24/07/2013
NEWS STORY
Anyone who thinks that Formula One's 82 year-old boss Bernie Ecclestone - seen here heading to the negotiating table - is losing his edge in old age should think again. It's no secret that F1 generates fantastic profits for its controlling shareholder, the private equity firm CVC, but what is less well-known is how little tax the business pays. All companies have a duty to their shareholders to minimise their tax bills and F1 is certainly no different. It has one of the world's shrewdest dealmakers in the driving seat and an article on the cover of today's Independent newspaper, written by Pitpass' business editor Christian Sylt, reveals that Ecclestone has negotiated one of the most lucrative tax arrangements in British business history.
The majority of F1's commercial operations are based in the UK where the standard rate of corporation tax is 24%. Despite this, in 2011 F1's net UK tax bill was just £945,663 ($1,468,000) on pre-tax profits of £305.6m ($474.4m). It is thanks to an ingenious scheme which is entirely legal, legitimate and has the support of the UK's tax authority H.M. Revenue & Customs (HMRC). And if F1's tax bill seems too good to be true then consider the fact that the eight teams based in the UK had revenues of £886m in 2011 but didn't pay a penny of tax here.
In fact, in 2011, the most recent year for which a complete set of data is available, tax was only paid by two of the 12 key UK companies connected to F1. The total list comprises F1 itself, the eight teams and two engine manufacturers headquartered in the UK and Silverstone. The only other UK taxpayer in addition to F1 itself is Cosworth.
F1 teams tend to avoid paying corporation tax because they spend all of the money they receive in a bid to boost their chances on track. Breaking even or making a loss means that they don't need to pay tax as there is no profit for it to be charged on.
F1 itself has a different trick under its bonnet to reduce its tax bill. It is perfectly legitimate but far more complex.
F1's £945,663 tax bill is thanks to an agreement with HMRC which is outlined in the prospectus for the planned flotation of the sport on the Singapore stock exchange. It reveals that F1's precise tax bill is far lower than previously thought.
F1's key revenue generating company, Formula One World Championship (FOWC), is located in the UK along with another 13 of the 30 companies in the group. They receive the lion's share of the sport's £980m ($1.5bn) revenue but their tax bill is minimised thanks to a series of loans they have taken out from their offshore counterparts in the F1 group. In 2011 F1 had £2.5bn ($3.9bn) of intra-group loans and HMRC allows the interest on them to be tax deductible.
The interest came to £387.7m ($601.8m) in 2011 and it drastically reduces the tax bill of the UK-based F1 companies pushing many of them into a paper loss.
This is confirmed in the flotation prospectus which states that "we have an efficient tax position. We expect our aggregate cash tax payments to remain broadly consistent with prior years."
It explains that "the group's tax charge is materially dependent on the amount of UK tax relief available to it for interest expense on certain intra-Group loans. The amount of such relief is limited to the ‘arm's length' amount of interest, which can be a subjective matter. In order to obtain greater certainty regarding our affairs we have since 2008 operated pursuant to a formal advance thin capitalisation agreement with the UK's tax authority, HM Revenue & Customs, which...applies until 31 December 2017."
F1's ultimate parent company, Delta Topco, is based in Jersey and the prospectus adds that it is "subject to Jersey corporation tax since it is a Jersey incorporated company. However, the current corporation tax rate in Jersey that is applicable to the company is zero."
Matthew Sinclair, Chief Executive of the TaxPayers' Alliance, says that "Britain's hideously complex tax code means it's incredibly difficult for the public to understand how much tax a company, let alone an F1 team, should pay. What's more, those with the right accountants and lawyers can take advantage of the loopholes that complexity creates to minimise their tax bills. It's vital that the politicians who created our broken tax code now drastically simplify and reform it so people can be assured that everyone, whether a racing boss or a coffee giant, is paying their fair share, no more and no less."
Despite not paying much tax, the UK benefits tremendously from companies connected to F1 being based in the country. The teams, engine manufacturers, Silverstone and F1 itself employ over 5,000 people and spend billions with UK businesses which do pay tax so HMRC wins in the end. However, moves are afoot to tighten up legislation in this area.
Last week the Organisation for Economic Co-operation and Development (OECD) launched a plan to update and co-ordinate national tax laws to stop them being "abused" by multinational companies. It said that tax income should reflect the economic activity it generates.
The OECD hopes that its plan will be put into action over the next two years and is working on an international legal structure that would help countries introduce it quickly.
Prime Minister David Cameron said he was "delighted" with the development. "Taxpayers, governments and businesses all suffer when some companies manipulate the tax system to avoid paying their fair share of taxes," he added.
Earlier this year it emerged that US companies Google, Starbucks and Amazon paid little tax in the UK despite having big operations here.
Google was fiercely criticised by UK MPs for routing £3.2bn of UK sales through Dublin which led to it paying little tax. Starbucks had UK sales of £413.4m last year and was questioned over transferring royalty payments to a Dutch sister company. Following criticism it agreed to pay £10m tax this year.
The companies pointed out that these tax avoidance schemes are legal and they have a duty to their shareholders to minimise their tax bills. They could do a lot worse than taking F1's lead.