Glasgow Rangers’ rapid descent into administration came as a complete shock to most football fans, once again highlighting the precarious nature of the game’s rickety financial structures.
‘Chasing the dream’ with too much borrowed money is a long-discredited business plan, though if such a ‘strategy’ is pursued, keeping the taxman sweet with occasional payments does make enormous commercial sense.
Not as though administration is some sort of magic wand designed to provide indebted football clubs with a simple, one-off answer to their financial woes. Rather it is a last resort for companies who find themselves in perilous financial waters but might just be able to avoid liquidation.
An administrator is a specialised insolvency practitioner appointed to run the business. However, the firm handed complete control of Rangers’ finances must now focus on safeguarding the interests of the club’s creditors.
It’s an enormous task. Rangers’ largest creditor is HM Customs & Excise who claim they’re owed £35 million in unpaid tax plus a further £14 million in fines and penalties. Craig Whyte, Rangers’ unpopular owner, maintains the taxman might want £75 million, although this figure, like so many others at Ibrox, remains unquantified
The HMRC tax demand centres around Rangers’ use of Employee Benefit Trusts (EBT), arrangements whereby players may legitimately ‘settle’ the trust by transferring a lump sum into it. The EBT trustees are then permitted to make unsecured loans to a named employee, usually the footballer, without the deduction of tax as loans are not considered income when received by employees.
Ordinarily, loans are made with no fixed repayment date and need not 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 player to assist with the payment of interest.
So great is the amount of money swilling into international footballer’s bank accounts that its leading exponents and their advisers spend a significant proportion of time concentrating upon tax mitigation.
Given the genuinely global demand for their services, a significant proportion of sportsmen ply their trade in foreign jurisdictions. This can have enormously positive financial implications for the international sports star, although it is not unknown for them to suffer the affects of onerous tax demands.
In this respect, UK income tax and PAYE is considered onerous, although a foreign footballer may legitimately avoid (not evade) tax by establishing an EBT.
However, although they effectively eliminate UK income tax, they are not a ‘one-size-fits-all’ product.
Since March 2007, payments to an EBT no longer qualify for UK corporation tax relief – unless the trust disburses taxable benefits or remuneration.
Nonetheless, EBTs are still considered enormously useful ‘tax neutral’ vehicles, provided the trust’s director or shareholder adheres to certain rules. And there’s the rub. Unless an EBT is both properly established and the rules under which it may be used strictly adhered to, the international sports star or the company paying money into the trust may attract a tax liability.
These EBTs were in place at Ibrox long before Craig Whyte bought the club for £1 from Sir David Murray last May, pledging to repay the club’s £18 million debt to Lloyds Banking Group.
But Rangers are far from the only British club to sanction their players’ use of EBTs. Although the Premier League contests the number of clubs involved, HMRC are understood to have contacted as many as eight top flight football clubs regarding their use of EBTs. Any outstanding matters and liabilities in respect of these structures had to be settled by 31 December last year.
The Premier League definitely did act as a mediator in negotiations between up to 15 clubs and HMRC to help settle a tax-related dispute over image rights. Under this arrangement, Chelsea, for example, paid £6.4 million to HMRC “in relation to an industry-wide investigation into the taxation of payments under image rights.”
The figure and statement appeared in the club’s accounts published earlier this month.
As professional footballers can often enjoy several different sources of income emanating from a variety of countries, it’s hardly surprising that HMRC have targeted the game in an attempt to recoup what it believes is unpaid tax.
Although structures may have been properly established, their usage and administration has often proved sloppy, so rightly providing the tax authorities with an opportunity to investigate.
Nevertheless, depending upon where they are ordinarily resident or domiciled, it is still entirely possible for a foreign footballer to continue to create a formal offshore structure to protect such income and permit the reimbursement of associated expenses and the payment of regular bonuses in a tax efficient manner.
The key to the successful operation of such structures is simple: neither club nor player must abuse them by allocating say, a disproportionate amount to image rights payments to a separate offshore company owned by the footballer.
Rangers’ apparent enforced sale of star striker Nikica Jelavic to Everton for £5.5 million in late January failed to solve their multitudinous financial problems, although by going into administration, they’re unlikely to face a winding-up petition.
The club must eventually extricate itself from this parlous position, probably before the summer, when wage bills must continue to be paid even though gate receipts are non-existent.
To do this, the administrator must reach agreement with Rangers’ creditors and persuade the SPL that the club can continue as a going concern. That appears an almighty undertaking and if Rangers ultimately fail, the repercussions for professional football in Scotland could be dire.
Meanwhile, the fallout from HMRC’s ongoing investigation into British football’s finances may yet see another big name club follow Rangers into administration.