Wednesday, February 22, 2012

HMRC v UK Football: The match is heading for penalties

There are so many stories in the news at the moment about the tax man challenging football clubs, players and managers.

There are some clubs who have admitted to owing money which they have not paid;

Just this year, Heart of Midlothian were threatened with liquidation by HMRC on 7th Feb after failure to pay a late tax bill – for the third time in four years.

Portsmouth FC were issued a winding up order by HMRC earlier this year over an unpaid tax bill of £1.9m, with a further debt of between £4-£7m still being paid off from a previous regime.

Then there are clubs who are disputing their tax bills. Glasgow Rangers FC have voluntarily entered administration in an effort to avoid a winding up order from HMRC. The latter unsuccessfully lodged a petition for £9m and there is currently a tax tribunal decision awaited (by April) over a disputed bill plus penalties which could total a further £49 mill.

The Guardian reported in December 2011 that HMRC has issued 25 wind-up petitions to Football league clubs in two years. The revelation was made by Greg Mitchell QC, acting for HMRC. He said that in the past 24 months there have been 25 winding-up petitions against football clubs in the Football League. Some are repeat offenders, so it is not 25 clubs in trouble.
The debts principally owed to HMRC in football insolvency are PAYE and VAT. The latter particularly relates to player transfers, because at least in relation to domestic transfers VAT is always charged.
One of the biggest bones of contention between Football bosses and HMRC is the “football creditors' rule", which governs the way football clubs clear debts. The rule means that creditors from the football world are given preferential treatment when clubs enter financial difficulties. The debt owed to the taxman is of a secondary consideration, this not unnaturally infuriates HMRC who have been trying to overturn this rule in court for a long time.
Another area of conflict is the use of Employee Benefit Trusts to minimise PAYE costs. EBTs, which HMRC have long been fundamentally opposed to, are mechanisms once beloved of football clubs whereby high earning players had chunks of their pay put into an offshore piggy bank trust. Funds would be redistributed to players at times when it was tax advantageous to do so, like after retirement or if players became non-UK residents. This avoided the club, and the player having to pay NI or PAYE at 50% on that element, and deferred the tax charge until later, sometimes many years later, long after the benefit had been earned.
New HMRC rules which come into being in a few months time mean that any withdrawals from EBTs post April 2012 will attract full PAYE deductions, negating their value and worth to those taking them out. Furthermore HMRC gave all businesses – including football clubs - until December 2011 to report their schemes and formalise their arrangements.
It is thought by professionals, including football finance expert Dr Chris Brady that the HMRC has clubs firmly in their sites who may not have complied. He told The S*n newspaper “EBTs became popular with clubs as a means of reducing crippling wage bills. We believe at least eight current or former Premier League clubs are being investigated.”
The Daily Mail reported in January that HMRC’s High Net Worth Unit are investigating at least two dozen leading clubs to look at how perks are being dealt with for players like Rooney, Terry and Lampard through The Football Clubs Employment Issues Questionnaire. This questionnaire, which HMRC refuses to discuss with journalists, asks 181 questions of financial directors of clubs, including whether WAGs are on the payroll, the use of freebie match tickets and corporate hospitality for players and their families, accounting practices for testimonials, tax treatments of Man of the Match awards, Christmas Parties for the staff... Particular focus is bound to be targetted at the payment of foreign players.

The newspaper also revealed how players like Wayne Rooney at Manchester United are helping fund an Enterprise Zone in a Business Park in Newcastle upon Tyne to take advantage of tax relief, such are the lengths that these highly paid earners will go to, to avoid paying 50% PAYE.

And of course in the highest profile case of them all, two weeks ago former Portsmouth FC Manager, Harry Redknapp, former chairman Milan Mandaric and former Chief Executive Peter Storrie were cleared in court of tax evasion charges after a 5 year long investigation.

Redknapp was charged with secreting transfer bonuses in an offshore account in the full knowledge he should be paying tax but jurors unanimously found him not guilty.

It is believed that the cost of bringing the case may have cost HMRC £1.5million but in a statement, Chris Martin, HMRC’s Assistant Director, Criminal Investigations, said he had ‘no regrets’ about pursuing the case. It was, he said, ‘vitally important’ that the facts were put before a jury for their consideration’.

So there is no sign of a thawing in relations and nothing to suggest the tension and challenges won’t carry on unabated. We can expect UK football clubs to continue to be firmly in the target of the taxman.

And what of supporters? This is a real challenge for the country’s football fans. As voters they call for the Government to tackle large scale tax evaders and tax avoiders, with popular campaigns against Vodafone and Top Shop on High Streets across Britain and big support for Robin Hood taxes. They want to see a clamp down on tax evasion at a time when ordinary people are facing cuts in pay, income and local services.

Equally many fans decry the obscene salaries paid to top flight footballers and the huge transfer fees being asked for some players and want to see a return to more modest times.

It is when these two desires collide that it becomes a real challenge.

If it is your football club facing administration, being deducted points, maybe even being relegated, losing foreign players, struggling with transfers, it is inevitable that you will want to see the taxman’s focus shifted somewhere else and for your club to stave off collapse. (And conversely, we have all seen entries on football fan websites, hoping that a club that a fan’s team is traditionally competitive with, should go bust, never to be seen again. A rather unattractive and ultimately self-defeating Schadenfreude if ever there was one)

Abraham Lincoln reminded us that only two things are certain in life, death and taxes. And of course it was Bill Shankly who once said “Some people think football is a matter of life and death, but it is more important than that” and between those two stools, the conundrum will continue to sit.

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