HM Revenue and Customs are expected to take a closer look at clubs’ finances in the future
In earlier years, football supporters have commenced their collective countdown to a new campaign around mid-July when improbable-looking match-ups, staged as one-paced friendly fixtures, begin demanding their attention.
This year, however, anecdotal evidence suggests a dour, dull World Cup has dampened enthusiasm for the forthcoming football season – not great news for an industry already under enormous financial pressure.
According to some experts, clubs face continued commercial strain throughout 2010-11 because revenues are expected to remain flat, player costs expected to rise and, most importantly, scrutiny from HM Revenue and Customs (HMRC) is expected to intensify.
Football is not immune from the recession’s impact, which means it is highly unlikely there will be any marked increase in several of the game’s most valuable revenue streams.
Match and season-ticket sales, merchandising, corporate hospitality and sponsorship all remain flat as the debilitating effects of the recession continue to ripple through the economy.
There are signs many clubs have not kept an adequate control on spending with player costs continuing to rise despite the lack of upturn in revenue.
The football industry norm is to work on a 65% ratio of player wages to turnover, yet a considerable number of high-profile clubs exceed this every year.
Ratios at some clubs exceed 100% and they are solely reliant on the generosity of owners to keep them solvent.
The risk with such business models which, one hopes, a reasonably-educated seven-year-old would reject as perilous, is if an owner decides he is no longer interested in football, a club’s accumulated liabilities, particularly player contracts, become extremely difficult to honour.
Charles Barnett, a partner with PKF accountants, said: “Football remains in difficulties financially. Revenues remain flat, yet costs continue to rise due to players’ wages increasing and the willingness of some owners to fund ever higher demands.
“The impact of this on clubs will be severe if action is not taken soon to control expenditure more effectively.
“Costs cannot continue to rise without income to cover them unless you have a benevolent owner.
“The danger of being reliant on such owners is their interest may wane, or their finances may have been affected by the recession, or they simply wish to get out of football.
“Lenders are becoming increasingly unwilling to be involved in clubs. They also believe no other business would be run in this way so why should football be treated as an exception?”
If banks won’t lend to perfectly good, viable businesses, why should they extend credit to enterprises whose idea of a good piece of business is to pay a motley collection of mercenaries more money than they, the football club, can generate?
Furthermore, the way in which some high-profile clubs pay many of their players is coming under increased scrutiny from HMRC.
HMRC has been keeping a close eye on football for some years and is now taking action to address various matters.
It has been scrutinising clubs to ensure regular and timely payments of tax liabilities, VAT and PAYE, but it is becoming increasingly involved in investigating what it believes are questionable methods of remunerating players.
Six years ago, HMRC reached an agreement with Arsenal who paid a substantial sum in back-dated tax and is believed to have abandoned its practice of using overseas trust funds, known as Employee Benefit Trusts (EBT) to pay its players.
As the 2009-10 season drew to a close, HMRC are understood to have launched an investigation into Rangers’ use of EBTs.
Between 2001-09, the Glasgow club is believed to have paid almost £50million into such trusts on behalf of its playing staff.
Employee Benefit Trusts are perfectly legitimate structures used by numerous international sports stars, mostly footballers, to mitigate UK income tax. They’re established once the footballer settles the trust, transfers a lump sum or other assets to it.
In practice, this transfer is made by the footballer’s employer.
On receipt, the EBT trustees invest these funds, usually making unsecured loans to a named employee (the footballer) on which interest is paid annually.
EBTs are popular because loans are not considered to be income when received by employees, thus ensuring no tax is payable on them.
Ordinarily, loans are made with no fixed repayment date and do not need to be repaid until the recipient, the footballer, moves to a more favourable tax jurisdiction.
Furthermore, additional loans can be made by the EBT to the footballer to assist with the payment of interest.
Though not illegal, HMRC has been keen to close the loophole and, as was the case with Arsenal, present the club with a back-dated tax bill, plus interest. However, in many instances where EBTs were established, the player indemnified the club against any future tax liability.
HMRC’s argument is while it is extremely difficult for them to recover tax from a player who may now be resident abroad, they can pursue UK-resident players who benefited from such arrangements and are seeking to hold the clubs liable for unpaid tax due from overseas stars.
“HMRC are on dodgy ground if an overseas player has effectively indemnified the club against future tax liability,” said one tax lawyer, “but that won’t stop them pursuing the route of least resistance for payment.
“It follows several clubs can expect visits from HMRC – and not just to take a look at their VAT records.”
Against such a sombre financial backdrop, the game really could have done with a more uplifting World Cup.
