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In November 2011 HM Revenue and Customs (HMRC) opened a case against the football creditor rule at the High Court in Central London for which a ruling is expected to be reached in coming weeks…

HMRC challenged the football creditors’ rule as they argue that football clubs going into administration cost the Revenue millions of pounds in tax as football clubs and players are paid as a priority.

“Whenever the football creditor rule is applied, there is always a loss to the taxpayer, which is why we bring these proceedings,” said HMRC’s Gregory Mitchell QC.

Under the football creditors’ rule, when a football clubs goes into administration outstanding wages are paid in full to management, players and club staff leaving unsecured creditors, including the local community and HMRC, left at the sideline receiving greatly reduced sums.

In November 2011 the dispute was first raised at the High Court by HMRC’s Gregory Mitchell QC, who said that the football creditors’ rule represented “the ugly side of the beautiful game”.

“The football creditors’ rule has been invented by the Football League and the Premier League. It is not a rule created by parliament.

“As far as we know there is no similar rule operating in any other country or industry. We say [the football creditors’ rule is] contrary to fundamental principles of insolvency law,” Mitchell said.

From 2002 until November 2011 there had been 36 insolvencies in the Football League, including Leeds United, Derby County, Wrexham and Exeter City to name a few, which subsequently left HMRC with what Mitchell dubbed “a very modest dividend”.

Portsmouth FC owed HMRC £37m when they went into administration in February 2010. Due to the football creditors’ rule the Revenue is only likely to receive £7m of taxes back; a loss of 80%.

But it is not just HMRC that is affected by the football creditors’ rule; local and small businesses are also left sat on the bench.

When Portsmouth FC went into administration local joiner and shop fitter, Andrew Clarke, received less than 20% of the £55,000 that he was owed by Portsmouth FC, for the work his business – TWC – carried out refitting the dressing rooms and fitting new offices at the football club.

“It cannot be right. Why should the League clubs get away with it? I feel sorry for local traders. Take the paper shop – it may be owed £100, but that is a lot for them,” Mr. Clarke said.

The Football League has argued that unlike Premiership football players who are paid millions, the football creditor’s rule was set in place to protect players’ earnings in the lower leagues.

The League has also said that the football creditors’ rule protects other clubs from entering into administration as one insolvent club would cause a knock-on effect across all clubs in the League.

“This is about encouraging in football the sort of rescue culture that everyone is so keen to see in all other businesses,” said a Football League source.

Football League supporters also argue that if the football creditors’ rule was not in place that more football clubs would be driven into liquidation and the ‘beautiful game’ would become destroyed by all of the clubs that would be thrown out of the League.

Following Harry Redknapp’s defeat over HMRC of being found not guilty of tax evasion at Southwark Crown Court on 8 February 2012, it is expected that HMRC will be hoping to level the playing field with a rule in their favour over the football creditors’ rule.

Mr Justice Richards, who has been hearing the evidence for HMRC’s football creditors’ rule case is expected to issue a verdict in the upcoming weeks.

Also in the news this week owner of Scottish Premier League team Rangers FC, Craig Whyte, announced that the club had applied for administration on Monday 13 February 2012.

Kevin Kinsella Jnr, of KinsellaTax, said:

“Revenue Law, Contract Law, Criminal Law and now Football Law. Really weird. I am looking forward to reading the outcome of this case.”

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