In early 2023, the Premier League submitted a complaint to an independent commission (the “Commission”) in relation to Everton Football Club’s alleged breaches of the Premier League’s Profitability and Sustainability Rules ("PSRs") for the three-year period to 2022/23. These breaches related to Everton’s spending on players, financing of its new stadium and taking out of commercial loans during this accounting period. 

The initial decision handed down by the Commission in November 2023 was an immediate 10-point deduction that resulted in Everton falling into the relegation zone. Upon appeal, the penalty was reduced from 10 points to 6 with an appeal board (the "Appeal Board") concluding that the Commission had made two legal errors.

Everton’s case serves as a reminder of the challenge that football teams face in balancing sporting success and the increasing pressure to adhere to financial sustainability regulations. The Appeal Board’s decision to reduce the severity of the punishment highlights the complexity and nuance required in enforcing financial regulations.

What are the Profitability and Sustainability Rules?

The PSRs are designed to promote financial stability and sustainability amongst Premier League clubs by limiting the losses that Premier League clubs can incur. The PSRs promote similar objectives to the Financial Sustainability Regulations of UEFA, and the Profitability & Sustainability Rules of the English Football League. The PSR regime also protects against unlimited cash injections from owners to ensure clubs operate within their own means.

On 31 March of each year, every Premier League club must submit its accounts for the two preceding years, together with its estimated profit and loss account for the current year. If a club’s aggregate earnings before tax for that three-year period results in a loss, the club must also submit to the Premier League its PSR Calculation. The PSR Calculation shows a club’s adjusted earnings before tax for each year. The adjusted earnings exclude costs incurred through depreciation of tangible fixed assets, amortisation of goodwill or matters that the Premier League recognises to be in the general interest of football or the wider community (including investments in women’s football, youth and community development). Covid costs were also excluded for the years affected by the pandemic. 

Outcomes of the PSR Calculation:

1. if adjusted losses are less than £15m, they are usually forgiven by the Premier League;
2. if adjusted losses are between £15m and £105m then the club must present financial projections for the upcoming two years, and provide evidence to the Premier League that it has “secure funding” in place. This cannot be a loan. It must consist of share capital, a secured irrevocable commitment by an existing shareholder to make further payment for shares or take any other form as the Premier League board sees fit; and
3. if adjusted losses exceed £105m, the Premier League may impose budgetary, financial or administrative restrictions on the club and shall refer the matter to the Commission.

Everton's Breach

According to the Premier League, Everton’s PSR Calculation for the 2021/22 season resulted in a loss of £124.5m which exceeded the PSRs threshold by £19.5m. While Everton conceded that it had breached the threshold, the club suggested that according to its calculations the breach was not £19.5m but rather £9.7m.

A combination of factors played a part in Everton’s heavy expenditure and increase in adjusted losses during this accounting period. When Ardavan Moshiri acquired a beneficial interest in the club, he embarked on an ambitious target to simultaneously build an elite Premier League playing squad and develop a new state of the art stadium. While the club invested heavily in new players, it was unable to recoup significant transfer fees for the players up for sale. The club also increased its debt capital to assist with the financing of its targets.

Failed Breach Quantification and Mitigation

During the proceedings before the Commission, Everton put forward two main arguments in an attempt to reduce the quantification of the PSR breach, namely that:

1. the transfer levy sums (a charge of 4% of the value of any transfer payment made by the transferee club it is required to pay to the Premier League) should have been excluded from the PSR Calculation because it is paid to the Professional Game Youth Fund for the development of academy players and should have been excluded from the PSR Calculation as it counts as youth development; and
2. any interest attributable to financing the new stadium should be excluded from the PSR Calculation. This was based on the Premier League previously accepting that such interest could be deducted. The club argued that if it was not for the construction of the new stadium, outstanding loan facilities would have been repaid or alternatively never entered into.

Both arguments failed, with the Commission deciding that:

1. the transfer levy sums are primarily paid into a pension fund for players, out of which only the surplus, if any, would flow indirectly to the Professional Game Youth Fund; and 
2. it could not, on the balance of probabilities, decide that Everton would not have obtained the two working capital facilities had it not been for the stadium development as it “was normal for the clubs to carry a degree of commercial debt.”  The Commission further concluded that Everton would in any case struggle to bring itself within the meaning of Section 25.2 of the Financial Reporting Standards 102 which permits capitalisation of borrowing costs directly attributable to the “qualifying asset” (i.e. the stadium) where the funds form part of an entity’s “general borrowings". This was because the commercial working facilities were advanced for the limited purposes of working capital and therefore not within the category of “general borrowings”.

This meant the Commission included £7.6m in respect of the transfer levy sums and the £2.2m in respect of stadium working capital facilities in the PSR Calculation, a total of £9.8m.

Appeal                                

Everton appealed the decision at the end of 2023 and the Appeal Board reduced the penalty,  concluding that a 6-point deduction was an appropriate sanction in this instance,  based on two grounds of appeal:

1. in respect of the Commission’s finding that Everton has been “less than frank” about its new stadium debt (so affecting the calculation on which the relevant losses were calculated), whereby Everton breached Premier League Rule B.15 which imposes an obligation of “utmost good faith"; here, the Appeal Board found that the Commission was wrong to arrive at this conclusion given that the Premier League had never put forward such allegations nor suggested that Everton’s representations about the stadium debt, albeit wrong, were anything more than an innocent mistake; and
2. the Commission had failed to take into account available benchmarks such as the approach taken in the English Football League (EFL) Guideline cases on the proportionality of the sanction.

Conclusion

This case is indicative of not only the Premier League’s stance towards breaches of its financial regulations but also the complexities surrounding implementation and enforcement of those regulations. While it is accepted that Everton had breached PSR regulations, the initial 10-point deduction led to questions in the football community as to whether the points deduction was proportionate for the breach. Upon appeal, the subsequent reduction to a 6-point penalty could make all the difference in the final Premier League standings at the end of the season.