I was gob-smacked by an article in this weekend’s Independent on Sunday about the Premier League and corporation tax entitled “football’s tax shame”. The article claimed that last clubs paid only £3 million in corporation tax, despite being “awash with money”. On the back of this worthies such as Gerry Sutcliffe, former sports minister, and Simon Hughes, deputy leader of the Liberal Democrats (part of the present UK coalition government), came forward to declare the situation a disgrace and in need of urgent reform.
Journalists who write about the business of football usually know about one or the other, seldom both, which means they often struggle with the part they don’t understand. In this case the writer, Paul Gallagher, appears particularly challenged in relation to both accounting, economics, and just the basic facts.
In the financial year 2010/11 the combined pre-tax losses of clubs in the Premier League was £308 million, largely because 68% of their £2.3 billion turnover was paid out in player wages. At some level, pretty much everyone knows this- football clubs lose money because of the prune-juice effect. Manchester City on their own reported a loss of £169 million. Football clubs are awash with money in the way that the Titanic was awash with the Atlantic Ocean- sinking into it rather than floating on it.
Corporation tax is a tax on profits, so if you don’t make profits you don’t pay corporation tax. More than anything else, this is main reason that clubs don’t pay corporation tax. Omitting this basic fact seems eccentric to say the least. As a matter of fact, clubs do pay substantial taxes to the government through PAYE, national insurance and VAT – amounting to £924 million last year according to Deloitte, the accountants.
Most people also know that UEFA’s Financial Fair Play is designed to force clubs to spend within their means, precisely because most clubs are loss-making, not profit-making and therefore do not have any profits on which to pay tax.
Gallagher seemed particularly overwrought about deferred tax allowances. As a matter of fact he rang me up last week to ask about these, without telling me the main thrust of his argument. The problem here is that he doesn’t seem to understand what is going on. He seems to have looked at the tax figures specified in the profit and loss account, and is wound up about tax losses from the past being used to offset current tax liabilities, in those very few cases where there are any profits to report. However, if he’s concerned about taxes actually paid rather taxes rather taxes accrued, he should be looking at the cashflow statement.
More likely he didn’t look at any accounts, but relied on the word of others, because he doesn’t know how accounts work. I might be wrong, but judging from what is written, it certainly looks that way. I emailed him after I read the article asking if he could explain his bizarre conclusions, but he didn’t reply.
So you thought you’d out him as a clownshoes in an article? Good practice!
It never ceases to amaze me how little journalists and our legislators understand about the most fundamental accounting practices as they apply to football. I watched with dismay a Sky reporter attempting to explain Chelsea’s recent reported profit. He clearly didn’t have the first clue about amortisation of the transfer fee over the life of the contract or profit/loss on disposal. Hardly the toughest concept to get your head around. Watching him stammer and mumble his way through a script he clearly didn’t understand was excruciating.
Similarly I had an argument with a Rangers fan who was attempting to liken the RFC situation to the tax status of Amazon, Google, Starbucks et al. Who to my knowledge have yet to flip off a load of creditors and phoenix with the Oldco assets.
Sounds like there might be a book in it!
I know academics so like to get het up about things they perceive as ‘misleading’ but I do wish you’d actually waited for my reply. You emailed me on my day off and I replied to you as soon as I came back into the office after my weekend off.
You make several wrong assumptions which I’ll deal with in turn:
1. As I explained to you in my reply and as I made clear in the article, the story focused on those eight clubs that made profit, not those that made a loss.
2. Re paying corporation tax and “omitting this basic fact seems eccentric to say the least”. I didn’t as you should have read from the story and from the Manchester United spokesman’s comment saying that “as with all businesses, when we make a profit we pay corporation tax – it’s as simple as that”.
3. You say: “As a matter of fact clubs do pay substantial taxes…” I presume you wrote this sentence to infer that I had ignored this fact when in actual fact, as I state in the article, “all of (the clubs) pay big sums in PAYE and other taxes”, and later to reinforce the point, I quote the Premier League spokesman: “He added that last season the league’s 20 clubs contributed in excess of £1bn to the Treasury via PAYE on salaries, VAT, corporation and other taxes.”
3. Your last two paragraphs are particularly presumptuous. Rather than being “overwrought” and “wound up”, I simply reported the facts based on all the accounts which, contrary to your assertion, I have in front of me.I then sent the story to a tax expert who pointed that I had originally included some deferred tax in my tax paid figures and corrected them.
4. If the article was “fundamentally misleading” I would have expected to hear a reply from either one of the clubs, HMRC or AN Other. Not one has contacted me to point out what is so apparently misleading about the article.
5. I do like to check things out before publication. If only others would do the same…
Regards,
Paul
Thanks for getting back Paul – I think this helps to clarify things. On your points:
1. I’m sure I wouldn’t have been nearly so “het up” if you had said in the article “most clubs pay no corporation tax because most clubs make no profits, but here is a story about the few who do declare a profit”
2. as 1. above
3(a) sure, but it stands repeating given the thrust of the article.
3(b) Maybe presumptuous- “let he who is without sin”, and all that. I did say I wasn’t sure, but from what I read it seemed that way ad I did write to you. Journalists have deadlines too…I think my real point is that I don’t think you understand how accounts work- in particular the accruals principle. I’m not a tax expert myself, but then I’m not making the big claims here. To the extent that I understand what you are trying to get at in the article, it seems to me that you are suggesting that there is something wrong with offsetting past losses against current profits. For example, suppose I invest $100m this year in starting a business which generates no revenue this year and then generates $25 million profit each year for the next fives years (and then shuts down). I would say this business has generated $125m gross profit less $100m start up = $25 million, and so I should pay corporation tax on that $25 million. But if I’m not allowed to carry forward my tax loss in year 1 I would be taxed on the $125 million, which at the UK’s 28% rate would take away more than $25m. It wouldn’t be worth starting in the first place. The fundamental economic issue here is that if the government is going to collect a tax on profits, it must ensure that only real profits are taxed, otherwise businesses will not invest.
4. Come off it ! I said it was misleading, not libelous. The clubs’ view would be that it would be better just to ignore it and it’s not HMRC’s business to correct newspaper articles. I guess I am AN Other. I did contact you about what is misleading in the article!
5. I don’t think you checked things very well. you spoke to one tax expert? Did you speak to Deloitte? They audit most of the clubs and are recognised tax experts. Or KPMG? Or any other tax consultants of which there are legions? My guess is that nine out of ten tax experts would say that your article is grossly misleading.
But I do appreciate you taking the time to engage in the debate.