Sticky Toffees – why Everton were docked 10 points


21st November 2023

Everton became the first Premier League club to be sanctioned – by way of 10 point deduction – under the Premier League’s Profitability and Sustainability Rules. This article explores why Everton suffered a 10 point deduction.

On Friday 16th November 2023, an independent commission handed Everton Football Club an immediate 10 point deduction for breaching the Premier League’s Profitability and Sustainability Rules (“PSRs”) for the 2019/20, 2020/21 and 2021/22 financial years (the “Relevant Period”), becoming the first club to be sanctioned under the PSRs. Their decision can be read here (as well as an earlier decision here).

What are the PSRs

The PSRs form part of the Premier League’s rules (the “Rules”) and are designed to promote financial stability and sustainability amongst Premier League clubs by limiting the losses they can incur, ensure that clubs are financially responsible and do not spend beyond their means and guard against unlimited cash injections from owners. They allow a Premier League Club to incur a loss of up to £105 million (the “Allowable Threshold”) over any period of three year financial years (the two financial years immediately prior to the one in question and the financial year in question). Expenditure relating to depreciation (not including player value), women’s football, youth development, community development and for 2019/20 to 21/22 seasons only costs relating to COVID-19 are exempt from the calculations of loss for PSRs purposes.

Where any Premier League club incurs a loss more than the Allowable Threshold during any three year period, then that is a breach of the Premier League rules and the Premier League must refer the breach to an independent commission (the “Commission”) to determine the issue.

The issue

The Premier League believed that Everton had incurred a loss of £124.5m (and therefore £19.5m in excess of the Allowable Threshold) for the Relevant Period and therefore were in breach of the PSRs. As such, in March 2023 the Premier League referred the alleged breach to the Commission.

Initially Everton had denied that they had breached the Allowable Threshold arguing that their loss was £87.1m, well below the Allowable Threshold. However, shortly before the hearing admitted that they had exceeded the Allowable Threshold and had therefore breached the PSRs for the Relevant Period, but only by £9.7m (having incurred a loss of £114.7m for the Relevant Period). The difference between the parties therefore was the calculation of the loss in excess of the Allowable Threshold, with a difference of £9.8m between them.

As Everton had admitted breaching the PSRs by exceeding the Allowable Threshold for the Relevant Period, the Commission were required to determine the following issues following a five-day hearing in October 2023:

  • the amount of loss incurred by Everton during the Relevant Period (and therefore how much in excess of the Allowable Thresholds that loss was) – essentially whether it was Everton or the Premier League’s calculation that was correct (or somewhere in between); and
  • the relevant sanction to be issued to Everton (including any aggravating or mitigating factors).

Everton’s arguments

Everton disputed the Premier League’s calculation of the loss (being £124.5m) on basis that the Premier League had failed to exclude the following from its calculation:

  • £7.6m being a proportion of the transfer levy sums paid by Everton to the Premier League which the Premier League had then paid in relation to youth development. The transfer levy is a 4% charge of the value of any transfer payments made by a club which is paid to the Premier League which is then used to pay premiums under the Professional Footballers’ Pension Scheme. However, any surplus is then paid to the Professional Game Youth Fund. Everton argued that the proportion of the total transfer levies paid by Everton which was then used to pay the Professional Game Youth Fund was an expenditure directly attributable to youth development and therefore should be excluded from the calculation of loss.
  • £2.2m interest charged by Everton to Everton Stadium Development Ltd (a subsidiary of the club responsible for expenditure on the construction of a new stadium) in relation to an intercompany loan which was designed to “pass on” interest charges payable by the club to the club’s commercial lenders. Everton’s position was that any interest attributable to expenditure on the stadium should be excluded from its calculations and argued that accounting standards meant that the commercial loans would have been repaid or never drawn down had it not been for stadium redevelopment and, as such, could be capitalised as they were directly attributable to a qualifying asset (the new stadium) and therefore excluded from calculations.

Everton therefore believed that the amount of loss they had incurred during the Relevant Period was £114.7m (only £9.7m over the Allowable Threshold).

The Premier League’s arguments

The Premier League disagreed. Their view in relation to the amount of breach was that:

  • the interest payments could not be excluded as Everton had not in fact incurred any interest cost in relation to the stadium and interest on an inter-company charge did not impact earnings before tax and therefore could not be excluded from PSR calculation; and
  • the transfer levy was not in fact expenditure attributable to youth development at all – it was expenditure by the Premier League of funds derived from the levy and that the payments were not directly attributable to youth development. Additionally, no other club (including Everton) had ever sought to exclude such payment and to do so would be both unprecedented and wrong in principle.

The Commission's decision

The Commission decided that Everton’s loss for the Relevant Period was £124.5m (as argued by the Premier League) and therefore £19.5m in excess of the Allowable Threshold. The Commission reached this figure by rejecting Everton’s arguments for the following reasons:

  • the payment made by Everton was of the transfer levy which, of itself, was not directly attributable to youth development (such payment being made by Everton to the Premier League for pension purposes, with any surplus paid by the Premier League to the Professional Game Youth Fund); and
  • the stadium was being funded by interest free loans from the club’s owner (not from the commercial loans to the club which had express prohibitions on those loans being used for the stadium). As such the interest payments that Everton sought to exclude were not in respect of the stadium and therefore could not be excluded.

As such the sums Everton sought to exclude should not have been excluded.

Mitigating and aggravating factors

Having found that Everton had exceeded the Allowable Threshold by £19.5m, the Commission then had to determine the appropriate sanction to be issued. Before doing so, it considered factors put forward by Everton that sought to mitigate its culpability and therefore reducing the nature and size of any sanction and factors put forward by the Premier League which sought to aggravate Everton’s culpability and therefore increasing reducing the nature and size of any sanction.

In short, the Commission only accepted one of the six grounds Everton raised in mitigation (and that one ground only to a limited extent) as follows:

  • Everton believed they could have treated some of the interest charges as capital expenditure which would have reduced the loss (but had not done so). The Commission rejected this argument as it had already been decided that the interest could not be excluded and as such could not be relied upon in mitigation.
  • Everton alleged that they had suffered a loss as result of Player X’s termination following his arrest and that they were entitled to sue him for £10m, but decided not to do so due to Player X’s psychological state. The Commission rejected this ground on the basis that those losses were the sort of event that occurs in management of football clubs (similar to injury or loss of form) and was not something that could be relied upon in mitigation.
  • Everton believed COVID-19 prevented them from selling players (which would have amortised costs and saved in wages). The Commission rejected this ground on the basis that the value Marcel Brands (the club’s Director of Football) had placed on eight players targeted for sale were no more than target prices, being aspirations and not true market values. The fact that those prices were not achieved was more likely there was no market appetite for those players at those prices than any COVID-19 impact. Additionally, the ability to sell players is inherently uncertain and events and market forces (including PSRs challenges – for example, Everton arguing Richarlison would have been sold for £80m not £60m had it not been for such issues) may operate against selling clubs. Clubs were expected to have in mind untoward eventualities when planning expenditure. The Allowable Threshold provided clubs with a generous ceiling within which to operate and, with prudent planning and budgeting, provided considerable protection against untowards events. Additionally, clubs had already been given benefit for COVID-19 related losses.
  • Everton believed they had cooperated fully and proactively with the Premier League. The Commission rejected this ground of mitigation on the basis that whilst Everton had engaged extensively with the Premier League, information provided by Everton had not been wholly straightforward, some of their claims were novel, some were abandoned shortly before the hearing and the Commission had previously found that Everton’s conduct had not been in utmost good faith. As such, there was no mitigation of Everton’s culpability.
  • Everton’s losses over the Relevant Period demonstrated a positive trend, showing they had positively addressed its PSRs issues. The Commission agreed with this ground to a limited extent, stating the fact that Everton had reduced its losses during the Relevant Period went a limited way to diminish Everton’s culpability.
  • The impact of the Russia invasion of Ukraine caused significant and unexpected impact on investment and sponsorship income from a company owned by a sanctioned Russian oligarch. The Commission rejected this ground of mitigation on the basis that the loss of sponsorship as a result of the Russia invasion of Ukraine could not be relied upon in mitigation as it was uncertain any such agreement for sponsorship would have been reached and in any case is the type of event businesses experienced. Similarly, any argument that the Russia invasion of Ukraine increased construction costs was also a type of event businesses have to contend with as part of their daily life.

As such, those arguments could not be relied upon to diminish Everton’s culpability:

  • The Premier League stated that a significant cause of the breach was Everton overspent on players and failed to take steps to reduce expenditure. The Commission stated that their approach was to consider the extent the Allowable Threshold had been exceeded. It was unwise for Everton not to have curtailed player purchases as they were aware of potential PSR difficulties but pressed on in hope that it would make sales of players allowing PSRs compliance. This was poor judgment. However, whilst an unwise risk, it was not a deliberate cynical breach with an aim of achieving sporting advantage which would increase culpability further.
  • The Premier League argued that the amount by which the loss exceeded the Allowable Threshold was an aggravating factor. The Commission stated that they would already take the extent of the breach as an important level of culpability and to include it as an aggravating factor would constitute double counting.
  • The Premier League argued that Everton had submitted misleading information about stadium financing costs. The Commission stated whilst Everton’s calculation in relation to stadium interest was less than frank, there were no allegations of dishonesty and Everton had not consciously intended to circumvent the rules. However, there was no doubt they had failed to discharge their duty of utmost good faith and therefore this was an aggravating factor that increased Everton’s culpability.
  • Everton had made a decision not to sell Player Y (having told the Premier League that they had intended to). The Commission stated that Everton’s submissions in relation to selling Player Y were not intentionally misleading and therefore did not constitute an aggravating factor.

Sanction

Having determined Everton’s culpability, the Commission went on to consider the appropriate sanction. The Rules gives the Commission a wide discretion to issue a range of sanctions, including points deductions, fines and compensation.

The Premier League believed that the only appropriate sanction was a points deduction. Everton disagreed and believed that a financial penalty would meet the justice of the case but if a sporting sanction was required that should be by way of a transfer ban rather than a points deduction.

The Commission stated that they had no doubt that a points deduction was the only sanction that was appropriate – a financial penalty would not be sufficient where the club enjoys the support of a wealthy owner and the requirements of punishment deterrence vindication of complaint clubs and protection of the integrity of the sport demanded a sporting sanction. The Commission expressly commented that:

  • Everton’s PSRs difficulties were not because of their stadium development, those costs had been excluded as a result of a previous agreement. Their difficulties were due to overspend (largely on new players and inability to sell other players) and having finished lower than projected in the 2021/22 season (in itself causing a £21m loss through loss of prize money). Everton’s desire to improve on-pitch performance (including to replace it’s “non-existent midfield”, as described by its owner) resulted in the club taking chances with its PSR position.
  • The position that Everton found itself in was of its own making. It was the club’s responsibility to ensure compliance and the excess over the Allowable Threshold (of £19.5m) was significant.
  • Everton had failed to manage its finances and it was mismanagement that led to the Applicable Threshold being exceeded by £19.5m.

As such, the Commission concluded that Everton’s culpability was great and that it was a serious breach requiring a significant penalty. The Commission decided that Everton should be subject to an immediate 10 point deduction.

It should be noted that in March 2023 the Premier League had asked the Commission for an expedited hearing to determine the issue prior to the end of the 2022/23 season (i.e. last season). The Commission decided not to grant such an application as it was unrealistic to expect the proceedings and any appeal to be determined by the end of the season and to compel Everton to meet such a timetable would risk procedural unfairness. If the Commission had granted that application, this would have meant that any sanction issued would likely to have applied to the 2022/23 season and, assuming that the Commission would have reached the same decision, it would have been extremely likely that Everton would have been relegated last season and by now be plying their trade in the Championship. Everton fans may take some solace that this decision, having been made relatively early in the current season, gives Everton a fighting chance of survival, especially as they are only two points behind Luton who sit just above the relegation places at the time of writing.

It should also be noted that Everton had concerns about not exceeding the Allowable Threshold for a number of years and had for some time been forecasted to breach the PSRs for the 2017-2020 financial years. This was mainly on the basis that the costs incurred during that period in relation to their new stadium could not be excluded on the basis that planning permission had not yet been obtained and therefore could not be capitalised in accordance with accounting practice and therefore excluded from the calculation. It seemed that the Premier League had some sympathy with Everton on this point at that time, as six other clubs had been able to capitalise stadium development costs because their developments could be considered probable at an earlier stage of their respective projects. However, at that time the Premier League reached agreement with Everton that they would not refer that potential non-compliance, and enforce that non-compliance so long as Everton:

  • (i) complied with certain conditions set out in that agreement (which are understood to include a wage cap); and
  • (ii) did not exceed the Allowable Threshold for the 2020/21, 2021/22 and 2022/23 seasons. Evidently Everton did not keep to that promise.

What next?

It’s not quite the end of road for Everton or PSRs issues generally:

  • Everton have already indicated that they are shocked and disappointed by the ruling, believing the sanction to be wholly disproportion and unjust. They have already communicated their intention to appeal (and the Commission commented in the Decision that any appeal will be determined by the end of the current season).
  • Whilst Everton are the first to be sanctioned, they were not the first club to be referred to the Commission by the Premier League for breaching financial rules. In February 2023, Manchester City were referred to the Commission in relation to 115 alleged breaches of financial fair play rules over a nine year period between the 2009/10 and 2017/18 seasons. It is also understood that Chelsea are under investigation by the Premier League and could well be referred to the Commission in due course. Everton have stated that they will be monitoring such cases with great interest.
  • As stated earlier, the Commission has the power to require Everton to pay compensation. In a hearing in March 2023, the Commission refused an application by a number of clubs (led by Leeds United but also including Nottingham Forest, Southampton, Leicester City and Burnley, all of whom – except for Nottingham Forest – were relegated during the Relevant Period) to be joined as parties to the hearing, but the Commission acknowledged those clubs had potential claims for compensation and stated that those clubs would have a period of 28 days from the Commission’s decision to make an application for compensation – that time period is now ticking and those clubs now have until mid-December to decide whether to pursue claims for compensation. It seems that Nottingham Forest may likely have little interest (or indeed unlikely have any losses to claim) as they retained their place in the Premier League, but the remaining clubs will almost certainly seek compensation on the basis that had the sanction been applied last season then they would have retained their place in the Premier League (together with the riches that come with that). The net effect of any successful compensation claims would be that Everton would be required to pay significant amounts of money to other clubs, amounts which at the very least may bring an end to the possible takeover of the club, but at worst could push the club into financial turmoil.

Conclusion

Whilst this is the latest in a series of clubs or teams falling foul of rules designed to ensure financial fair play – these include Saracens, Red Bull F1 and Sheffield Wednesday – it is a landmark decision in the Premier League. However, it is unlikely that Everton will be the only club to be sanctioned and the sporting world will be keeping an eye on developments in any appeal pursued by Everton, any claims for compensation pursued by other clubs, as well as the Manchester City investigation.

If you require any advice please contact Tomos Lewis or Dov Katz.

If you need advice on commercial issues

Speak to one of our specialist commercial lawyers

Arrange a call

Enjoy That? You Might Like These:


articles

4 December -
Earlier this year we reported on the Judicial Committee of the Privy Council (JCPC) Change Programme and Consultation on sweeping changes to the JCPC Rules and procedures regarding Privy Council... Read More

articles

2 December -
In a world where remote working is the norm, emails are firmly the primary method of business communication. However, when it comes to service of contractual notices or legal proceedings... Read More

events

28 October
Our Public Sector Insights webinar on Thursday 12 December focused on data protection and information governance. Read More