David Conn: Leicester's tax deal indicates easier way out for crisis clubs

Government's plan to help insolvent companies threatens Football League with glut of members opting for administration

Leicester City's new owners, chaired by Gary Lineker's agent Jon Holmes, may be considering a sentimental restoration of the club's original Victorian name, Leicester Fosse, to mark their new beginning, but the Football League and other clubs are still shocked at the deal which saw Holmes' consortium pay a mere £1.25m to buy Leicester out of administration, leaving millions of pounds of debt unpaid, including more than £6m to the Inland Revenue. A League spokesman said this week that the tax man's acceptance of a tenth of nearly £7m – although this could rise to 40 per cent if Leicester are promoted and survive in the Premiership – owed by Leicester could lead to "an avalanche of clubs" looking to wipe out their tax bills by going into administration.

Football's financial meltdown, with 14 clubs going into administration in the last two years, has already cost up to £1m in public money as clubs have left ambulance services, police and local councils out of pocket. Ordinary staff have been sacked while footballers are protected, and the list of unsecured creditors has included local suppliers owed money they can ill afford to lose. But until Leicester's settlement, tax and VAT, preferential creditors, were usually paid in full, and this prevented administration from becoming the soft option of choice for overspending clubs. But under the Government's Enterprise Act, which comes into force in April, the Inland Revenue will be downgraded from a preferential creditor to an ordinary unsecured creditor, lining up for its payment haplessly alongside the printers, pie-makers and builders.

The League's spokesman, John Nagle, said this issue, hardly at the forefront of most fans' understanding, has struck at the heart of the League's insolvency policy and there are real fears that it will undermine the last vestiges of the club's and the game's integrity. He explained: "The League's concern has been to maintain football's reputation in the community and fair competition between clubs, but this settlement by the Inland Revenue seriously undermines that and gives clubs an incentive to go into administration rather than work hard to pay what they owe."

Previously, the League's insolvency policy required that "football creditors" – players and other clubs – be paid in full, that preferential creditors, the VAT and tax bills, were also fully met, and for a satisfactory settlement to be reached with the other unsecured creditors, commonly around 10p in the pound. As clubs have lurched into insolvency, football, with the Premiership still enjoying a bountiful financial boom, has left a miserable trail of petty debt nationwide.

This has not done much for the integrity of football's reputation. When Hull City went into administration two years ago, £162,000 in tax and £231,752 VAT was unsecured and unpaid. The club owed £66,694 to Humberside Police for their work at matches and nearly £2,000 to the local ambulance service – although this was dwarfed by the £5,912 owed to Mr Chu, a local Chinese restaurant. Unsecured creditors were paid nothing, preferential creditors 30p in the pound, while football debts had to be met in full. The local council and Hull University Union, owed £7,520, were among the creditors.

The inequities of the system have been plain: the police, whose relatively heavy matchday presence has to be paid for by the clubs themselves, have been left owed money by almost every club which has gone into administration: £5,200 by Lincoln City, £6,520 by Bradford City, £23,505 by Bury. Leicester, who have the former directors Greg Clarke and Martin George as directors of the new company, owed East Midlands Ambulance Services £16,000, and St John Ambulance, which provides first aid as volunteers, £4,415.

Bradford City, who collapsed into administration in May last year with debts of £36m, owed money to no fewer than four different local authorities: Bradford, Kirklees, Leeds and Wakefield, a total of £205,498. They accepted 10p in the pound with the offer of more if the club were promoted to the Premiership, an unfunny joke now. All the players, including Benito Carbone with his £2m per-year salary, had to be met in full. Swansea City, who entered a Company Voluntary Arrangement last year, owed four different departments of their local council over £30,000. The unsecured creditors settled for 5p in the pound.

Altogether, around £1m in public money has been left unpaid by football clubs, to police, ambulance services and councils. The gas, water and electriticy suppliers always feature on the creditors' lists, too. Until Leicester, though, tax and VAT were protected and new buyers or directors had to agree to pay them in full.

Most clubs who have come out of administration are still struggling financially to meet their commitments; at Bradford, the Rhodes family have almost exhausted their fortune and put their home up as security as they strive to meet their obligations. The supporters' trust which saved Chesterfield from extinction had to cede control of the club to local businessmen and must raise funds for at least the next two years to try to repay the debts of the old club. Swansea's plight at the bottom of the League is not unconnected with the ongoing battle to meet what they agreed to pay creditors – which included paying over £350,000 tax and VAT in full.

This requirement that tax be paid in full has acted as some deterrent to clubs considering administration, but the League now fears that Leicester will mark a watershed. Ipswich, who declared themselves insolvent last week with debts of around £45m, appointed the same administrator as Leicester, Nick Dargan, and the club's chairman, David Sheepshanks, hinted that they will look to wipe out their own tax bill. "We don't know if Leicester does set a precedent but we will certainly be looking to do a deal with the Inland Revenue," he said.

Clubs who pay high wages have huge PAYE bills and the League genuinely fears its whole competition will be undermined by the development. "We urge the Inland Revenue to bear in mind the needs of sporting competition before reaching their settlements," Nagle said.

A Treasury spokesman said the downgrading of the Inland Revenue to the status of a mere unsecured creditor was intended generally to help companies come out of administration and to allow more creditors to be paid. In football, it has blown away the League's insolvency policy and is likely to mean that the game's current financial meltdown will begin to cost serious amounts of public money. Last month Richard Caborn, the Sports Minister, said the Government was "not in the business of bailing out failing clubs". In effect, at Leicester, it has.

The Inland Revenue has made it clear to the League that, if it is not to be paid in full, it will not approve arrangements to pay football creditors in full. That measure, introduced to prevent clubs gaining an unfair advantage over their competitors by not paying for transfers, or signing star players then not paying them, is now in trouble. The League believes it can now only protect players' wages, requiring that they be paid in full, and is seriously considering introducing penalties, including the deduction of points, to deter clubs from going into administration.

It is, at times, hard to believe these dismal issues and non-payment for public services have to be contemplated when the Premier League is sitting on its £1.5bn, three-year, TV deal. Sheepshanks last week blamed his club's insolvency on the "unsustainable gap" between the Premier and Football Leagues, and urged the game to have a "meaningful debate" about more equitable redistribution. Next week, two Labour MPs, Andy Burnham and James Purnell, who previously worked as special advisors on sport, will be writing to Mario Monti, the European Competition Commissioner, to argue that if the Premier League clubs are to continue to be allowed to act together, as a cartel, to push up the price of their TV deal, they should have to distribute the money more equally.

In putting their case, they stated: "We are now seeing that public money is being lost as a direct result of the Premier League failing to redistribute money down the football pyramid. This is a ridiculous position for football to be in and we are urging the European Commission to require football to redress the unequal distribution of its money, so that it can be healthy throughout, not just at the top."

The Premier League, formed by the Football League's First Division clubs in 1992 specifically to escape more equal financial distribution, has already scoffed at the idea. But three more of its clubs will sink in May to the Football League, and mountains of public money could be lost. Perhaps that will prompt the game into a serious discussion about the meaning of the word "integrity".

davidconn@independent.co.uk