Jul 195 min read

Swap Deal Summer: How Premier League Clubs are Changing Transfer Tactics Under PSR Rules

This summer’s Premier League transfer window has been relatively quiet, in part due to the CONMEBOL Copa America and UEFA’s European Championship tournaments.[1] While many of the world’s best players were away on international duty, several swap deals quietly became one of the bigger stories of the summer.[2] While American sports fans have grown familiar with the idea of a team trading one player to secure the rights to another, this practice is far less common in the world of soccer.[3] However, due to the Premier League’s changing financial squad-building regulations, the player swap may become a more common occurrence for teams looking to fit their squad under the League's Profit and Sustainability Rules (PSR).

The Premier League (as well as UEFA for its European club competitions) have implemented their own “salary cap” regulations for some time now.[4] However, The Premier League agreed upon a “sanctions policy” in August 2023 after fines failed to elicit any significant change in economic restraint.[5] Following the League’s enforcement of the PSR penalties to deduct points in the season standings from Everton and Nottingham Forest, clubs scrambled to comply before the League’s financial year ended June 30th.[6]

The League’s PSR are not salary cap rules per se. Unlike American leagues in which salary caps literally limit a team’s player salary expenditures, the PSR and Financial Fair Play (FFP) regulations limit a club’s financial losses. The League defines “PSR Calculation” as “the aggregation of a Club’s Adjusted Earnings Before Tax” for the preceding three years.[7]Earnings Before Tax are a club’s profits or losses after depreciation and interest,[8] whereas “Adjusted Earnings Before Tax” refers to a club’s earnings less costs of:

(a) depreciation and/or impairment of tangible fixed assets, amortisation or impairment of goodwill and other intangible assets (but excluding amortisation of the costs of Players’ registrations);

(b) Women’s Football Expenditure;

(d) Community Development Expenditure;

(e) in respect of Seasons 2019/20, 2020/21, and 2021/22 only, COVID-19 Costs.[9]

While the League’s rules are not explicitly designed to limit player acquisition expenses, those costs represent a massive part of a team’s total expenditures when looking at the entire club as a business.[10] The rules were created partly to prevent clubs from reckless spending and getting into financial trouble, such as Leeds in the late 90s (their conduct spawned the phrase “Doing a Leeds” which refers to financial mismanagement),[11] but the rules have also had ancillary competitive balancing objectives.

Under Premier League Rule E.52, clubs that lose more than £15m under the three-year PSR calculation are subject to heightened financial reporting standards.[12] But Rule E.53 is the main driver of the changes to team spending we see now. Notwithstanding adjustments for playing in lower-tier leagues during the three-year PSR window, clubs with losses of in excess of £105m are subject to discipline including the dreaded points deductions.[13]

One of the fastest ways for a club to raise money quickly is through transfer fees from selling players. While the benefits of traditional sales may be limited because buyers will prey on a selling club’s need to comply with the spending rules, swap deals might allow for a bit more leeway. When a player is transferred out of a club for a fee, the fee is registered as profit instantly, but when acquiring a player, the expense from the fee is amortized over the contract's life up to five years.[14] Players developed through a team’s academy as seen as “pure profit” because no transfer fees were paid to acquire them. Therefore, swapping academy players in separate deals closely linked can quickly generate short-term profits on the books for both teams.

The short-term benefits are not permanent solutions because if the swapped players are later sold at a loss, that is still a loss on the books. But, for a team in need of a quick compliance fix, they can be quite useful. Teams can ensure they are not subject to punishment now and can worry about generating more revenue in the future.

If the regulations were originally created to promote healthy financial positions amongst the League’s members, this sort of salary capology, while legal may not be within the spirit of the regulations. One way the league has sought to combat potentially inflated fees is through its power to make “Fair Market Value Assessments” which examine whether the valuations assigned were within an acceptable range of those expected by clubs negotiating at arm's length.[15]

The League is reportedly transitioning towards a new framework influenced by creative accounting measures, the failed Super League initiative, and state-backed ownership groups. The proposed framework comprises two primary components: a squad cost control ratio and an upper spending cap linked to broadcasting revenue.

The squad cost control ratio will limit club spending on wages, amortized transfer fees, and agent fees to 85% of revenue (70% for clubs in UEFA competitions) within any given season.[16] Additionally, an upper hard cap will be introduced, restricting spending on wages, transfers, and agent fees to a multiple of the broadcasting revenue earned by the lowest-ranked Premier League club. For example, last season, Southampton earned £103.6 million ($131 million) from television revenue. Under the proposed rules, a multiple of five times that amount, or $653 million, would serve as the cap.[17]

This new proposal aims to work in conjunction with the squad cost controls set to be implemented in 2025, replacing the existing Profit & Sustainability rules that led to points deductions for Everton and Nottingham Forest this season. Starting in 2025, teams will be restricted to spending 85% of their total revenue on wages, transfer payments, and agent fees.

A Professional Footballers’ Association (PFA) spokesperson has stated that “we will obviously wait to see further details of these specific proposals, but we have always been clear that we would oppose any measure that would place a ‘hard’ cap on player wages.”[18] Given the comparison to American sports, where artificial wage suppressors like salary caps may require collaboration with unions, it makes sense why the PFA has steadfastly asserted its right to be consulted on the matter.

In the United States, the non-statutory labor exemption has been a fundamental aspect of labor relations in American sports.[19] This exemption allows for salary caps in exchange for a guaranteed portion of league income. European Union “competition law” and its application by the Court of Justice of the European Union (CJEU), along with U.K. labor law, particularly the Trade Union and Labour Relations Act 1992,[20] could provide a basis for understanding the challenges associated with implementing a salary cap. These legal frameworks could be examined in a future article to explore the potential hurdles a salary cap would need to overcome.

Caleb Clifford is a third-year law student at USC Gould School of Law with an interest in labor, employment, and IP law. He was the president of USC’s Sports Law Society and can be found on (X) @Cliffnotes_ and LinkedIn (Caleb Clifford).

[1] https://www.thetimes.com/sport/football/article/premier-league-transfers-latest-deals-3wdffdk5m

[2]https://www.cbssports.com/soccer/news/premier-league-transfer-swaps-explained-why-chelsea-aston-villa-and-more-are-selling-players-to-each-other/

[3] https://www.youtube.com/watch?v=gxVctUN1GFM

[4] https://www.cnn.com/2014/05/16/sport/football/financial-fair-play-uefa-football/index.html

[5] https://www.toffeeweb.com/season/23-24/news/44393.html

[6]https://www.skysports.com/football/news/11661/13112071/profit-and-sustainability-rules-premier-league-points-deductions-here-to-stay-for-financial-breaches

[7] https://resources.premierleague.com/premierleague/document/2024/03/04/0910e1b3-f94a-41a5-9818-6e1b5c961a9a/PL_Handbook_2023-24_DIGITAL_26.02.24-v3.pdf at 98.

[8] Id. at 89.

[9] Id. at 80.

[10] https://swissramble.substack.com/p/tottenham-hotspur-finances-202223

[11] https://en.wikipedia.org/wiki/Doing_a_Leeds

[12] https://resources.premierleague.com/premierleague/document/2024/03/04/0910e1b3-f94a-41a5-9818-6e1b5c961a9a/PL_Handbook_2023-24_DIGITAL_26.02.24-v3.pdf at 134.