rule is overturned, and even if it is not, HMRC’s stance is unlikely to change and football clubs will continue to face winding up petitions presented against them, which, if the tax can’t be paid or a deal done, will result in further football clubs going into administration.

To avoid the risk of a points deduction both this season and next, a football club in the Football League must go into administration by the fourth Thursday in March, a date that fast approaches.

The traditional exit route from administration is a sale of the club in conjunction with a company voluntary arrangement whereby the sale proceeds, after payment of the football creditors and any secured creditors, are distributed equally amongst all creditors.

This is done through the arrangement, to ensure that the company exits administration having resolved its pre administration creditor position, enabling the purchaser to operate the club going forward without the risk of suffering a further points deduction.

Again however, like any other industry and sector, this route depends on finding a purchaser to buy a business that’s performance relies on the unpredictability of sport. Liquidity is at a premium at present and whilst top-flight clubs with track records will be an attractive proposition for a purchaser, clubs in the lower leagues like Plymouth Argyle and Darlington are harder to sell, with an offer for Darlington recently falling through.

The world of football may therefore appear to be one of mega rich owners and players earning more in a week than most earn in years, but like any industry, you have financial high fliers and financial strugglers. All football clubs want to emulate the success of the top Premier League clubs, however even spending incredibly large sums such as £500bn over the past few years, does not guarantee domestic or European success.

Those clubs in the lower leagues therefore have to fight hard for revenue like any other business in these economic times, with the added pressure that a failure to pay tax could lead to the final whistle not only on the pitch, but also for the club itself.

Neil Smyth is restructuring and corporate recovery partner at Taylor Wessing