HMRC gives Formula One £180 million tax boost

  • By Christian Sylt

Formula One has been handed £187.5m by HMRC to settle a dispute after the Government put the brakes on a perfectly legal tax avoidance scheme it had been using for a decade.

The build up for this year's F1 campaign began to rev up on Thursday as the sport's ten teams hit the track in Barcelona for pre-season testing. However, the manoeuvres which will affect the future direction of the sport haven't been taking place near a circuit, but back in London.

Documents released by F1's owner, the American investment firm Liberty Media, show that last year it received £187.5m in settlements with tax authorities, which it describes as a "net tax benefit for a settlement reached by Formula 1 with the UK tax authorities".

F1's headquarters and the company which owns its valuable commercial rights are based in London, so it pays tax in the UK on its profits, known as EBITDA. However, instead of paying corporation tax at the standard rate of 19%, Liberty's chief financial officer Mark Carleton said last week that "2017 cash taxes for F1 were approximately 2% of UK EBITDA due to the occurrence of some one-time items and charges".

He added that "in 2018 we are expecting a mid to high single digit effective cash tax rate on UK EBITDA".

It reflects a letter sent by Liberty to its shareholders last month, which said that F1's lower rate is driven by "conclusions reached by HMRC regarding the future treatment under UK tax law of certain historic transactions and the effects of a F1 corporate restructuring in the fourth quarter of 2017".

The restructuring involved switching the offshore parent companies of F1's rights holder for ones that are based in the UK. The only foreign company is Liberty, which is at the top of the chain and is based in the US. It appears to have been met with approval from the tax man.

HMRC's decision represents a huge boost for F1, as it saves around £3.5m for every percentage point of reduction in its tax rate.

Before the restructuring, F1's offshore parent companies gave massive loans to their UK subsidiaries and charged high-octane interest rates on them. The subsidiaries paid hundreds of millions of pounds in interest on loans every year, which pushed them into loss so they paid little tax.

The profit of F1's UK companies was essentially wiped out by the interest, and as it was received offshore it could be paid to the sport's owners without tax being deducted.

This is known as an Advance Thin Capitalisation Agreement (ATCA) and it was set up by F1's former owner, the private equity firm CVC, in 2008.

The scheme came with HMRC's blessing as it had to approve the amount of interest which was tax-deductible.

However, the government gave the scheme the red light last year when it introduced legislation which capped the amount of tax-deductible interest on these loans at 30% of profits.

It was thought that this would boost F1's tax bill as its interest payments had completely cancelled out its profits in some years.

In 2016 Liberty warned in its filings that "changes in tax laws, including pending legislation, could adversely affect the results of Formula 1". Liberty added that its shareholders should "expect low double digit effective cash tax rate".

However, thanks to HMRC, the new legislation didn’t make as big a dent in its bottom line as was expected.

Liberty Media boss John Malone said F1 had an 'attractive' tax structure.

It vindicates Liberty's faith in F1's tax structure, which it said was one of the driving forces behind agreeing to buy the sport for £5.8bn in September 2016.

Soon afterwards, Liberty's chairman John Malone told business broadcaster CNBC that when the acquisition was proposed to him he said "Eureka! And even the tax structure is brilliant". Liberty’s chief executive Greg Maffei concurred and added that F1 has "an attractive low tax rate structure".

This brought it to the attention of the Labour Party, which used F1 in its election manifesto last year to highlight how much money the exchequer was losing through ATCAs.

It claimed that it could raise between £0.5bn and £1bn in revenue from "an investigation of ATCA and clampdown on their use".

The Labour Party added that "Formula One’s very significant reduction in their tax liability over the last five years ($192 million on $5 billion of profits) through the use of an ATCA suggest that there has been considerable scope for avoidance.

"Formula One had generated significant losses by making huge loans between different groups, charged at exceptional (10%) rates of interest, and which were allowed as a loss under an existing ATCA with HMRC. Had the tax been levied at the more usual level, Formula One would have been liable for a further £400 million."

Formula One said that it has done nothing wrong, adding that it has conducted of all its tax matters "fully in accordance with applicable law".

In a statement, HMRC said: "We do not comment on individual taxpayers.

"HMRC subjects large businesses to an exceptional level of scrutiny, actively investigating more than half of the UK’s largest businesses at any one time. Last year alone HMRC secured £8 billion in additional funding for our vital public services by intervening to make sure large businesses play by the rules."

With HMRC in the driving seat, F1 has avoided this pitfall and it now appears to have a clear road ahead yet again.