On 8th April 2024, it was announced that Everton would be hit with a further two-point deduction having been in breach of the Premier League’s Profitability and Sustainability Rules (PSR) for the financial year ending 30th June 2023 (FY23). This article will look at the independent Commission’s findings which led them to handing out the points deduction. Initially, a background will be provided in relation to the charges relating to the PSR breach by the club. Everton have since announced that they have appealed against the decision. Background
As has been explained in previous articles, the PSR limit the total losses a club can make over a rolling three-year period. In this case relating to Everton, the monitoring periods in question related to the financial years (FY) of 2021, 2022 and 2023. The PSR calculation for FY 2023 included FY 2021 (which was an average of FY 2020 and FY 2021 due to a concession in the rules brought about by COVID-19), FY 2022 and FY 2023. In the Premier League, a club is required to have losses not exceeding £105 million.
In the event a club shows losses exceeding the PSR limit (£105 million in this case), then they are referred to an independent Commission who will be tasked with determining the appropriate sanction while considering appropriate aggravating and mitigating factors.
On the 15th of January 2024, the Premier League charged Everton with a PSR breach, alleging that the club had losses totalling £128.2 million for FY23, thus exceeding the limit by £23.2 million. Furthermore, it was noted that in the accounts for FY23, Everton capitalised interest totalling roughly £19 million on the basis that this was incurred in relation to financing of its new stadium, and initially, the Premier League reserved its rights in relation to this figure, in particular reserving the right to contend that any or all of that figure was wrongly capitalised, meaning that Everton would have been further in breach of the PSR, with the amount depending on the figure deemed to be wrongly capitalised.
Everton responded to the Premier League complaint on the 29th January 2024, admitting to being in breach of the PSR but only by £16.6 million. The club claimed that the difference in amount alleged by the Premier League and the amount it admitted being related to interest directly attributable to the club’s new stadium which was capitalised retrospectively for FY21 and FY22. In addition, Everton objected to the Premier League’s reservation of rights generally in relation to capitalisation of interest in FY23.
On 26th February 2024, the Premier League applied to amend its complaint, seeking to withdraw its reservation concerning the £19 million capitalised in FY23 and instead alleging that the same sum could not be capitalised, with only roughly £2 million (alternatively roughly £7.4 million) allowed to be capitalised, thus implying PSR threshold breach of approximately an additional £17 million (alternatively roughly £11.6 million).
On the 8th of March 2024, the Premier League’s application was rejected by the Commission. The Premier League then renewed its application for permission to amend, which the Commission ultimately granted, and Everton consented to.
However, given the Premier League’s application to amend complaint, and an overlap between proposed amendments and factual + expert issues arising in relation to roughly £6.6 million capitalised retrospectively, the Commission decided to resolve proceedings in two stages.
First, the Commission decided appropriate sanction for admitted breach (i.e., admitted losses of £16.6m above PSR threshold).
Second, the Commission will later determine a further PSR breach in respect of retrospective capitalisation of roughly £6.6 million for FY21 and FY22, as well as capitalisation of interest relating to FY23, as alleged by Premier League’s amendment. A further hearing in relation to this is set to follow accordingly.
Approach to sanctioning
In determining the appropriate sanction, the Premier League submitted that a sanction must achieve – but go no further than – is reasonably necessary and proportionate to do so. This is to achieve the legitimate purposes of punishment, vindication, deterrence, and restoration of public’s confidence in integrity of competition. In this case, it submitted that a points deduction should be imposed for “the fact of the breach”, and as per the Everton FY22 Appeal, the Premier League argued that 3 points represented the appropriate starting point for any PSR breach.
Given that Everton’s PSR excess loss was £16.6 million, and that in general per previous cases it had been established that every £6.5 million in excess loss represented an approximate one-point deduction, the Premier League argued for a further two-point deduction. Therefore, the Premier League argued for a starting point of 5 points deducted before any aggravating or mitigating factors.
Everton, on the other hand, did not explicitly dispute approach to sanctioning suggested by Premier League. However, it essentially said that it should not receive any further penalty even given the fact it had exceeded the PSR threshold considering the admitted breach. Several reasons were given for this, namely: the double jeopardy principle (being punished twice for the same thing) since they were hit with a six-point deduction for a breach in FY22; various other mitigating factors; the fact that Nottingham Forest got deducted only 4 points for a breach greater than that of Everton; the exceptional position in which Everton found itself due to the proceedings for FY22 – if further points were to be deducted for FY23, Everton would have been hit with two points deductions in the same season. Alternatively, Everton submitted that it should receive no greater sanction than one-point penalty.
Aggravating factors
There were no aggravating factors raised by the Premier League.
Mitigating factors
In the case of any mitigating factors, the burden of proof lay on Everton to establish whether any of them held true. Everton, in its case, raised 5 different mitigating factors, which were as follows:
1. Double jeopardy – Everton argued that this principle was applicable to the circumstances here given that PSR is based on a rolling assessment, this case involved the Commission considering accounting periods already considered in the Everton FY22 proceedings (FY22 and the average of FY20 and FY21). In addition, Everton submitted that based on its appeal, the Commission should adopt the EFL guidelines in relation to breaches of the Profitability and Sustainability (P&S) rules in successive seasons, especially given the Premier League adopted no guidelines. In this case, losses, would have been capped at £35 million for FY21 and FY22, which would have reduced losses by approximately £20 million which would have meant that these proceedings would not have taken place. In light of all this, Everton argued that it should receive no further penalty, have the starting point reduced to zero, or alternatively argued that the starting point of a 3-point deduction sought by the Premier League was not justified. The Premier League, in response, did not accept that the double jeopardy argument arose, arguing that these proceedings involved a different assessment of different years, since T (the financial year under proceedings) was different in each year. However, the Premier League said that assessing “all the circumstances” and given the overlapping years as between the Everton FY22 proceedings and these proceedings, it was appropriate to reduce the points deduction by 2 points.
Therefore, the Premier League accepted that some credit should be given to Everton for overlapping years of assessment, but this should be no more than 2 points. It submitted that 2 points credit was proportionate, but anything more would be unjustified because of two things: firstly, despite being involved in the Everton FY22 proceedings, it did not take the necessary steps to avert a PSR breach for FY23, and secondly, the previously positive trend of its losses was reversed in FY23.
2. Prompt admission of liability – Everton submitted that it admitted exceeding PSR in the amount of the admitted breach, i.e., c. £16.6 million, at the earliest available opportunity and relied upon this as a distinct head of mitigation. They backed this up by referring to criminal justice system which reduced a sentence in the event of a plea at the first available opportunity, and also referred to the Nottingham Forest case where the club was given a reduction of two points from its points deduction for exceptional co-operation and early guilty plea. Therefore, they argued that any points deduction should be reduced by at least 1 point to reflect its early admission.
The Premier League rejected this and argued that no credit should be given to Everton for admitting the Admitted Breach. It alleged that the draft PSR calculation was prepared showing an admission of breach of c. £23.2 million, but Everton withdrew that admission and now admitted only c.£16.6 million (the “admitted breach”), for which it should not be entitled to any credit.
3. USM Services – in this case (raised significantly by Mr Kenyon (the Chief Commercial and Communications Officer) as part of his evidence), Everton argued that the loss of sponsorship represented a mitigating factor due to it being an extraordinary circumstance, and that it was unable to replace that sponsorship agreement despite significant effort, and also that it is harder for clubs to sell the naming rights for their stadiums and training grounds. It went on to argue that, while it was justified to suspend and not terminate the Finch Farm Agreement, this did not matter but the appropriate question is whether sufficient steps had been taken by way of attempts to find alternative sponsors, which the club submitted it did.
The Premier League rejected that Everton were entitled to any mitigation on this point, on the basis that such suspension of a deal was fundamentally ordinary and could happen to any club, and that Everton exceeded PSR threshold due to imprudent financial planning.
Further, the Premier League argued that firstly, other clubs had Russian sponsors prior to the Russian invasion of Ukraine and did not encounter PSR difficulties; secondly, it argued that sponsors were regularly lost including in unexpected or unforeseeable circumstances, and thirdly that clubs should proceed on the basis that at some point they might lose income they expected to receive.Ultimately, the Premier League contended that Everton had not taken sufficient steps to mitigate its losses, as a result of which it should not be afforded any mitigation. That said, Mr Lewis KC, on behalf of the Premier League accepted in principle that imposition of sanctions represented a matter that could be generally classed as extraordinary.
4. Everton’s broader financial circumstances – Everton argued their “broader financial circumstances” as a separate head of mitigation. These factors included: the construction a new c.£800 million stadium, which it argued was unavoidable, with a particular reference made to a £3.5 million expense attributable to the new stadium, which was expensed through the Profit and Loss account of Everton Stadium Development Limited (ESDL); the efforts in which the club has engaged concerning player trading and the difficulties it had experienced in that regard; as well as the effect of the FY22 sanction (a six-point deduction) and a positive trend of losses in recent seasons.
The Premier League, essentially, rejected all these points. In relation to the £3.5 million expensed to ESDL, it argued that it was not extraordinary, could not be capitalised and was part of the PSR calculation and thus could not amount to mitigation. The Premier League submitted also that clubs often incur expenditure from which they gain no sporting advantage which, nonetheless, counts towards their PSR calculation. Also, it argued that Everton’s assertions on the new recruitment strategy were misguided, as the club’s expenditure in FY23 was made at a time when it was likely that Everton knew that they were in breach of the PSR yet spent in excess of £100 million on 8 new players in that time, thus incurring new substantial amortisation and wage costs during FY23, which were neither necessary nor prudent given their position. Furthermore, the Premier League rejected Everton’s reliance upon the effect of the sanction handed them for FY22, its positive trend of losses, and other exceptional items.
5. Co-operation with the Premier League – Everton pointed out its co-operation with the Premier League as a mitigating factor, citing that in the case of Nottingham Forest, there was a reduction in penalty of two points for what was described as “exceptional co-operation”, and Everton pointed out several factors to justify this.
On the other hand, the Premier League submitted that Everton’s co-operation could not be described as “exceptional”, arguing that Everton did no more than the minimum expected of all clubs, and in some respects instead demonstrated conduct falling short of what was required.
In summary, the Premier League argued that a sanction of anything less than 3 points would undermine the integrity of the league and the aims of the PSR. Regarding the timing of the points deduction, the Premier League argued that any sanction must be imposed immediately. On the other hand, Everton argued that given double jeopardy, any further sanction would only serve to undermine public confidence in the Premier League and thus Everton submitted that no further sanction would be appropriate.
Decision on sanction
Approach
The Commission agreed with the Premier League that protection of integrity of the PSR and vindication of compliant clubs are at the forefront, with punishment and deterrence being important, albeit less important, aims, with the overarching question being that any sanction must be proportionate, meaning that the sanction “must achieve PSR aims but not exceed that reasonably required to achieve those aims”.
Viewed through the prism of those aims, the Commission considered a points deduction necessary in this matter. The Commission viewed that firstly, any PSR breach is serious, given the extensive leeway afforded to clubs before reaching that limit and also considering the length of assessment period, and accordingly a points deduction is appropriate in all cases.
Appropriate starting point
The Commission concluded that 3 points is appropriate to reflect the fact that Everton breached the PSR, thus representing the starting point for a deduction.
The Admitted Breach exceeded the threshold by 15.8%, and as this was less than 20%, a further 3-point deduction was not considered appropriate by the Commission, but not to the extent that only a further one-point deduction would be appropriate. Therefore, the Commission considered an extra two-point deduction to be appropriate. All this means that the Commission determined that a 5-point deduction would be appropriate before considering any mitigating factors (no aggravating factors were raised). Mitigating factors
As previously outlined, 5 mitigating factors were raised, of which 3 were accepted. The mitigating factors that were rejected were in relation to Everton’s broader financial circumstances and its co-operation with the Premier League. In the case of the latter, on balance, Everton’s co-operation was not considered to be exceptional and exceed that required by the club per the rules. The following mitigating factors were accepted by the Commission:
Double jeopardy
During the hearing, it was considered agreed by both parties that overlapping years should be considered as a matter of proportionality, and the Commission also agreed. As a matter of proportionality, it deemed that it was responsible for acknowledging that any sanction on Everton in relation to FY23 should be reduced to reflect the fact that Everton were already sanctioned for overspending in 2019/20, 2020/21 and 2021/22, which were also included in the FY23 PSR calculation.
On this point, the Commission concluded that a reduction of 2 points from the points deduction total was appropriate for the following reasons:
· Everton had an admitted total PSR loss of c. £121.6 million for the FY23 calculation: c. £62.7 million in FY23, c. £3.9 million in FY22 and c.£ 55.1 million in FY21.
· Giving the 3 calculation periods equal weighting, Everton were already penalised for just under 50% of loss which led to its FY23 PSR breach.
· Thus, the Commission considered it appropriate to reduce Everton’s penalty by just under 50%, and so reduced it by 2 points (for purposes of sticking to whole numbers).
Loss of Finch Farm Agreement
The Commission accepted that Everton were entitled to mitigation relating to the loss of revenue from USM Services, thus reducing their culpability as an offender. The Commission considered the Finch Farm Agreement a concluded contract, for which Everton would receive £20 million in FY23, thus not falling into loss of chance category. Further, it agreed with Everton that loss of USM Services sponsorship revenue was not a circumstance arising from ordinary course of business.
Everton, however, did not suggest that this loss of revenue, would cause them to set an unachievable revised budget, or that would be impossible to achieve PSR compliance. However, Everton failed to meet the budget and its evidence was that it could have sold further players in FY23, which would have significantly reduced but not eliminated its admitted breach but didn’t do so.
Therefore, credit for loss of USM was limited by business decisions made by Everton during FY23 which caused its breach of PSR.
Everton’s prompt admission of liability
This ground was accepted by the Commission, as it deemed that Everton admitted the breach in its response (answer) to the complaint lodged by the Premier League, considered to be the first available opportunity.
It also supported the analogy of the criminal justice system whereby credit given for early plea.
In summary, the Commission ruled that Everton’s prompt admission of liability together with the loss of revenue from USM Services Limited warranted a one-point reduction from Everton’s point deduction total. Final sanction
Therefore, in total, considering a 5-point deduction for the breach itself, and a 3-point reduction considering the mitigating factors, the Commission deemed a 2-point deduction to be appropriate in this case.
Timing of sanction
Everton argued that the sanction should be deferred till next season, as this would represent a second points deduction in the same season. Despite the Commission acknowledging this scenario, it rejected Everton’s argument, on 4 grounds:
1. Standard Directions recognise and agree aim of points deduction taking effect in same season, thus justifying points deduction being appropriate in same season.
2. The purpose of a points deduction is to redress the imbalance caused by a sporting advantage obtained by a rule breach, which should be addressed in the same season as much as possible.
3. Nottingham Forest received a penalty in this season for same period of assessment, thus making it unfair to them to defer Everton’s penalty.
4. Deferring its sanction for FY23 may achieve nothing more than defer the question for the next day.
Therefore, Everton were handed a 2-point deduction with immediate effect.
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