Clamp Down On Arsenal Tax Dodge - 16/10/2005

Arsenal have been hit with a bill of nearly £12m after an investigation into a tax avoidance scheme used on payments made to players and agents. The club is the first high profile hit for a campaign by HM Revenue and Customs against tax avoidance in the game. Arsenal set up a series of front companies and offshore trusts to reward its stars and save millions in tax every year. On average, players were left paying about half the 40 per cent tax rate for high earners. HMRC is demanding at least £11m back tax. Payments of more than £4m to agents have also been ruled not to be an 'acceptable business expense.' Arsenal must now pay an extra £700,000 of VAT on these. Arsenal chairman Peter Hill-Wood said, 'The Revenue are crawling all over us. We thought we had acted perfectly legally ... but now maybe the rules have changed. We are not the only people who have been doing this.' The club's tax scheme was brought out into open through documents in the divorce case of former Arsenal midfielder Ray Parlour. When he was forced to disclose his salary details to the courts, it showed that he earned a pre-tax package of £1,557,267 for the 2001-2 season on which he paid £350,000 tax, a rate of just 22 per cent.

Top Arsenal players usually receive two contracts. One pays them an annual basic wage mostly taxed at the higher rate of 40 per cent plus national insurance. They also have a second 'shadow' contract for performance-related bonuses that reward success on the pitch (and therefore may not pay as much this season). In a more successful year these can account for up to half of the total pay package and are paid via two offshore front companies that accountants say enables foreign players to avoid almost all tax. As a result, Henry is estimated to have saved almost £70,000 a year, manager Arsene Wenger about £118,000 annually, and Dennis Bergkamp more than £45,000. British-born players were able to cut their tax rate from 40 per cent to 25 per cent. Arsenal are going to have to explain in their annual report how they will put aside £11m to pay the tax bill, something they could do without as they prepare to move into their new stadium. But Premiership clubs in general are worried that it will become harder to attract top foreign players to Britain when they can still benefit from tax-free payments abroad. Premiership clubs are considering whether to make a formal representation to the Treasury. However, given public discontent about high wages, they might not receive much sympathy when it is known that players have not been paying their full share of the tax bill.