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HMRC fail to overturn the football creditor rule

By December 12, 2014November 26th, 2018No Comments

It’s a win for the Football League as HMRC has been unsuccessful in their bid to overturn the football creditor rule, losing the case to the High Court’s decision.

Football Creditor Rule

The football creditor rule is used by the Football League to allow English FA members to pay their debts off before any other creditors when a club goes into administration. HMRC said that it was unfair for players to get preferential treatment for payouts when a club goes bust as there is often little money left to pay back other creditors, including HMRC themselves.

HM Revenue and Customs lost their preferential creditor status in 2003, when the 2002 Enterprise Act came into play. It is thought thatLeeds United went into administration in 1997 HMRC has lost out to millions of pounds when football clubs have become insolvent, due to the fact that they have received majorly reduced sums.

HMRC first sought legal action against the use of the football creditor rule in the Football League in May 2010 and was followed by a five day trial at High Court in November and December 2011. Judge Mr. Justice David Richards has since ruled in favour of the Football League as HMRC failed to convince Richards during the trial that the football creditor rule violates the fundamental principles of insolvency law.

Commenting on their loss to the Football League, a spokesperson for HMRC, 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.”

Also not happy with Judge Richard’s High Court decision, MP Damian Collins, once a member of the House of Commons’ Culture, Media and Sport Committee, has announced that he will act to remove the football creditor rule through targeted changes to the 1986 Insolvency Act.

How many English football clubs are in administration?

English football clubs have entered administration a total of 53 times during a ten year period between 2000 and 2010, and HMRC has issued over 24 winding up petitions to clubs in the UK.

Leaked HMRC documents show 15 English football clubs owed £40.26m to the revenue when they entered administration and that over 98% of that debt has never been paid to the taxman and remains unaccounted for – that’s a whopping £39.5m of unpaid tax.

As the football creditor rule gives preferential treatment to pay debts back in full to players and other clubs first, HMRC has received little back of the money they are owed:

    • Leeds United agreed to pay 2.2% of £7.7m in 2007, leaving more than £7.5m tax unpaid to the taxman;
    • Darlington paid up a mere £3.64 of their outstanding £215,631 tax bill in 2009, six years after the club entered administration in 2009;
    • Portsmouth FC is the biggest offender on the official leaked HMRC documents. The first Premier League football club to enter administration, on 26 February 2010, at the time the club owed £17.3m to the taxman; HMRC is yet to see a penny of this sum to date.

Commenting on their win at High Court against HMRC, a spokesman for the Football League, said:

“The judgment confirms that The Football League’s rules and insolvency policy do not breach the principles of existing insolvency law. We recognise that some regard the application of these rules as being imperfect. However, they remain an essential part of football’s approach to handling insolvent clubs within the wider context of competitive league football.”

Employment Benefit Trusts (EBTs)

Also a hot HMRC topic of debate in the Football and Premiership leagues is the use of Employee Benefit Trusts in football. On 14 February Rangers FC used tax avoidance scheme Deepwater Ltd.2012 BBC News announced that HMRC were said to be launching investigations into up to eight top premiership clubs for their use of Employment Benefit Trusts, following an ongoing tax enquiry into Rangers FC.

Click here to read ‘HMRC to investigation use of Employment Benefit Trusts in Football’

In last weeks news the loan firm that helped Rangers FC to set up their tax avoidance scheme has been named as Deepwater Ltd. Deepwater Ltd was established in Jersey and was used to pass Employment Benefit Trust payments from Murray Group Management Ltd to Rangers FC players, team staff and executives.

Rangers were informed last month that Deepwater Ltd is closing down and players have been advised to reassign the loans to themselves, relatives or Murray Group Management; alleged 87 cash payments were channelled through this tax avoidance scheme.

Rangers FC are reported to have channelled £47m into sub trusts for team players, executives and coaches. Ibrox stars receiving large payouts are thought to include striker Nacho Novo and midfielder Ronald de Boer who reportedly received £1.2m each, striker Dado Prso, who was paid £1.9m, and ex-skipper Barry Ferguson, who allegedly got a £2.5m payout.

Murray Group Management and Deepwater are yet to comment on the tax avoidance scheme allegations.

Kevin Kinsella Jnr, of KinsellaTax, said:

“HMRC were disappointed. I think the football world to be on a different planet to thre rest of us.”

Tax Avoidance is the legal structuring of affairs to reduce one’s tax bill. Although tax avoidance is not illegal, if HMRC deem a tax avoidance scheme to be aggressive they will work to close it down.

KinsellaTax staff consists of ex-HM Inspector of Taxes and ex-HM Custom and Excise Officers.

To discuss a tax avoidance enquiry with one of our trained tax professionals call 0800 471 4546