Financial chicanery in football is nothing new, and it is well known that the clubs at all levels have trouble making the books balance. As a result, to make English football more sustainable, regulators such as the Premier League (FAPL) have introduced rules such as the Profitability and Sustainability Rules (PSR) to force clubs into more sustainable financial thinking or face the prospect of sanctions as severe as fines, points deductions, and relegation. Manchester City is also facing FAPL charges of PSR (as detailed in a previous blog post) but the case is still ongoing, but the Everton decision could be a useful precedent for how a future Commission may look at that case.
PSR Explained
The PSR are designed to promote financial stability amongst FAPL clubs by placing limits on the allowable losses a club can make. It does this by looking at a club’s annual accounts covering a three-year period. By 1st March each year, a club must submit its annual accounts to the previous year (T-1), and the year before that (T-2), together with its estimated profit and loss account for the current year (T).
If the club reports an aggregated loss over this three-year period, then they must also submit their PSR calculations to show their adjusted earnings before tax, meaning their earnings before tax excluding costs that the FAPL considers to be in the wider interest of football, these generally include costs such as investments in infrastructure (e.g., training grounds, stadium), youth development, and women’s football. Additionally, in the years covering 2019 to 2022, and costs directly associated with Covid-19 were also excluded from the PSR calculation, which could potentially include reductions in player transfer values as long as it can be directly attributable to Covid-19. A further covid-19 related allowance was made to clubs in that they were permitted to average the losses made over 2020 and 2021.
The rules allow a club to make a loss of up to £15 million almost without consequence, if a club makes a loss up to this level, then the FAPL will ask a club to provide further information on its ability to fund the club the following season under Rule E15.9. If the loss exceeds £15 million but is less than £105 million, then a similar requirement is imposed, but covering a two-year period instead.
A club will not face the prospect of sanction until they make a loss exceeding £105 million over a three-year period. If they do, then the FAPL may impose budgetary and financial restrictions on the club and refer the club to a Commission under Rule W of the FAPL Handbook.
Everton – A Brief Recent History
Farhad Moshiri first bought a shareholding in Everton back in March 2016, and gradually increased his stake until he became the majority owner in September 2018, and by January 2022 had acquired a 94.1% stake. He is currently involved in a protracted sale of the club to 777 Partners, an American investment fund where there appears to be real doubts about where the funding comes from, and how they can fund the club moving forward according to some investigative outlets such as Josimar, but that is a story for another time.
Upon Moshiri’s acquisition of the majority stake, the club entered into a substantial investment programme into the playing squad in the first three to four years, which is common for many clubs with rich owners. As we shall see later, this investment into the playing squad will be one of the club’s downfalls. He also intended to build the club a new stadium at Bramley-Moore Dock, and set up a separate wholly owned subsidiary, Everton Stadium Development Ltd (ESDL) to carry out the project, estimated to cost £760 million, initially planned to be funded partly by Moshiri and third-party commercial loans. However, it took them some time before they could secure those loans. Moshiri made some payments to Everton to fund the stadium by way of interest-free loans, some of which were later converted into shares.
Case Facts
In June 2020, they eventually secured a loan from Metro Bank PLC for £26.25 million under the government’s Coronavirus Large Business Interruption Loan Scheme, but crucially in the loan application, it stated that the funds were to be used for working capital rather than financing the new stadium (that will be crucial later on). They secured another £150 million in financing from Rights and Media Funding Ltd (RMF) in June 2021 which also stated that the funds would be used for working capital and not stadium financing (that will also be crucial later on).
In 2019, Everton identified an issue with its treatment of the stadium financing in its PSR calculations. The Bramley-Moore Dock site required significant investment prior to even gaining planning permission due to it being on a UNESCO World Heritage site. How such expenditure is treated for accounting purposes is covered under Financial Reporting Standard 102, which in short says that expenditure cannot be capitalised (i.e., treated as a capital asset) unless it was probable that there was some form of future economic benefit.
In practical terms, this meant that Everton’s stadium spending could not be capitalised until planning permission had been granted, because Everton would not be able to build the stadium, and therefore benefit from it, without the required planning permission. In accounting terms, this resulted in these costs being recorded in the profit and loss account as a cost, and ultimately being counted within Everton’s PSR calculation. This created an anomaly as other clubs had been able to avoid this end result.
During 2020 and 2021 Everton made approaches to the FAPL regarding this anomaly and stated that up to that point, Moshiri had invested c.£54 million through shareholder loans to cover the development costs. On the back of this, the FAPL produced a report in January 2021 that noted that Everton was forecasted to breach the £105 million threshold but would not do so if the stadium expenditure were to be excluded. They put the figure at £17.4 million. As a result, the report stated that the FAPL should negotiate an agreed sanction for this breach. This culminated in the agreement on 13 August 2021 and had initially agreed that they could exclude these within their calculations but only subject to other restrictions on transfer spending.
The report also looks at Everton’s transfer activity across 2017 to 2022, in particular, it names ‘Player X’ who the club signed in 2017 and subsequently released in July 2021 after he was suspended from all football activity. Player X was also considered one of their best players over this period. Everton had discussed taking legal action against him for breach of contract and particularly how his absence had an adverse impact on the club’s league position the following season, but ultimately elected not to do so due to expected effects on the player's mental health among other reasons. The club projected that they could have recouped £10 million from them in any legal action.
By early 2022, it became clear to Everton that they would have a hard time meeting the PSR targets due to them finishing lower in the league than expected and realised that they would need to sell players to help them meet their PSR obligations. Other clubs were aware of this fact and as a result, drove hard bargains in the knowledge that Everton needed the cash. Everton pointed to the sale of Richarlison to Spurs for £60 million as an example, as they priced him at £80 million and pointed to the loss as an additional reason for their failure to meet their PSR target.
Everton also highlighted that due to the war in Ukraine, and the subsequent sanctions imposed by the UK government on Russian nationals and entities caused them to withdraw from a 20-year stadium naming rights agreement with USM Services, a company owned by Russian billionaire Ulisher Usmanov.
When Everton submitted its audited accounts for 2021 to the FAPL in March 2022, it sought to exclude many of the sums listed above in its PSR calculation:
£17.4 million on interest on stadium financing which had been charged to ESDL.
£5.8 million relating to payments to the FAPL Transfer Levy
£10 million relating to loss from not suing Player X
£61 million relating to player trading losses attributable to Covid-19 in addition to other Covid-19 losses permitted under the rules.
With all of these new exclusions, Everton claimed to show an adjusted loss of £87.1 million, well inside the permitted £105 million. However, the FAPL rejected these new exclusions, and under its application of the PSR, Everton was shown to have made a loss of £120.8 million. At the Commission hearing in October 2023, Everton amended their case to admit that they were in breach, but only by £7.9 million. The FAPL again rejected this new figure and Everton’s mitigations and placed their calculated PSR loss at £124.5 million instead - £19.5 million above the permitted threshold.
The October Commission Hearing
At the October hearing, the FAPL identified four areas of dispute in its submissions:
Post-Planning Permission Stadium Costs – Everton claimed to exclude £14.5 million of interest on inter-company loans between the club and ESDL. The FAPL asserts that Everton has made calculation errors and that this fell outside the August 2021 agreement as that only covered costs that had been incurred up to the date of the agreement.
Transfer Levy – Clubs pay a 4% levy of transfer fees which is then used to fund a pension scheme for professional footballers, with any surplus being shared with the Professional Game Youth Fund. Everton argued that the £5.8 million in levy contributions could be excluded as this fell within the category of youth development expenditure. The FAPL argued that no other club in its history had ever tried to argue this, and it was wrong in interpretation and principle.
Player termination loss – Everton’s aborted claim against Player X for welfare reasons.
Covid-19 Losses – Everton argued that the Covid-19 pandemic had an adverse impact on player transfer receipts, and this would fall within the permitted Covid-19 exclusions. The FAPL rejected this as a significant proportion of this was due to a failure to sell a particular player (Player Y), which was down to a club decision rather than the pandemic.
It further advanced four aggravating factors:
Everton’s overspending on players and their failure to reduce expenditure.
The amount that they exceeded the £105 million threshold.
That Everton submitted misleading information regarding stadium financing costs.
Everton chose not to sell Player Y.
Everton argued that there were substantial mitigating factors that caused them to be in breach. These included:
They could have treated £9.3 million in stadium financing interest as capital expenditure.
Player X termination loss
Covid-19’s impact on their player trading
Their full and open cooperation with the FAPL
Their PSR losses showed a downward trend.
The Russian invasion of Ukraine’s impact on the proposed naming rights deal.
In response, the FAPL argued that:
The stadium financing interest exclusion is inapplicable as the August 2021 agreement did not permit interest to be claimed as an exclusion, as it was not a cost related to the stadium, as the interest on the Metro Bank and RMF loans were for working capital, and not for the stadium.
The Transfer Levy payments to the pension fund are not expenditure by a Club, but expenditure by the FAPL from funds derived from the levy; and plus, the fact that payments are not directly attributable to the Professional Game Youth Fund (PGYF). Any payments to the PGYF are a result of a surplus to the pension scheme and are made by the FAPL, not clubs.
Player termination loss was down to a decision of the club and could not show that the loss was in fact recoverable.
The club’s cooperation was not exceptional enough to constitute reasonable mitigation.
Quantifying the Breach
In order for the Commission to arrive at a decision, it was necessary for them to come to an independent conclusion as to the extent of Everton’s breach. This involved looking at losses relating to youth development, and stadium financing interest.
Youth Development
Rule A1.11(c) of PSR rules permits a club to exclude from the PSR calculation Youth Development Expenditure. Youth Development Expenditure is defined in Rule A1.273 as being “expenditure by a Club directly attributable to activities to train, educate and develop Academy Players…”.
The FAPL Transfer Levy is a charge of 4% of the value of any transfer payments made by a club which the club is required to pay to the Premier League under Rule V38 of the FAPL Handbook. The sums received by the Premier League by way of the Transfer Levy are used to pay premiums due under the Professional Footballers’ Pension Scheme: any surplus is added to the Professional Game Youth Fund as per Rule v41.
Everton argued to exclude not only the regular payments that it made regarding youth development but also the proportion of the Transfer Levy paid by it which has been passed on by the FAPL for youth development, as these monies are directly attributable to youth development purposes. In response, the FAPL’s argued that Everton’s interpretation of the Transfer Levy is rather creative, but fatally flawed. As a matter of pure interpretation, the expenditure by Everton was the Transfer Levy: it was not expenditure on youth development as it was not directly attributable to the development of academy players: it was payment of the Transfer Levy.
On this point, the Commission found in favour of the FAPL, and that the £7.6 million deduced by Everton must be added to the PSR loss calculation.
Stadium Finance Interest
As stated above, Everton argued that these costs should be taken into account due to the benefit derived from receiving planning permission for the new stadium at Bramley-Moore Dock. It further argued that it would never have taken the loans from Metro Bank PLC and RMF Ltd if it was not moving ahead with the project, or even if there wasn’t, Moshiri would have paid them back rather than spending on the new stadium. Everton argues that it is unnecessary to demonstrate that those loans were used to fund the stadium development in order to exclude the interest charges from its PSR calculation. It makes the point that in April 2022 the Premier League had accepted that such interest could be deducted, and only recently changed its case to argue that as a matter of principle, none of the pre-planning stadium interest could be excluded from the PSR calculation as a cost.
In response, the FAPL pointed to the wording of the loan agreements with Metro Bank and RMF Ltd which showed that the pre-planning stadium interest charges had not been incurred in respect of the Stadium because it had not been funded by the commercial loans from Metro Bank and RMF Ltd but by the interest-free loans made by Moshiri.
Once again, the Commission favoured the arguments made by the FAPL, primarily due to the various loan documents showing what they were to be used for. The overwhelming evidence was that the stadium was funded from the loans made by Moshiri, and not from Metro Bank PLC and RMF Ltd. As a result, no pre-planning interest charges were incurred in respect of the Stadium and cannot be excluded from the PSR calculation.
After considering both the youth development and the stadium financing interest issues, the Commission quantified Everton’s loss for 2022 at £124.5 million, £19.5 million above the permitted threshold of £105 million.
Sanction
As this was the first case to be brought under PSR, there was no precedent for the Commission to consider in terms of sanction. It considered the EFL guidelines of setting a starting point of 12 points and then applying any mitigating or aggravating factors to vary the sanction from the starting point. However, It was recognised in EFL v Birmingham City FC that the guidelines do not have legal force and are not binding on a Commission: and as such the Commission retains its general power to impose any sanction permitted by the Rules. Additionally, the FAPL has no such guidelines within its rules, only that under Rules W50 and W51 a Commission has the power to make any such order that it sees fit in accordance with the rules, having considered any aggravating and mitigating factors.
The FAPL did propose a formula for determining any sanction for PSR breaches by setting a starting point of 6 points, then adding one point on for every £5 million a club exceeds the £105 million threshold. Applying this would have resulted in a nine-point deduction.
The Commission rejected this as it felt it was too restrictive on the Commission’s powers under Rule W50 and W51, and took its own approach, which frustratingly it did outline other than to say “according to the circumstances of the case”.
It considered that the primary purposes of sanctions are to punish offenders, to deter future offending, and to protect the integrity of the game. Further, it was recognised in Sheffield Wednesday FC v The Football League Ltd that a PSR breach will confer a sporting advantage on the offending club, to the detriment of competing clubs who have been more financially responsible. In turn, any punishment should vindicate the compliant clubs for following the rules. They also said that they must not be swayed by sympathy and the fact that the penalty might make the prospect of relegation greater.
Sanction – Aggravating Factors
The Commission found that a significant aggravating factor was the extent of the breach by Everton, although in modern-day football £19.5 million is not a huge amount at the upper echelon of the game, it is still a sizeable breach that helped them buy players that helped them stay in the FAPL at the expense of other clubs. Other aggravating factors include:
Continued overspending despite repeated warnings from the FAPL. The August 2021 agreement imposed certain obligations on Everton, one of which was to obtain FAPL’s approval of purchases of new players. The FAPL approved each request but cautioned Everton when doing so that they were not managing Everton’s finances, and that it was for Everton to ensure compliance with the PSR. The FAPL maintains that for Everton to have continued such player purchases despite such plain warnings was recklessness that constitutes an aggravating factor, even if such player purchases were made in the mistaken belief that it would achieve PSR compliance through improved on-field performance. The Commission considered this to be a reckless, and not deliberate breach of the rules.
Providing misleading information regarding stadium finance interest. The FAPL argues that many of the submissions made by Everton on this point were unintentionally incorrect or misleading, and that this must constitute an aggravating factor. FAPL Rule B.15 also obligates its member clubs to “behave towards each other Club, Official, Director and the League with the utmost good faith” and Everton failed to do so. The Commission agreed that Everton failed to adhere to Rule B.15, but did not consciously intend to do so, but agreed that this should constitute an aggravating factor.
Misleading the FAPL about selling Player Y. In its FY 2022 PSR submission Everton identified Player Y as being one of the players it intended to sell but had been unable to do so. The FAPL asserts that was false. It points to two facts to support that conclusion. First, Player Y had been identified in Everton’s 13 March 2020 Summer Player Trading Strategy as being a player to be sold. However, in a series of Everton’s documents produced in 2020 starting with the Financial Forecast Update April 2020 Player Y’s name had been removed from the list of players whom Everton intended to sell. Everton agreed that Player Y had been removed but explained it by the fact that Player Y’s potential sale was being handled by Bill Kenwright and therefore the removal of his name from the list did not mean that Everton were unwilling to sell Player Y. Second, although his contract was not about to expire, Player Y was given a new contract during the summer 2020 transfer window. The Commission considered these arguments but was not persuaded that this was an aggravating factor as Everton were still willing to sell Player Y had they received an appropriate offer. As such, Everton did not intentionally mislead the FAPL.
Sanction – Mitigating Factors
The Commission considered the six mitigating factors put forward by Everton:
They could have treated £9.3 million in stadium financing interest as capital expenditure.
Player X termination loss
Covid-19’s impact on their player trading
Their full and open cooperation with the FAPL
Their PSR losses showed a downward trend.
The Russian invasion of Ukraine’s impact on the proposed naming rights deal.
Of the six listed above, the Commission were only willing to accept the downward trend shown in Everton’s PSR performance as mitigation. It dismissed the others largely for the reasons already stated earlier in this piece. The Commission heard expert evidence on the Covid-19 impact on the transfer market and heard that of all the national and international player transfer markets, the FAPL was the least affected by Covid. Mr Brown’s evidence, based on Everton’s actual experience, was that Everton’s most significant market for selling players was the Premier League. That conclusion demonstrated that Covid had had comparatively little impact on Everton’s ability to sell players.
The Commission recognises that Everton engaged extensively with the Premier League regarding the stadium finance interest issues, but that the information Everton provided was often inaccurate or unintentionally misleading, and as such not to be in compliance with the obligation of utmost good faith under Rule B.15.
In regard to the war in Ukraine’s effect on the naming rights deal with USM, it further stated that there was no evidence that the proposed monies were certain or probable.
Commission Conclusion
In considering all of the facts and factors outlined in the case, the Commission concluded that Everton’s PSR difficulties are not attributable to the costs of the stadium development, more that it overspent (largely on its buying new players and its being unable to sell others), and because it finished lower in the league than it had projected in FY 2022 (16th against the projected 6th – causing a loss of expected income of c.£21 million from FAPL prize money). In short, that Everton’s troubles were of its own making. Everton were irresponsible taking a chance that things would turn out positively. Further, Everton was less than frank in its dealings with the FAPL over the stadium interest issue.
The reality is that Everton failed to manage its finances so as to operate within the generous threshold of £105 million. This led the Commission to conclude that this was a serious breach, worthy of a 10-point deduction effective immediately. How it arrived at the 10-point figure is unknown. Everton have indicated that they are likely to appeal the Commission’s verdict.
Any appeal is unlikely to throw out the charges, but looking at precedents in the EFL, clubs have often managed to reduce the original sanction at appeal. Sheffield Wednesday, for example, managed to halve a 12-point penalty for an FFP breach related to the sale of their Hillsborough stadium when they appealed the initial ruling in 2020.
Wider Impact
When an unexpected event occurs, there is often a temptation to exaggerate its importance, declare that the world has irreversibly changed, and seek refuge under the bed. This ruling, unless overturned on appeal, seemingly suggests wrongdoing on Everton's part, prompting clubs affected in recent seasons, such as Leicester City and Burnley, to voice their concerns. The delayed justice for these teams, which could have avoided relegation if Everton had been promptly penalized, adds weight to their grievances.
The possibility of affected clubs pursuing legal action looms, a scenario the Premier League would undoubtedly prefer to avoid. Acknowledging the "justice delayed" critique, the league has committed to expediting future hearings and applying punishments in the same season as the charges. Whether this concession satisfies all parties remains uncertain.
A potential consequence might be a shift towards a Spanish-style, forward-looking financial regulation model, where each club receives a tailored budget based on its current financial standing. While previous Premier League leaders and current owners may resist this notion, it could become a logical step if clubs reject prolonged sanctions.
The league, aiming to assert its autonomy in rule enforcement, may champion the idea that it doesn't require external oversight. The robust prosecution of Everton might influence the UK government to consider a more tempered form of independent regulation, a development the league would likely endorse.
The underlying concern, however, centres on the implications for Manchester City and Chelsea. City faces 115 charges for a more severe, intentional, and protracted breach of rules, while Chelsea may be on a similar trajectory. These two clubs, more successful than Everton in recent years, are under increased scrutiny.
Caution is advised against drawing direct parallels between Everton's case and the situations of City and Chelsea. Everton's case, while complex, had straightforward fundamentals, resulting in minimal political fallout. The same cannot be said for Manchester City, where the league accuses them of dishonesty, a challenging charge to prove, prolonging the arbitration process.
Nonetheless, the Everton case highlights the Premier League's commitment to enforcing its rules, allocating resources for strong prosecution, and advocating for the most severe sanctions available. In terms of implications, this underscores the league's significant stance.