Describing the share issue as “an alarm”, Sergejus Fedotovas, the Hearts director, said that all previous efforts to raise revenue had been exhausted, and that the only other option in a difficult economic climate would be “dramatic” cuts.
Hearts’ financial predicament could be exacerbated by a tax demand for £1.75 million which may have major consequences for the future of the club.
The case, which Hearts reveal in their share issue brochure, will go to a tax tribunal next month, where the Scottish Cup winners have vowed to “robustly defend” their stance against Her Majesty’s Revenue and Customs.
At the centre of the dispute is the loan agreement for a number of players between Hearts and Lithuanian club Kaunas, who were then run by Vladimir Romanov, the Hearts majority shareholder since 2005. The Edinburgh club have warned that, if the tax case goes against them, it “could have a dramatically negative effect on the company”.
The share offer, launched on Thursday, allows fans to own up to ten per cent of the club and, although Fedotovas claimed that the intention was to invite “more participation” and “closer dialogue” with the community, he admitted that the scheme was first and foremost a cry for financial help.
“We are doing this as a solution to the financial challenges that are facing the club and are affecting all clubs in Scotland,” he said. “If you want to maintain a squad that is capable of playing in Europe then the budget should be according to that. It is much easier for clubs that have stadiums with a capacity of 40-50,000 people. For a number of clubs in Scotland, getting into Europe is a bonus. For us, that is the task every season, something that we must achieve.
“The share issue is a signal, an alarm to the people who are truly concerned about the club. We have gone through a really entertaining period and achieved on a number of occasions quite positive results in the SPL. Now, we have entered a period where economic downturn causes problems. If we want to maintain the name of the club in the capital city as one that aspires to play at the high level, then we cannot just cut, cut costs.
“For more than a year, we have extensively cut costs across the board, whether that was the playing squad, administration, facilities. We cannot live like this all the time.”
Despite selling some of their biggest assets and concentrating on home-grown talent, Hearts are still struggling to make ends meet. Fedotovas admitted that they had run out of ideas in their attempts to increase revenue, which is “short of £7 million”. It cost the club £8m just to pay the players’ wages last season, although that bill has now been cut. “We cannot go to supporters and ask them to pay twice for their season ticket because that would be a disaster. We have exhausted all the possibilities, and we still have a funding gap between the costs and the income.
“That’s why we are coming to the wider society, to the people who are concerned about this club. We are saying ‘we want you to step up and say if you really care’. If you think that we should be strong and continue fighting then we need to do it together.
“If this strategy fails, the club will be faced with a tough financial reality. The answer to that would be another dramatic cut in costs. And I don’t think anyone would be happy with a weak team and bad football results.”
Prospective shareholders are being asked to invest a minimum of £110 by the club’s 19 December deadline. Fedotovas said that, if fully subscribed, the 11p shares would raise around £1.7m. He said that the money, which would allow the club to “trade normally,” would fund youth development, the growing cost of maintaining Tynecastle and, further down the line, the manager’s transfer budget.
“If we are considering signing new players or re-signing players who are currently in the squad, we need the financial muscle to be able to do that,” said the director.
Due to the transfer embargo imposed on them by the SPL, Hearts were unable to bring Rudi Skacel back to Tynecastle. The Czech player, who had been training with them, signed a short-term deal with Dundee United on Friday. “That is tough news for us to hear,” said Fedotovas. “Unfortunately we weren’t able to conclude with anything. We will look to January to see if there is a possibility to sign him in January and whether we would be financially strong to do that.”
Vladimir Romanov, above, the club’s majority shareholder, has said that if the share issue were to be successful, he would consider passing more, maybe all, of the club into the hands of supporters. Fedotovas, who described the move as a “tasting step”, claimed that the early signs were promising. “I am happy to say that, just hours after the initial launch, we are having many calls from people who are registering their interest.”
What is clear is that Hearts remain at the mercy of Romanov and his Ukio Banko Investicine Grupe, which has been in control for almost eight years. As of 20 June last year, Hearts owed UBIG £22.4m, with interest at 4.5 per cent. The share document states that UBIG will not seek repayment of this amount during season 2012-13 but the position will be reassessed on 1 July 2013. “If UBIG were to demand repayment of the full amount,” states the document, “the Company [Hearts] would be insolvent and face liquidation.”
Against this bleak backdrop, the revelation that Hearts are also embroiled in a tax dispute is potentially devastating.
Hearts say they will “robustly defend” their position and contest that the situation is no different to any other loan, where parent clubs often meet wage demands. The share document states: “The directors are attempting to robustly defend those claims but the burden of proof is on the company and the tax will be payable unless the company is successful in challenging the claims. The claims will be heard by the relevant tax tribunal in November 2012.
“Specifically, HMRC has claimed unpaid tax liabilities of circa £1.75m (excluding interest and penalties) in relation to the arrangements between the company and Kaunas FC [and] certain players who were loaned to the company.” In season 2005-06, a number of players signed by Kaunas were immediately loaned to Hearts, including Edgaras Jankauskas, Roman Bednar, Martin Petras and Ludek Straceny.