What is corporation tax and who pays it?
Football clubs do not pay corporation tax. So why does it matter about corporation tax rises since they will never change the amount of tax paid by a club?
The UK government has now announced a U-turn on the proposed decision to not raise corporation tax to 25%. Given the rate of current announcements, it is difficult to stay up to date. The UK government is now proposing to increase corporation tax to 25% in the next tax year. In line with the original planned.
Firstly, we need to understand what corporation tax is and who pays it. Paying tax is not a bad thing. It shows the business is profitable in the jurisdiction in which it operates. When profitable, the business is usually generating cash. This suggests the business can stand on its own, independent of its shareholders. This is surely the holy grail for football clubs who are notorious for relying heavily on their owners.
Corporation tax is payable by incorporated entities (i.e. limited companies) and not individuals. The amount of tax payable is calculated with reference to profits chargeable to corporation tax or taxable profits. This concept is different to accounting profits or losses.
A corporation tax return is submitted to HMRC, the UK government department responsible for the collection of taxes, by way of a self-assessment. Unlike the financial statements of the majority of large businesses, the entity tax returns are not subjected to independent scrutiny on an annual basis. Football clubs are no different in this respect. Similarly to a club’s Financial Fair Play/ Financial Sustainability Regulation (FFP/FSR) submission, a tax return is not audited annually. It is, however, subject to inspection or review from the relevant authorities.
On the whole, professionals football clubs in the UK take on the legal form of incorporated bodies and therefore would be liable to pay corporation tax on their taxable profits. Historically, the vast majority of clubs have made taxable losses and have therefore not paid much, if any tax. A significant amount of the club revenues is spent on servicing the clubs’ most valued assets and employees, the players. Wages and the cost of acquiring the registration of a player are both deductible for tax purposes. The amount of which is down to the accounting treatment and elections of each club. On the flip side, profits generated by the sale of player registrations are also taxable.
Looking to the future
The more organised clubs, the recipients of the best tax advise and those with the time and resources to plan for the future will be ahead of the game. They will be looking to the future and assessing the impact of increasing revenues and cash generation. Where will the money be spent? On players? Most likely, given what we have seen historically. And what happens if clubs are mandated to become profitable and truly stand on their own? This may mean clubs eventually make accounting profits.
Accounting profits are the starting point for a tax return and the calculation of taxable profits. Similar to an FFP/FSR submission, adjustments are made to calculate taxable profits, on which tax is payable. The methodology to calculate football earnings is remarkably similar. In a tax return, allowable expenditure remains and disallowable expenses are removed. Tax legislation is complex and constantly changing. Historically, since clubs have made taxable losses, they have not needed to worry. But we believe the time to start thinking about tax is now. That is, if clubs haven’t already started to take it seriously.
The proposed rise in tax to 25% from 19% is significant. If clubs do not plan for the future, they may end up being caught by the tax legislation that wasn’t intended for them. Although some clubs have made substantial losses chargeable to corporation tax in the past. The use of these losses is now restricted under certain circumstances. This is a topic we cover in the Professional Certificate in Football Finance that equips learners with a well-rounded understanding of a variety of finance topics, including taxation, through the lens of a football club.
Impact on football financial regulation
Corporation tax income (yes I said income) and expense is not taken into account in UEFA or the Premier League’s financial rules (Financial Sustainability Regulations or Profitability and Sustainability respectively). Those with a keen eye for detail or an understanding of UEFA Financial Fair Play will have noticed that it has now been updated Financial Sustainability Regulations and includes a cap on player related costs. The emphasis on “fair play” being removed and being replaced with “sustainability”. As mentioned earlier, sustainable corporate entities tend to be profitable and profitable entities are more likely to pay taxes.
So although the taxes recorded in the profit and loss account of the club are not counted towards football earnings or their equivalent in the relevant submission to the football authorities, the changing regulatory landscape may have an impact on those clubs looking to compete in European competitions. Indirectly, these UK clubs may end up paying tax, and at a higher rate than was announced in the mini budget.
Jeremy Hunt, the new UK Chancellor has made significant U-turns over the majority of the decisions made in the mini-budget announced less than one month ago. The impact of these announcements has been positive in the financial markets.
We have already discussed the reversal of the proposed decision to abolish the 45% tax rate in detail in our previous journal entry. This reversal remains, alongside the reversal of the mini-budget decision to cut the basic rate of tax from 20 to 19%. Although the impact would have been much smaller in football, this would have meant players and staff in the game would have seen a net pay rise. This will no longer go ahead.
The positive news from both the player and club’s perspective if looking at the announcements in isolation is that the announcement to reverse the increase of 1.25% in National Insurance still stands. This will benefit the clubs and the players. They new Health and Social Care Levy will no longer be introduced.
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