Many of Rangers’ Football Club’s huge range of financial problems appear to have been caused by the all-too-common occurrence of previous management abandoning all commercial sense in running a football club. Unfortunately a similar blindness to commercial reality also appears to be taking hold of the potential new owners.

Prospective owner Charles Green proposed a corporate voluntary arrangement (“CVA”) which would have preserved the existing company by way of a payment to creditors of an agreed percentage of their debts. The percentage proposed was a miserly 9%, yet Green expresses himself as disappointed with HMRC’s rejection of the proposal. Indeed, the CVA picture for HMRC was in fact even gloomier than that, as detailed below. Here are 5 reasons why HMRC is spot on with its decision to reject the Rangers CVA:

1. Precedent

To signal to employers and taxpayers in general that it is acceptable to grossly overstretch your financial resources and then expect the taxman to pick up more than 90% of the can would have been a very dangerous precedent to set. HMRC has to be seen to be operating on the basis that it expects taxpayers to meet their obligations, and will not offer them an easy way out when they fail to do so.

2. Consistency and lack of preferential treatment

It is HMRC’s stated policy to oppose CVA’s where the company has been non-compliant with its tax obligations (see below). I believe this to be an entirely reasonable policy, which makes a fair distinction between businesses which are thrust into financial diffculty by some unexpected turn of events, but have nonetheless made strenuous efforts to abide by their fiscal obligations, and those which have effectively used HMRC as a cheap source of finance as a matter of course over a significant period of time.

For far too long HMRC took a very lenient line with football clubs in general, presumably fearful of the perceived negative publicity associated with actively participating in the demise of a much-loved local institution.

However, they have now quite rightly perceived that the almost inevitable consequence of the financial demise of a football club is not its disappearance, but its reemergence in another form (Chester City, FC Halifax etc, etc), often a more sustainable form free of the malign influence of rapacious owners and operated on a much more realistic and sound financial basis. I would strongly suggest that that is a good thing, both for the fans of the club and the taxing authority.

3. Non-compliance

There is the world of difference beteen a taxpayer which is rendered unable to pay its tax liabilities as a result of unforseeable circumstances, and one which systematically sets out to defer paying its tax in order to favour more pressing creditors or simply to obtain access to cheap funding. A company which, like Rangers, deliberately continues to pay salaries substantially in excess of its resources, giving rise to significant PAYE & national insurance liabilities which it knows it cannot realistically pay, deserves no sympathy or preferential treatment from HMRC. 

4. It’s not their money

Another key factor in my view, and I suspect in that of HMRC also, is the nature of the tax debt. Taxes such as corporation tax are paid out of the company’s own resources based on its own profits, so there are no third party considerations to bear in mind. However, taxes such as PAYE and employees national insurance in particular, and also to a significant extent VAT, are qualitatively different, and I would certainly take a harder line with defaulters in respect of these latter taxes.

The reason for this is simple – the money concerned does not, and has never, belonged to the company. Instead it is merely the mechanism whereby tax and national insurance deducted from employee salaries, and VAT added to sales prices, are collected and passed to HMRC. I would therefore see PAYE, national insurance and VAT default as at best misappropriation of funds, and at worst as theft.

It is for this reason that I warmly welcome the advent of Real Time Information PAYE processing; ideally I would like to see this leading to automatic transmission of PAYE and NI deductions and VAT to HMRC, thus removing the temptation and the possibility for businesses to use other people’s money to prop up their ailing finances, and safeguarding the tax take and the position of those employees who have accepted the deudction of tax and national insurance from their salaries in good faith that it will be paid over to HMRC.

And here is another area where the prospective owner appears to be out of touch with reality. The big risk for his consortium of the ‘phoenix’ strategy which HMRC’s CVA decision will force them to adopt is that the players of the existing Rangers Football Club refuse to transfer to the new company. Mr Green may say publicly that the players have no choice in the matter, but I would suggest that as a matter of employment law he is wrong.

Under the Transfer of Undertakings Protection of Employment (“TUPE”) Regulations governing situations where the identity of the employer changes, the employer is obliged to offer its employees continuity of employment, but they are not obliged to accept it. Indeed, when Simpson Burgess Nash bought out the business of Frenkels an employee declined our offer of continuing employment, which she was entirely within her rights to do.

Now if my employer had systematically deducted tax and national insurance from my salary, and misappropriated it in betrayal of my trust that it would then pay those monies over to HMRC, I would certainly think twice about whether I wanted to become an employee of its successor company.

If the players are being true to their own best interests (which I think it is fair to say tends to be a characteristic of modern footballers) they will look at this factor, and also at the distinct possibility that Rangers will be relegated several divisions, and consider whether they might better placed as free agents.

I can of course see why the propsective owner is dismayed at this prospect, given that by definition it would be the best players who were more likely to be marketable who would tend to take this option, but that doesn’t mean that he can flout employment law to keep them.

Indeed, it worries me that Mr Green does not see this as a potential opportunity to divest himself of some (no doubt) eye-wateringly large contractual commitments to senior players. Is this an early indication of a similar disregard for commercial realities that got the club into trouble in the first place?

Surely the club would be better building on more modest foundations, free of huge existing salary commitments, than trying to go on so far as possible as if nothing had happened? Because something very fundamental has happened, and not to recognise that is, to my mind, a recipe for further disaster.

5. Outstanding Tribunal case re: Rangers’ employee benefit trust

However, the biggest factor in HMRC’s decision, and the one that makes it inconceivable to me how the administrators and Mr Green ever thought that HMRC might even consider accepting the CVA proposal, is the outstanding Tax Tribunal case regarding the use of employee benefit trusts by Rangers to pay large sums to various players. Rangers contend that this was effective in avoiding any obligation to pay PAYE and national insurance on such amounts, but HMRC disagrees.

The amount at stake in this case, estimated at between £35 and £70 million, dwarfs even the vast sum owing to HMRC in respect of other taxes (£21.5 million). So what would have happened if HMRC had accepted the CVA proposal, which would have allowed it to go ahead?

Clearly the answer to that is ‘one of two things’:

1. HMRC would have lost the Tribunal case and collected only its 9p in the pound of the £21.5 million (say £2 million in round figures). Presumably it is expecting to win the Tribunal case, otherwise it would not have brought it. HMRC is not always correct when it thinks it will win tax cases, but it does not seem likely that it would take a case it expected to lose. Thus HMRC could be expected to see this as the less likely outcome.

2. HMRC would have won the Tribunal case, and Rangers would now have owed it roughly £55 to £90 million. As a result the 9p in the £ offer would have been meaningless, as another vast debt would have appeared on the horizon. Whilst this would have increased HMRC’s share of the pot of assets, it would also have greatly reduced the size of that pot. Thus HMRC might conceivably have been in the distinctly odd position of being better off (and certainly not materially worse off) losing the Tribunal case than winning it. How can anyone be surprised that HMRC chose not to put itself in that invidious position?

Given that a significant number of other top football clubs are reputedly awaiting Tribunal cases in respect of their use of employee benefit trusts, this may be the tip of a significant iceberg, and we may see the face of top flight football change significantly as a result. Many English football clubs have for far too long been run with a blatant disregard for fundamental business principles, and a large number of chickens may be about to make a long overdue return to roost. And for the reasons outlined above, I will have no sympathy for those involved.