Taxman turns trust-buster as clubs feel the EBT squeeze

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The taxman is taking the battle to Football Inc. on a range of fronts despite the failure of its tax evasion cases against former executives of Portsmouth FC as it cracks down on an industry long seen as having a dubious financial reputation.

The aggressive stance by HM Revenue & Customs over millions owed in unpaid tax has been the reason for both Glasgow Rangers and Portsmouth going into administration this week, the latter for the second time in two years.

It emerged last year that HMRC issued winding-up petitions 25 times for clubs in the Football League in the past two years but the financial woes of the clubs on the south coast and in Glasgow has brought into sharp relief two of the taxman's key battlefronts.

Rangers were forced into administration over an unpaid tax bill of £9m after money was taken from player wages but not handed over to the HMRC. However, the club is awaiting the verdict of a tax tribunal over a much bigger scheme which could cost it £75m.

The Revenue gave clubs – and other, non-footballing, institutions – until the end of December to come clean about the use of employee benefit trusts (EBTs), which had been used by Rangers for years to pay players and avoid the full impact of higher rate tax.

Clubs and highly-paid foreign players had been able to decrease British tax bills by having a substantial proportion of their wages paid into an EBT, which are only taxable when funds are withdrawn. If a player does so after moving from Britain – with its top rate of income tax of 50 per cent – to a lower tax jurisdiction, they have been able in the past to cut their bills. HMRC has said that clubs and players must pay tax on sums paid into the trusts, and a tribunal will next month rule on Rangers' payments into EBTs over the years.

The unsuccessful prosecution of Peter Storrie, a former Portsmouth chief executive, by tax authorities last year highlighted the extent of football's multinational financing framework. An alleged "golden hello" was paid to the Senegalese player Amdy Faye, when he moved from French side Auxerre, through the Monaco account of his agent Willie McKay and then on to his account in Senegal, the prosecution claimed. Storrie was acquitted of any wrongdoing over the deal.

However, it remains unclear how many clubs have used EBTs, or have since come forward to declare their use to HMRC. Football finance expert Chris Brady, visiting professor at Greenwich School of Management, said "it would be amazing if clubs weren't using them" given the amounts of money sloshing around the Premier League and the desire to attract foreign players.

He believes there are six current or former Premier League football clubs who remain in "deeper discussions regarding their use" with HMRC. The tax authorities said that that figure was "speculation".

A Revenue spokesman said: "HMRC have made it clear that where an employer uses EBTs to reward employees, tax must be correctly accounted for ... our main focus continues to be by engagement with our customers to see how we can settle by agreement.

"However, where an employer using an EBT does not come forward, we will look to take action through litigation."

The Revenue has also launched a court challenge against the "football creditor rule" that the English game's rulers have imposed, under which managers, clubs and players get preferential treatment over other creditors when a settlement is finally made. In Scotland all creditors are treated equally.

When Portsmouth became the first Premier League club to go into administration two years ago, the Revenue got a fraction of the sums it was owed. Small creditors, including local businesses owed several thousand pounds, were at the bottom of the pile. This time around, the High Court heard yesterday that the club had an unpaid tax bill of about £2m with other creditors owed about the same amount.

Portsmouth North MP Penny Mordaunt said: "Although the creditors would love to be paid, they are not holding their breath."