The Premier League’s Profit and Sustainability Rules: Relegation danger for those in breach

Football fans are becoming increasingly familiar with news that clubs are facing charges for breaching the Premier League’s Profit and Sustainability Rules (the Rules)

The Rules impose economic restraints on clubs to prohibit them from sustaining losses of more than £105m in a three year period. Non-compliance with the Rules risks serious sporting, financial and reputational implications for clubs, as is being borne out in the recent charges against Everton FC. The consequences of transgressions are felt not just by the clubs but also (and perhaps more acutely) by their fans.

The Rules explained

By 31 March, clubs must submit to the Premier League their estimated profit and loss account and balance sheet for T (the current year), and their annual accounts for T-1 (the year preceding T) [1].

If the aggregation of a club’s pre-tax earnings for T-1 and T-2 (the year preceding T-1) results in a loss, the club must submit the calculation of its pre-tax earnings for T, T-1 and T-2. Clubs are permitted to “adjust” these by excluding costs relating to:

• The depreciation of tangible fixed assets.
• Women’s football expenditure.
• Youth development expenditure.
• Community development expenditure.

For seasons 2019/2020, 2020/2021 and 2021/2022, clubs are permitted to exclude COVID-19 related costs.

The aggregation of a club’s adjusted pre-tax earnings for T, T-1 and T-2 is known as its “PSR Calculation”. Although clubs should aim for their PSR Calculation to not result in a loss, the Rules provide a “degree of latitude” [2] as follows:

1. Losses up to £15 million - the Premier League determines if the club will, until the end of T+1 (the year following T), be able to pay its liabilities.
2. Losses in excess of £15 million - the club must provide projected accounts up until the end of T+2 (the year following T+1) and evidence of secure funding, which cannot be a loan. Failure to do so may result in the Premier League exercising various powers, including requiring the club to submit, agree and adhere to a budget.
3. Losses in excess of £105 million - the club is treated as being in breach of the Rules and the Premier League “shall” refer the breach to an independent Commission (the Commission).

Notably, a club’s loss, which is in excess of £105 million, is reduced by £22 million for each season in T-1 and T-2 in which the club has been in the Championship.

Term	Meaning
T	A club’s Accounting Reference Period.
T-1	A club’s Accounting Reference Period immediately preceding T.
T-2	A club’s Accounting Reference Period immediately preceding T-1.
T+1	A club’s Accounting Reference Period immediately following T.
T+2	A club’s Accounting Reference Period immediately following T+1.

The Commission’s process and powers

Proceedings before a Commission are commenced by a written complaint from the Premier League, to which the club has 14 days to respond, with either an admission or a denial.

If the club admits a breach of the Rules, its response may include details of any mitigating factors for the Commission to take into account. If the club denies the alleged breach, it must set out its reasons and annex copies of any documents upon which it relies. The Premier League has the burden of proving the complaint to the Commission, on the balance of the probabilities.

Sanctions

If a club is found to be in breach of the Rules, the Commission has discretion to impose sanctions, including:

• An unlimited fine.
• Suspending the club from playing in matches, for such a period as it thinks fit.
• Deducting points scored.
• Recommend that the Premier League orders a match be replayed.
• Recommend that the Premier League expels the club from membership [3]; and/or
• Make such other order as it thinks fit.

A club has 14 days from the date of the Commission’s decision to appeal.

The case against Everton FC

Following a complaint in March, on 17 November 2023, an independent Commission directed an immediate deduction of 10-points from Everton for breaching the Rules for the period ending season 2021/2022 (the Decision). Although Everton accepted that it was in breach of the Rules, it argued that its breach if properly calculated was £9.7 million over the £105 million threshold, not £19.5 million as alleged by the Premier League. Everton has appealed the sanction imposed and a decision is expected imminently.

For Everton’s fans, the anguish continues following the Premier League’s announcement last month that the club (and in a separate case, Nottingham Forest FC also) had breached the Rules for the period ending season 2022/2023. A further, separate Commission will be convened in respect of this further breach.

Impact of the Decision

The Rules were introduced in 2013 under the previous banner of “financial fair play”. By limiting the losses that clubs can incur, they are “designed to promote financial stability and sustainability” and “ensure clubs operate within their own means” [4]. In keeping with the purpose of the Rules, in the Decision, on the gravity of the sanction imposed on Everton, the Commission said:

In a statement published on 15 January 2024 regarding the charges relating to season 2022/2023, Everton pointed to the absence of Premier League guidelines to prevent a club from being sanctioned for alleged breaches in financial periods during which it had already received a sanction [6].

Readers who are familiar with the Rules will be aware that they can be difficult to navigate from a legal and accounting perspective. This is reflected in the Decision which involved “voluminous and detailed experts’ reports” [7] including from accounting experts.

Everton’s club statement raises questions as to the fairness and logic of the application of the Rules to the circumstances Everton finds itself in, and we will watch with interest as to if and how the Commission addresses this.

Premier League clubs are expected to meet to discuss replacing the Rules with new rules aligning with UEFA’s financial regulations. We will explore UEFA’s financial regulations in a future article in this series.

 

Read other items in Commercial Brief - March 2024