1. ITV Report

Revealed: How Formula One drove its tax bill down to just £5.2m on £372m of profits

The parent company of Formula One paid just £5.2m ($6.5m) in corporation tax last year on profits of £372.3m ($463.6m) according to its latest accounts, ITV News has found.

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Over the past decade. F1’s annual corporation tax rate effectively came to an average of 3.3 per cent - nearly eight times lower than the standard rate.

Since 2006, F1 has paid a total of $122.9m in tax on profits of $5bn thanks to an agreement with HM Revenue and Customs (HMRC) which allows it to use internal loans to generate losses on paper and reduce its bill.

Analysis of more than 100 sets of company accounts shows how lucrative the agreement is as F1 would have had to pay at least $500m more in corporation tax if it hadn’t been in place.

F1 is controlled by the Luxembourg-based private equity firm CVC Capital, which bought it for $2bn in 2006. In September CVC agreed to sell the business 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.

profits made by F1 since 2006
paid in tax on those profits during that time
- or £401m - more tax would have had to be paid without the agreement with HMRC

In a recent interview, Liberty Media’s billionaire chairman John Malone said that on being told about the proposal to buy F1: "I just said ‘Eureka! And even the tax structure is brilliant'."

As CVC, and the majority of F1’s other shareholders, are based offshore, HMRC will receive little in capital gains tax from the proceeds of the sale.

Soon after CVC acquired F1 it set up a complex web of companies in the UK and offshore jurisdictions, including Jersey and Luxembourg. This structure served a financial purpose as it enabled F1 to shift profits from its UK headquarters to offshore subsidiaries where little or no tax is due.

It is a perfectly legitimate practice known as transfer pricing, or advance pricing, and is usually only open to multinational companies.

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Last year, F1 had $1.7bn of revenue which principally comes from three sources: race hosting fees, television broadcasting fees and advertising and sponsorship of races.

This revenue is largely received by two companies - Formula One World Championship and Formula One Marketing - both of which are located in the UK, along with another 13 of the 24 companies in the group.

Although the revenue is paid to UK companies, they have a trick under their bonnet to minimise their tax bill.

Many of the UK companies have received huge loans from their offshore counterparts in the F1 group which charge a 10 per cent annual interest rate. The interest came to $395.4m last year and payment of it is a cost to the UK companies - so it pushes them into a paper loss, which reduces their tax bill.

The loss is only on paper as both the British and offshore companies are owned by the same shareholders - so the loaned money is simply being moved from one hand to the other.

As the interest is received offshore, it isn’t taxed there - and so it can be paid out to F1’s shareholders with no deductions.

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In 2015, F1 had $4.3bn of intra-group loans and, crucially, HMRC’s consent is required for the interest on them to be tax deductible. The more interest HMRC allows to be deducted, the less tax there is to be paid in the UK.

In F1’s case, HMRC agrees that the interest on its loans can be classed as deductible - which is why its tax bill is so low.

This is known as an advance thin capitalisation agreement and it is confirmed in F1 company documents which state:

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.

– F1 company documents

All of F1’s UK-based businesses are ultimately owned by parent company Delta Topco, and its accounts show that in the year to 31 December 2015 it paid a total of £5.2m ($6.5m) in corporation tax last year on profits of £372.3m ($463.6m).

So, to summarise, 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 an agreement with HMRC.

This led to F1 paying HMRC at least $500m less than it would have done if it hadn’t had an agreement with the tax man. In turn this made F1 more attractive to buyers and Liberty has offered $4.4bn. However, because the majority of F1’s shareholders are based offshore HMRC will receive little capital gains tax which would be paid if the sellers were in the UK.

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Alex Cobham, director of research at the Tax Justice Network, said it was "simply astonishing".

For a successful, global business, it’s impossible to imagine how interest rates of more than nine per cent over the Bank of England base rate could have been justified as market rates – and simply astonishing that HMRC could agree to such terms, and give up hundreds of millions of pounds of tax revenue that would otherwise have been due.

It’s no surprise to see Liberty, as they look to take over the company, boasting to their investors of the ‘extreme tax efficiency’ of F1.

Extreme, it certainly is – and hard to believe that HMRC could have made such agreements. This confirms the need for public scrutiny of advance pricing and advance thin capitalisation agreements.

These dull titles hide the fact that they are contracts with private companies that reallocate significant public resources. Given the potential to create quite extraordinary private gains, as appears to be the case with F1, there can be no justification for their ongoing secrecy.

– Alex Cobham, Tax Justice Network

Corporate tax agreements raced into the spotlight in August, when Apple was fined a record €13bn (£11bn) by the European Commission (EC).

Apple channelled all of its sales in Europe through a company in Ireland, where the government allowed it to allocate the vast majority of its profits to a head office which the EC claims existed “only on paper”. As a result, its tax rate hovered between 0.005 per cent and one per cent, and the EC alleges this was a benefit to Apple in particular which breaks EU state aid rules.

However, F1 is on the final lap of its agreement with HMRC.

Company documents reveal that the deal expires at the end of next year, which coincides with changes in British tax law. These changes are being introduced in April and will cap the amount of interest on internal loans which can be used to offset tax.

The limit will be equivalent to 30 per cent of taxable profits, which is far lower than the level of around 90 per cent F1 has enjoyed in recent years.

It should mean that F1 pays millions of pounds more in tax in the UK, and the research suggests its bill could increase more than ten-fold.

A Treasury spokesman said: “As announced at the Budget and confirmed in the Autumn Statement, the government will legislate to limit the amount of tax relief large businesses can claim for their UK interest expense.”

  • Video report by ITV News business editor Joel Hills: