How Premier League financial rules will change transfer market - as Aston Villa & Chelsea post big losses

As clubs begin releasing details of their financial status for last season, one thing has become clear – a lot of teams are cutting it very fine when it comes to staying within the Premier League’s profit and sustainability rules (PSR), and the way that they are now forced to change their business models will have a significant impact on the way the transfer trade works in England and the wider footballing world.

Chelsea, who have spent over a billion pounds in transfer fees since Clearlake Capital took over from Roman Abramovich, have recently announced pre-tax losses of £90.1m for the 2022/23 season, following on from a loss of £121.4m loss the year prior. Aston Villa’s accounts reveal a pre-tax loss of just under £120m. Leicester City, in the Championship, are in danger of failing to comply with PSR too, while Everton have already fallen foul and may do so again this season, alongside Nottingham Forest.

The PSR allow clubs to make a loss of up to £105m total over a rolling three-year period, of which no more than £5m per year should be operating losses with up to £30m per year coming from secure investments by owners or shareholders. If Aston Villa, for example, have reported a loss of £120m before tax, then even though they made a profit of around £400,000 in 2021/22, they appear to be over the permitted losses and at risk of sanctions, which as we know from Everton's case can include a points deduction.

The picture, for Villa and other clubs, is not always quite as clear-cut as it immediately appears. Money spent on infrastructure, academies, women’s football and community projects do not count against losses under PSR regulations, and public financial results do not typically break costs down. According to a report by Birmingham Live, Villa spent around £19m on such projects in 2021/22, meaning that they could easily be well within the PSR thresholds if spending was broadly similar in 2022/23.

Villa insist that they are projected to be PSR compliant, and there is no reason to disbelieve them. But having posted a substantial loss this year, they will still be heavily restricted in their capacity to spend on transfers over the remaining two years of the rolling period which will include that £120m loss – a period which includes the 2023/24 season, in which they are estimated to have had a net spend over £65-70m as they brought in players such as Moussa Diaby and Pau Torres.

If Villa are heading towards another loss, to continue using them as an example, then that means they will need to sell some players before the end of the season, which for PSR purposes is 30 June. That set-up creates the first big change in how the transfer window will operate – the addition of a secondary window-within-a-window at the end of June by which point teams in danger of going too far into the red will have to move players on.

The result of that is that teams who are in a position to spend will often be able to negotiate much better deals for players from clubs who need to sell around that period. If Villa do need to move a player on, for instance, then they may try to sell Douglas Luiz to Arsenal – but Arsenal would be able to take advantage of Villa’s very real need to sell him and likely drive the price down as a result. If Villa don’t have to sell to make ends meet, then they are in a much stronger bargaining position and would be able to hold out for a larger fee.

The chances are that Villa will be alright this summer, because although they spent a lot on transfer over the course of the season, that spend will have been amortised. The current rules mean that the cost of a player’s transfer is spread over the length of their contract, up to a maximum of five years (this was changed recently after Chelsea started taking advantage of this rule by handing players contracts of up to eight years in length - a tactic which other clubs did not appear interested in mirroring).

So Moussa Diaby may have cost a reported £51.9m, but as he signed a five-year deal at Villa Park the effective cost as far as PSR is concerned will be just over £10m per year plus his wages. This gives clubs a lot of leeway to kick the can down the road on a spending spree, but the bills will always come due eventually, especially for teams who don’t have huge commercial income.

As a consequence, we’re increasingly going to see spending cycles in which teams who have overspent in previous years will have to sell players off to stay within the boundaries of PSR. That will naturally mean that many teams are effectively out of the market when it comes to buying players every season – and that could depress the market around the world.

That’s because the Premier League is by far the biggest-spending league in the world when it comes to transfer fees. With PSR preventing English clubs from splashing cash as freely as has previously been the case and with some clubs essentially unable to sign players they want every year, the many clubs in less pecunious leagues who have built their business models around buying cheap and selling high will find that they have fewer bidders with less spending power. PSR may only apply to English clubs, but it may well reduce the rate of transfer inflation across the footballing landscape.

The biggest change that PSR is likely to generate affects academy players, however. For PSR purposes, when a player is sold, the calculations care only about the profit or loss made on the sale – and because home-grown players don’t cost transfer fees at all, selling one on is treated as pure profit. Clubs who can generate large numbers of young players to move on for a fee will be able to use that to fund lavish spending on outside players.

That’s what we may already be seeing with Chelsea, a club who look like they are very likely to be outside PSR limits as it stands, although they deny that they are at risk. Selling Mason Mount to Manchester United for £60m will have taken a substantial chunk out of their losses over the past few seasons, and it also explains why the club have been considering the sale of Conor Gallagher despite the fact that he has been one of their more consistent performers under Mauricio Pochettino.

The financial reality of academy products being more valuable as saleable assets than as players may also explain Manchester City’s decision to let Cole Palmer go, for instance. If clubs can essentially turn their academies into talent farms, it can free up a lot of funds for transfer outlay elsewhere.

That, of course, clashes with the collective notion that many football fans buy into that academy products are especially prized assets at a club – ‘one of our own’ players that have a deeper connection with the club and its supporters. If Premier League clubs are being encouraged to invest heavily in their academies (which will also be the case because spending on academies doesn’t count against PSR) then that will be great for the overall level of quality in the league and for the England national team, but may also erode another layer of connectivity between clubs and the fans in the stands.

So PSR will change the transfer landscape. It will serve to entrench the most successful clubs at the top of the financial food chain, because clubs with huge commercial revenues like Manchester United will find it much easier to keep their operating losses minimal – but it will also, hopefully, dissuade owners from spending recklessly, and will reduce the astonishing rate of inflation of players’ wages and transfer fees, which have become a genuine threat to the game.

Spending has surged as more money, from commercial sources and rights deals, has flowed into the game, but the bubble has become so big that it will burst horribly if there is a broader economic depression that reduces the value of rights deals and the spending power of fans. Limiting how far clubs can go into the red should serve to protect clubs from that possibility.

The fact remains that we will see more big clubs selling young, home-grown players and taking advantage of smaller sides who are struggling to keep up with PSR requirements. It will not level the playing field – this is not a salary or spending cap, such as American sports fans are used to, and the biggest and richest clubs will continue to enjoy a sizeable advantage. How that changes the footballing landscape over the course of the coming years remains to be seen, but it will have a major impact on the way the transfer window works, and it seems apparent that some teams have not yet adjusted to the new reality.