How has Aston Villa fallen into arrears with HMRC?
Relegation from the Premier League at the end of the 2015-16 season, after 24 seasons, hit the club hard. This further cut into their revenue streams, dropping:
- £2.9 million from gate receipts.
- £17 million from broadcasting income.
- £9.1 million from sponsorship deals.
- £6.4 million from royalties.
The club reported losses of £29.6 million during this period. In order to maintain the club, the new owner took several steps that reduced the club’s losses for the following financial year to £7.5 million:
- Selling players for a £26.6 million profit.
- Cutting full time staff from 348 to 226.
- Cutting overall employees by 1,428 to 889.
- Cutting executive pay from £4.6 million to £357,000.
In addition to this, Villa have been receiving parachute payments for their drop from the Premier League. However, they are now entering their final year of receiving such payments. It is anticipated that the club will only receive £15 million; less than half the amount they received last year. Villa had been hoping to secure promotion in the Championship play-off final in order to secure their financial position. However, this was not to be.
The May 2017 accounts show retained losses of £232 million, meaning a balance sheet deficit of £147 million, leaving Villa balance sheet insolvent. Promotion to the Premier league would have meant increased income of at least £170 million over the next 4 years. Later increasing to around £290 million if they survived the first season. The club is now left in a difficult situation where it must resolve its issues with HM Revenue & Customs in order to survive.
What would insolvency mean for Aston Villa?
If Aston Villa were to enter into administration or liquidation, following a winding up petition from HM Revenue & Customs, there would be severe consequences for the club. Villa have suggested to the press they intend to pay the tax bill imminently. However, it is anticipated they will require further shareholder funding or a quick sale of players in order to do this. This pressure to sell will have a detrimental effect on the squad even if they can avoid insolvency.
If Villa do enter administration, they will receive a deduction on 12 points in the 2018/19 season. This deduction is applied at the end of the season. If they are due to be relegated before this deduction, this could be carried over to the 2019/2020 season. In order to continue trading, Villa would also have to find a buyer for the club and also deal with the football creditors rule.
In the case of a winding up petition, you can find out what you can do here.
What is the football creditors rule?
The football creditors rule means that super priority is given to football league creditors over all other creditors. If football creditors are not paid in full, the club is prohibited from taking part in league football until this is rectified. In practical terms, this generally means that any buyer looking to take the club out of administration either needs to bid sufficient to pay these creditors, after the costs of insolvency. Or, provide an undertaking to pay these creditors from the new business. Football creditors include:
- Other clubs
- The football league
The intention behind the football creditors rule was to avoid the domino effect. Essentially, causing other clubs to enter insolvency as a result of one club entering insolvency. This could, effectively, devastate the football league causing numerous club insolvencies. It is, however, a heavily contested topic with HM Revenue & Customs bringing numerous cases against the fairness of the rule. Some examples provided by R3, the insolvency industry trade body, are as follows:
- Crystal Palace FC administration in 2010: football creditors were paid in full, unsecured creditors received just under 2p/£.
- Plymouth Argyle FC administration in 2011: football creditors were paid in full, unsecured creditors received 0.77p/£.
In response to this, in 2015 additional rules were introduced meaning that unsecured creditors must receive at least 25 p/£ (or 35p/£ if payment is protracted over 3 or more years). If not, an additional 15 point deduction would be applied to the club. This is extremely serious with a double threat of relegation and significant lost revenues. In their current position, struggling with revenue, Villa hope to avoid this. If they were to enter administration, they would be the first club subject to these tough new rules.
Further revisions to the football creditors rules are anticipated, with unsecured creditors still likely to be unhappy with their disadvantaged position. Some of R3’s suggestions included:
- Points deductions simply for falling into arrears with HMRC.
- Player liabilities being limited to a period of 12 months.
- 30 point deduction for a failed or rejected Company Voluntary Arrangement.
What next for Villa?
With HM Revenue & Customs threatened winding up petition, Aston Villa will need to act quickly if they are to avoid formal insolvency. Due to the football creditors rule, HMRC grant very little grace time to football clubs who do not pay their taxes on time. This is in order to limit their losses as much as possible.
If you are worried that you may be threatened with, or your business has already been issued with a winding-up petition, speak to one of our business rescue experts for a free, informal, initial consultation regarding the best next steps for you and your business.