Analysing Everton's Points Deduction
Everton were hit by a two-point deduction for a breach of PSR in FY 2022-23.
Another week, another points deduction.
Once again, tucked away in a dark corner of the Premier League’s website, came the publication of an Independent Commission’s report. For the third time in the space of five months, this report referred to events surrounding Everton.
Three weeks after Nottingham Forest received a four-point deduction, Everton learned of their fate for a breach of the Premier League’s Profit and Sustainability Rules (PSR) in the reporting period ending June 30th, 2023.
Everton, whose win over Burnley on Saturday was their first in the top flight since December, were deducted two points. A punishment that, combined with the six-point deduction (reduced down from an incredibly harsh 10 on appeal) handed their way in February, now means the Toffees sit two points above the relegation zone with seven games remaining.
The Toffees immediately followed Forest’s suit and confirmed their intention to appeal. The Premier League has unwittingly created a scenario where relegation could now be decided after the season has concluded.
The Premier League’s executive board has now asked, across two separate hearings, for Everton to be deducted a total of 17 points for breaches of the PSR in the reporting period ending June 2022 and the one ending in June 2023. Sean Dyche’s team are now eight points worse off than the total of points they have earned through their performances across the campaign.
Here, More Than A Game breaks down the Commissions’ report.
THE BREACH AND THE PUNISHMENT
Like in MTAG’s analysis of Forest’s case, we will start with the summary provided at the top of the report.
Here, the Commission — chaired by Mr James Drake K.C. — provides an abridged version of the 50-odd pages of legal jargon and accounting terminology that is to follow.
It sets out that the Commission feels, like in the decision laid out by Everton’s Appeal Board in February, that the only suitable punishment for a PSR breach is an immediate deduction of three points, less any aggravtion or mitigation.
Two points were added onto Everton’s punishment for the scale of Everton’s breach, which is £16.6million over the allowable threshold of £105m. That is a smaller breach than Everton’s first one, by £2.9m. It is considerably less than the £34.5m breach committed by Forest over their allowable threshold of £61m.
The Premier League, unlike in their first case against Everton, put forward no aggravating factors.
The Commission accepted three lines of mitigation from Everton:
The fact that the club had already been penalised in the FY22 proceedings for losses in years which overlap with the years at issue in these proceedings.
The loss of sponsorship revenue from USM Services Limited.
The fact that Everton admitted their breach of the PSR at the first opportunity.
While no other mitigation put forward by the club was accepted, these three avenues did ultimately result in a reduction of the punishment to a two-point deduction.
EVERTON’S PUNISHMENT
PSR Breach Entry Point: -3
Quantum of Breach: -2
Loss of USM Sponsorship & Early Plea: +1
Double Counting of Overlapping Periods: +2
Deduction: -2
The Commission’s summary concludes: “The penalty of two points is to apply immediately. Whilst the Commission appreciates that Everton has already received a deduction of points in the present season as a result of the Everton FY22 Proceedings, the Commission regards an immediate penalty as the fairest solution to all other clubs within the Premier League, and the Commission has regard to the strong statement in the Standard Directions that all clubs and the Premier League have expressly agreed to resolve alleged breaches of the PSR within the relevant season where possible. The Panel takes the view therefore that it would be inappropriate to postpone the penalty until sometime next season, not least because that may achieve nothing more than deferring the question for another day and another Commission.”
The hearing took place across three days at the end of March.
‘Super Silk’ Lawrence Rabinowitz did not represent Everton at the hearing, as he had done at the appeal, but did play a part in the early preliminary stages. His services may well be called upon again by the club down the line.
DIFFERING NUMBERS
The Premier League believed Everton to have been £23.2m over the allowable threshold, while they also took umbridge with the Toffees having capitalised interest payments on their new stadium to the tune of approximately £19m.
Everton disagreed, presenting — and admitting — a breach of £16.6m, but refuting the suggestion they had incorrectly capitalised the interest payments. The £6.6m difference between their figure and that of the Premier League, the club state, is accounted for in interest payments that are directly attributable to the stadium build and which were, as part of the club’s FY23 statutory accounts, capitalised retrospectively in FY21 and FY22.
Having rejected the Premier League’s application to amend its original complaint but, with Everton’s blessing, having accepted the League’s renewed application in mid-March, the Commission elected to split this case into two parts — at least due in part to a lack of time as they rushed to meet the Premier League’s self-imposed deadlines for expediating these processes ‘in-season’.
This Commission felt it could not adequately settle these accounting differences in the allotted time. Instead, Everton will now face another hearing, in front of the same Commission, some time down the line, to settle whether their breach was in fact £16.6m or, as the Premier League suggest, higher. It is worth noting that Everton’s accounts have now been fully audited and signed-off.
THE PLAYERS
Everton’s Director of Football, Kevin Thelwell, was called on as a witness for cross-examination. Thelwell, who took up his post at Everton in early 2022, gave evidence regarding the club’s player trading strategy. He compared Everton’s ‘Initial Strategy’ (Farhad Moshiri’s ‘shoot-for-the-stars’ model) with the ‘New Recruitment Strategy’.
Everton’s New Recruitment Strategy
Greater emphasis on the development of younger players, with a view to th esale of those players after they had gained experience in Premier League matches and increased in value.
The goal: To ensure the club had a greater level of financial stability and sustainability while also constructing their new stadium, ultimately making savings through reduced transfer and wage costs, and then going on to make profits, particularly in relation to home-grown players.
Thelwell’s evidence included what the Commission called a “detailed account” of the sale of players.
In the summer window of 2022, Everton brought in Amadou Onana, Dwight McNeil, Neal Maupay, James Garner and Idrissa Gueye on permanent deals. They also signed James Tarkowski on a free and brought in Conor Coady and Ruben Vinagre on loan, having sold talisman Richarlison in June for £60m.
Thelwell defended the club’s decision in this window, suggesting the recruitment was necessary as Everton attempted to remain competitive in the Premier League, having only stayed up by the skin of their teeth in 2021-22. He also made the point that Everton were one of only four top-flight clubs to generate a profit when it came to player trading across the 2021-22 and 2022-23 seasons combined.
The Premier League claim that Thelwell oversaw “reckless” spending on players during this period, that resulted in losses of £37m (which are not disputed).
The League also put it to Thelwell that ‘Player B’, whose exact identity is difficult to quantify, could have been sold in FY23. However, Thelwell stated the club’s plan was to sell for a higher price as the player continued to develop.
‘Player C’, who left the club in January 2023, is referenced at this stage, with Thelwell acknowledging the decision to sell the now-England international to another Premier League club came late in the transfer window, and it had been Everton’s initial intention to sell that player towards the end of FY23.
THE FINCH FARM AGREEMENT
Richard Kenyon, Everton’s Chief Commercial and Communications Officer, gave evidence regarding the club’s suspension of its commercial deals with the companies backed by Alisher Umsanov, Mr Moshiri’s business associate and an oligarch who was sanctioned in the wake of Russia’s invasion of Ukraine.
USM, Yota and Megafon were sponsors of the club. In particular, Everton had struck a training ground sponsorship agreement with USM, worth approximately £20m per season.
However, on March 24, 2022, Everton elected to suspend their commercial deals with these deals.
Kenyon confirmed that, as a result of their suspension of the USM contract, the club lost £20m in sponsorship and £300,000 in re-branding costs. He also stated that, since May 2022, Everton have been actively looking for a new sponsor for Finch Farm, but that search has so far proved unsuccessful.
In their cross-examination, the Premier League’s lawyers brought up the somewhat strange examples of tobacco and gambling sponsorship agreements having ended due to sanctions, but Kenyon fairly argued that in those cases, clubs were provided with several years’ notice, and they were not in any way comparable to a sudden invasion of a European state.
The Premier League also suggested that Everton had been reckless in “putting their eggs in one basket” when it came to Usmanov’s sponsorship, and cited Russia’s anexation of the Crimea in 2014 and the Salisbury poisoninigs of 2018 as evidence. Kenyon, and importantly the Commission, disagreed with this assertation.
James Maryniak, Everton’s Chief Financial Officer, gave evidence around the construction of the club’s new stadium, rising player costs, the difficulties of selling more players to make up for previous “mistakes” and the general notion of double-punishment. He also suggested Everton had been cooperative with the League.
Everton’s Fan Advisory Board (FAB) also provided a witness statement.
THE SANCTION
The Premier League submitted that Everton should be hit with an immediate deduction for a breach of the PSR, in line with the Everton Appeal result.
Their submission, as detailed in point 94 of this report, suggests the League believes the Commission overseeing the Forest case made errors.
Due to this, the Premier League submitted that this Commission should instead follow the logic of the Everton Appeal Board. In the League’s view, the Appeal Board had not added on points for ‘bad behaviour’ (as the Forest Commission had assumed), but rather it must have based the additional three points on the scale of Everton’s breach, using one of the following two calculations.
Roughly one point for each £6.5 million in excess of the Upper Loss Threshold.
Three points in total for a breach in the region of 20% of the Upper Loss Threshold (being £19.5 million divided by £105 million, or 18.6%).
With no aggravating factors to call on, the League therfore submitted that Everton’s punishment, before mitigation, should be:
-3 points for a breach, -2 points for scale: -5 points
Everton, meanwhile, argued — through their lead KC James Segan — “all roads lead to no further sanction.”
MITIGATION
Everton relied on five heads of mitigation:
DOUBLE JEOPARDY
Everton argued the Commission should transpose EFL guidelines, with the Premier League having no such guidelines to protect against double jeopardy.
The Premier League agreed that Everton were worthy of some credit for the overlapping reporting periods, and that 2 points could be deducted from the punishment as long as the starting point was -5 points.
ADMISSION OF LIABILITY
Everton argued they had admitted guilt early in the case, and matched Forest’s levels of “exceptional” cooperation. Given Forest received 2 points back for an early guilty plea and their cooperation, Everton suggested they should receive 1 point back for an early admission of guilt.
The Premier League argued agains this, claiming Everton had not admitted guilt but rather simply submitted a PSR calculation as they are required to do. They also state Everton, even though simple maths would suggest otherwise, were wrong to place '“equal weighting” to Forest having received 1 point back for their early plea of guilt (in Forest’s case, they received a total of 2 points back for both their cooperaration and plea combined).
USM LOSS
Everton submitted the loss of this £20m per-season revenue stream was due to “extraordinary” circumstances and must therefore count as mitigation. Unlike in the FY22 case, in which Everton had no signed documents to call on as evidence for their proposed stadium naming rights deal with USM, the Finch Farm sponsorship was already in place and had been for some years.
The Premier League firmly disagreed and contended that this loss was not unlike other losses of sponsorship suffered by other clubs previously, and that the club should have terminated their deal rather than suspending it. They claimed that Everton should have known their ties with Usmanov carried a heightened risk, but provided little evidence to back up this claim. However, under questioning from the Commission, the League’s representatives acknowledged the imposition of sanctions against a major sponsor would generally be deemed “extraordinary”.
BROADER FINANCIAL CIRCUMSTANCES
Everton contested that the construction of their £800m stadium on the banks of the Mersey, and efforts the club had made in regards to player trading, should be seen as mitigation. Everton also stated that since the case regarding FY22 was only heard in November of last year, FY23 had already been and gone, and therefore no further work to correct mistakes could be done. The club also suggest the loss of income from sponsorship, the sacking of managers and reduced player-trading profits make it difficult to break out of the cycle.
The Premier League argued that Everton spent over £100m on eight new players in FY23, at a time they should have known they were in breach even though the FY22 case had not yet been heard. They state other matters relied on by Everton were ordinary business factors.
COOPERATION
Everton contested they had cooperated in an “exceptional” manner, like Forest had.
The Premier League, in response, claimed Everton had done no more than what was the minimum requirement.
THE DECISION
The Commission eventually summarises:
A breach of the PSR in this instance must equate to an entry point of a -3 deduction.
The Commission disagrees with the Forest Commission’s suggestion that breaches should be separated into ‘bands’ (minor, significant, major). Therefore, Everton’s argument that it falls into the lower end of the ‘significant’ band is rejected.
As a result, the Commission agrees with the Premier League that a further punishment is needed to reflect the quantum of the breach. While this Commission is reluctant to apply a mathematical formula, it believes a relative structure of -1 point for every £6.5m OR for every 6.67% over the Upper Loss Threshold is a method that can provide some level of certainty for any future cases (Editor’s note: of which there are unlikely to be many).
The Commission therefore settled on a further deduction of -2 points, levelling out at -5 points, less mitigation.
The Commission disagreed with the Premier League’s view that -3 points is the absolute minimum that a club can be deducted for a breach of PSR. While it is seen as a solid entry point, it states “there is no prescribed minimum below which the aims of the PSR will not be fulfilled. Rather, the determination of the appropriate sanction involves a careful balance of the legitimate purposes of a sanction.”
The Commission deemed that Everton’s double jeopardy argument carried weight. By their calculations, Everton were already punished for 48.2% of this breach, and therefore, just under 50% of the punishment should be taken off. That equates to 2 points being added back to Everton.
The Commission accepted Everton’s argument around USM. They criticised the Premier League’s arguments around gambling and tobacco sponsorships. The Commission also disagreed with the Premier League’s assertion around “placing all their eggs in one basket” when it came to USM, in a rather scathing take-down of the League’s argument.
However, the Commission does not feel that Everton made smart business decisions in FY23 and, while the club deserves some credit for the loss of sponsorship, these poor financial decisions must still be taken into account.
The Commission also rejected Everton’s broader financial circumstances argument.
The Commission did, though, accept Everton were entitled to credit for an early plea of guilt.
Together with the loss of USM sponsorship, Everton received 1 further point back for their early plea.
In regards to cooperation, the Commission does not find Everton’s to have been of the “exceptional” level. However, like in point 212, the Commission also suggests the Premier League’s criticism of the club has been overly harsh.
The Commission concludes that it would not be suitable to defer/suspend a points deduction until next season, or the aims of the PSR would not be achieved.
By Patric Ridge
Full details of the cooperation argument can be read in point 159 of the Commission’s decision.
A good summary of the position. But Everton remain in limbo with the outstanding resolution of how interest payments should be treated. It would appear the Epl are attempting to ignore accounting standards, something one might expect from a vindictive and poorly run organisation.