Campaign group the Tax Justice Network has called on Parliament's Public Accounts Committee to launch an investigation into an agreement between HM Revenue and Customs (HMRC) and the parent company of Formula 1 which saw it pay just £5.2m in corporation tax on profits of £372.3m in 2015.
This weekend F1 fans will be hoping for some twists and turns when the season gets underway in Australia. The wheels and wings of the F1 cars have been widened in bid to boost top-speeds and prevent Lewis Hamilton’s Mercedes team from racing off with a fourth consecutive championship. However, even more dramatic action in the sport is taking place closer to home.
ITV News can reveal that the concern over F1’s lucrative tax agreement has driven the Labour MP Margaret Hodge to table Parliamentary Questions about it and they will be discussed in the House of Commons next month. It will turn the headlights on a deal which has cost the taxpayer hundreds of millions of pounds.
“This case confirms absolutely the need for public scrutiny of advance thin capitalisation agreements - secret deals which give select companies tax relief on intra-group lending, in this case saving F1 at least $500m (£400m),” says Alex Cobham, chief executive of the Tax Justice Network.
“As of 2014, we know there were 500 agreements in force - in all probability costing tens of billions of pounds. There may well be many more today, but the government appears to have stopped providing even this minimal transparency. The UK public will want to know how many of these deals are in place, and how much it is costing the Treasury overall - at a time of extreme cuts to public services. We would urge the Public Accounts Committee to launch an investigation in order to scrutinise these opaque deals.”
It would be its second major sports investigation so far this year as it has already turned its gaze on footballers avoiding tax on income from image rights. HMRC told the Public Accounts Committee that in the past two years its football division has brought in £158m but the sums in F1 are even more turbo-charged.
In November ITV News revealed that over the past decade F1 has made profits in the UK of around $5bn (£4bn) on revenue of $14.8bn (£11.84 bn) - but only paid $122.9m (£98.3m) of tax thanks to its agreement with HMRC.
This gave the company an effective tax rate of around 2% despite the standard rate coming to an average of 25.8%. F1’s headquarters are in London so it shouldn’t pay less than this but it has an ingenious, and perfectly legitimate, trick under its bonnet.
The amount of profits F1 has made in the UK over the past decade
The amount of tax F1 has made in UK profits over the last decade
In 2015, the latest year for which accounts are available, F1 made $1.7bn (£1.36 bn) of revenue from four main sources - race hosting fees, the sale of broadcast rights, hospitality tickets and sponsorship. Almost all of this revenue is received by companies based in Britain which should leave them with high-octane profits and a hefty tax bill.
However, the offshore companies in the F1 group have given huge loans to their counterparts in Britain and the interest payments push them into a paper loss. The profits in Britain are essentially wiped out by the interest payments and as they are received by companies which are based offshore they can be paid out as dividends to F1’s owners without corporation tax being deducted.
It is such a good deal that it is one of the reasons that American investment firm Liberty Media agreed to buy F1 for $8bn (£6.4 bn) last year. Liberty’s chairman John Malone recalled that on being told about the opportunity to buy the sport he “just said 'Eureka! And even the tax structure is brilliant.” Likewise, Liberty’s chief executive Greg Maffei described it as “an attractive low tax rate structure.”
In summary, F1 lends itself money, charges interest on it and uses this to reduce its tax bill. HMRC gave the green light to this complex structure but is coming under pressure.
It revved up last month when the European Parliament voted in favour of “an immediate investigation into competition concerns arising from the Formula 1 industry.” This was tabled by Anneliese Dodds, MEP for South East England, who said that it was driven by “serious concerns being raised about an agreement with HM Revenue and Customs that allowed the sport to pay an effective 2% tax rate.”
Dodds has been investigating alleged anti-competition in F1 since 2014 when Manor and Caterham, two teams which were based in her constituency, crashed into administration. In a letter sent to Margrethe Vestager, the European Commission’s Competition Commissioner, on 30 January Dodds said she was alerted to F1’s tax agreement by the ITV News investigation. Last month Vestager replied to say that it hadn’t fallen on deaf ears.
“If the Commission has sufficient doubts that a tax ruling gives a selective advantage, and hence could constitute state aid, the Commission can investigate tax rulings ex officio. In this context, my services are looking at the information provided,” she said in her reply to Dodds.
It has fuelled concerns that the EC could launch an investigation and impose massive fines on F1 as it did last year when it demanded a record €13bn (£11.18 bn) from Apple. The ruling set a precedent and it is being appealed by both the tech giant and the government in Ireland where its European headquarters is located.
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% and 1% and the EC alleges this was a benefit to Apple in particular which breaks EU state aid rules.
The EC would not comment on whether it may come after F1 next but Cobham has urged it not to delay. “Without greater transparency of these agreements, or the basis on which certain deals are made with certain companies, it is not unreasonable to imagine that the government’s actions here may amount to illegal state aid. As Commissioner Vestager examines the documents relating to F1, we would encourage her team to be mindful of the much wider use of these agreements, and to consider seeking additional information from the UK government.”
It could put the brakes on F1’s tax benefits but Dodds says that’s just the start. “These tax rulings must be investigated and I have previously written to the European Commission to investigate the F1 tax deal and see if it breaches state aid rules. We have already seen Apple fined a record €13bn (£11.18 bn) that must be repaid to the Irish budget and if this agreement also breaches state aid rules, the money must be paid to the Treasury.”