Football Creditors Rule

[Skyline]

Part of the HMRC action against Pompey seems to be tied up with the Football Creditors Rule. While I know in vague terms what it's all about (i.e. football creditors get first dibs on any money owed), is there a good reference that gives a proper definition of what it is, history of how it came about, and why the Government was happy to agree to it when no other business (or indeed sport) in this country seems to have the same level of protection?

[Y21_Royal]

One for Dirkers methinks

[Dirk Gently]

Not sure how it came about - I believe it was part of the original Football league rules when the game went professional - or earlier. It's always been there, and was setup so that clubs could play each other in front of a paid crowd - less relevant now that gate-sharing has been abolished but it still apples in the cups.

But without it no-one would ever play an away cup tie and the whole transfer system would collapse). Would you play a cup game away at Portsmouth....?

The government as an elected body don't have an opinion, but HMRC absolutely hate it, and their current opposition to anything to do with football, and their policy of refusing to vote for any football CVAs where they get less than 100p in the pound, is down to that.

It's only recently become an issue though. Until the 2002 Enterprise Act, the taxman was a preferred creditor by law (i.e they got paid in full before anyone else, the same as football debts are now). So they were happy and it wasn't an issue - it just meant that the programme printer or the pie supplier down the road got even less. Now, legally, HMRC have the same status as the programme printer and the pie supplier so they're kicking up a stink.

[Mr Angry]

But why should football be a special case?

Any other business has to pay the HMRC first, so why should football be different?

[Dirk Gently]

But why should football be a special case?

Any other business has to pay the HMRC first, so why should football be different?

Well, any other busines has to pay the HMRC equal first - they now have the same status as all other creditors.

Legally there's no justification - it's something in football - an agreement required as a condition of membership of the leagues.

No wonder HMRC hate it.....

[Barry the bird boggler]

So basically it all comes down to the previous government failing to take good and proper care of public funds by not countering the position adopted by the clubs by introducing a law stating that the HMRC must receive full payment on any debts run up by any businesses in administration.

[Dirk Gently]

Rather the previous government removing the HMRC's status as preferred creditor.

I have absolutely no idea why they did that!

This sums it up nicely :

Wednesday, June 02, 2010
HMRC To Sue Premier League
By Bobo

The taxman is suing the Premier League in a bid to remove the preferential status of football creditors.

HMRC are seeking a legal ruling that the League's 'Football Creditors Rule' is unlawful and can no longer be applied. Since their own preferential status was removed in 2003 the taxman has routinely voted against CVA agreements across football in protest at footballing creditors receiving preference under the individual leagues rules.

Should the taxman be successful against the Premier League, the Football League and Conference will almost automatically have to fall into line - meaning that clubs will no longer have a guarantee of payment should another side go bust. It also means that sides would be more likely to fold and reform at a lower level.

With the Government on an economy drive, the taxman stands to lose 80% of their claim against Portsmouth - up to £28million - if the CVA is passed and cannot allow such losses to be repeated with other Premier and Championship sides said to be in debt to similar levels. A spokesman told Accountancy Age magazine:

"HMRC‘s view is that there is nothing in insolvency legislation that provides for unsecured debts due to “football creditors” to be paid in preference to other unsecured creditors such as HMRC.

"Our view is that the practical application of the so called 'Football Creditors Rule' may be unlawful. We have nothing further to add at this stage."

[Skyline]

Cheers for that Dirk.

Still think it's odd that the government would be willing to remove the HMRC's preferential treatment - it is, after all, the body that generates the money for Government to use.

[Dirk Gently]

Cheers for that Dirk.

Still think it's odd that the government would be willing to remove the HMRC's preferential treatment - it is, after all, the body that generates the money for Government to use.

Couldn't agree more - I'm trying to find out what their motivation was.

[Z175]

The problem with this is that for Owner Managed Businesses, eg Football Clubs in a lot of cases, the owners secure fixed charges on the assets and floating charges on the stock.

Mr Gaydamak and others, who are by far the biggest creditors, and the banks, will have insisted on this before loaning the money. in the case of the owenrs, they lend their business money and secure it on the assets.

Thus HMRC, the employees and the suppliers are the ones that lose out when that company becomes insolvent. The employees (who have some limited protection) and suppliers would avoid the company if they weren't getting paid, but HMRC has no choice.

HMRC as top of the pile ahead of fixed charges, therefore made sense.

But from a general economic, sound place to do business perspective, having to take this rule into account caused a lot of unneccessary tax accounting costs.

Imagine if this rule still existed - the argument that Portsmouth owe HMRC more moeny is currnetly being debated at the moment. But the finalisation of what they should actually pay as a figure may take at least a year if not more. The creditors couldn't legally be paid in a CVA until this was finalised and the league would presumably not let them back in without a CVA.