26/11/2016
NEWS STORY
Formula One's tax arrangements came under scrutiny last night when ITV News and business journalist Christian Sylt blew the lid on a behind the scenes "agreement" between the government and the sport which has led to it avoiding tax payments of more than $500m.
Sylt analysed more than 100 sets of company accounts to show how the deal has given F1 turbocharged tax savings.
Last year F1 paid just $6.5m in corporation tax on profits of $463.6m whilst its tax bill hit a low of just $569,000 in 2009 on profits of $586.4m. It means that F1 had a tax rate equivalent to just 3.3% over the past decade whilst any other company based in Britain was paying 25.8%.
The key to this benefit is that Britain's tax man allows F1 to use the interest on internal loans to reduce its profits and thereby its tax bill. Last year F1 had revenue of $1.7bn and the vast majority of it was paid to companies based in London. They made profits of $463.6m before interest payments were deducted and this is the key to the whole scheme.
F1's parent company Delta Topco is based in Jersey where no corporation tax is due as it is a tax haven. Delta Topco and the other offshore companies in the F1 Group lend billions of Pounds to the UK companies which are making all the profits. The UK companies then have to pay hundreds of millions of Pounds in interest on these loans and as this is a cost to them they make huge losses so pay little tax.
The interest payments end up in the offshore F1 companies and ultimately in the hands of Delta Topco in Jersey where no tax is paid either. From there the money is paid to F1's owners who are mainly based offshore too so also don't pay much tax.
In short, the scheme involves internal loans moving from the left hand of F1 to the right hand with the interest payments leading to its profits ending up offshore where no tax is due. There is nothing improper about this system at all. In fact, it isn't just completely legitimate but is rubber-stamped by Britain's tax man who has to agree to F1 using the interest to reduce its tax bill.
John O'Connell, chief executive of the TaxPayers' Alliance, told Sylt that "cases like these leave taxpayers baffled as people struggle to make sense of our insanely complicated tax system. Politicians talk the talk but have completely failed to address the problems that arise from a complex tax code, including the loss of people's faith in the system."
The structure was set up in 2006 by F1's controlling shareholder, the investment firm CVC which bought the business for $2bn in 2006. In September CVC agreed to sell Delta Topco for $4.4bn to US media firm Liberty Media which told analysts that F1's "extremely tax efficient" structure was one of the driving forces behind the blockbuster deal.
Liberty has been hailed as being almost altruistic in its approach with some speculating that it will save everything from F1 teams to tracks. However, its praise of a scheme which sees it get money that would otherwise end up in the hands of the tax man suggests that its aims are actually no different to F1's current owners.
In summary, over the past decade F1 has made profits in the UK of around $5bn on revenue of $14.8bn but only paid $122.9m of tax thanks to its agreement with the tax man. This led to F1 paying at least $500m less tax than it would have done if it hadn't had this agreement. In turn it made F1 more attractive to buyers and Liberty has offered $4.4bn.
It doesn't stop there as usually UK-based business owners pay what is known as Capital Gains Tax when they sell shares in the companies they own. However, because the majority of F1's shareholders are based offshore the tax man won't receive much Capital Gains Tax ether. In fact, the F1 shareholders who are based in the UK only own around 5.3% of Delta Topco with the biggest stake held by the sport's boss Bernie Ecclestone so the tax man has him to thank for the largest windfall it will get from the sale.
F1's tax trick could be on borrowed time as company documents reveal its agreement with the tax man expires at the end of next year. This also coincides with changes in the UK tax law that were announced in the 2016 budget.
From April next year there will be a cap on the amount of interest which can be used to reduce profits and thereby tax. The limit will be 30% of taxable profits which is far lower than F1's current level of between 70% and 90%. In fact, in 2011 it came to a whopping 127%. It should mean F1 pays much more in tax in the UK and in turn its profits will reverse. Time will tell what impact this has on Liberty's takeover plans.
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