Step Five: The feasibility and practicalities of a Budget Cap

One thing that surprised me when the idea of a budget cap was first mooted was the almost universal view that it could never be implemented nor enforced. Had the criticism been that it could never be agreed politically among the teams perhaps I would have wholeheartedly concurred, as this proved to be the case.

Let’s try and answer this here. Could financial rules be successfully implemented in Formula One even if the political issues could be placed aside or if the FIA was strong enough to implement such regulations simply because they concluded it was the right thing to do for Formula One?

I’m not sure when tax was first mooted, certainly the ancient Roman government taxed its citizens.

(According to HM Revenue & Customs own website: "Income Tax was announced in 1798, and introduced in 1799, as a means of paying for the war against the French forces under Napoleon". The Napoleonic Wars ended in 1815. - Editor).

Whenever a government tax began, the idea stuck. I doubt that it was considered popular nor 100% enforceable when first mooted, but it is an important idea in allowing the human race to advance. Human society without government is anarchy and government is pretty much impossible without tax. Successful taxation tends to need a complex set of rules. People accept tax, see the need for it, on the whole abide by the regulations, and look down on folks who cheat the system. People who do get caught cheating get punished and this punishment reflects the strength of the government in question. In China, chief executives and politicians alike get shot for corruption. In the UK, one can go to prison. In Italy, well it’s more grey, but even there fashion icons Dolce & Gabbana appear to be in some trouble over tax evasion.

Society is way, way more complex than sport. In Formula One each team does the same thing, making the application of financial rules hugely more simple than anything the government does. It’s important to keep this in mind as there is no thought of trying to do the impossible here. My point is that we are dealing with an idea much easier to implement than taxation, yet with marked similarities in the preparation of accounts.

First of all one has to understand that measuring spend is not as easy as measuring, say, the cubic capacity of an engine or indeed any technical rules. Actually some aspects are easy, but only with a view from the FIA that ‘these are the rules, either abide by them or don’t enter’.

For example, say that part of the budget cap rules were that one could only spend £10m on salaries and £15m on out-of-pocket expenses like travel, materials, and sub-contract services. Seems to me that it would do the job to insist on a single bank account that the FIA could inspect at any time, with the understanding that more than £25m must never come into it, nor more than £25m come out during a financial year. Pretty easy to understand that one. Then the regulations simply have to say that any payment made on behalf of the team in question, to anyone or any company must be from this account. Therefore any service towards the team that is not accounted for via this account is cheating. The cash spend could be regulated pretty well in this way, but there is a lot more to consider than just cash.

Here are some examples of problems. Suppose one team owns a factory and another leases theirs. It would be unfair for the latter to have that much less to spend because of the rent. Then what of team accountants who wish to run accounts in dollars and another in euros, perhaps offshore to lower their tax bill? Why should a team in Switzerland who pays most of its expenses in Euros and Swiss francs be subject to a constraint defined in British pounds? Suppose one team makes a big mistake one year and needs to spend an extra million to regain any kind of competitiveness? Surely one should be allowed to borrow against future years rather than just write off the season? What do we do with repairs and dilapidations? Buildings could look really shabby if spending on them hurt the car. Suppose a sponsor supplies their sponsorship in kind rather than cash, say free team clothing, or free machines for the factory as long as customers can have a tour three times a year? What about a team which doesn’t have a great wind tunnel? All the cash will disappear in a moment if they want one, and yet without one they are at a disadvantage. I’m sure you are getting the picture. There are all kinds of problems.

Thing is, all the problems are essentially solvable. Consider that every significant company in the western world has to undergo an audit by an independent firm of accountants to prepare annual accounts. They face much the same problem, although driven by a different issue (firms want to avoid paying tax on the whole). Over the years, sets of internationally recognized procedures have guided accountants to a system that works across the board, for all types of different companies working in all types of differing businesses. Again don’t forget all Formula One teams do the same thing. It’s a much simpler task for which to devise accounting regulations.