Rangers FC and HMRC – Update

Rangers FC, the Scottish Premier League club, have been placed into liquidation by HM Revenue & Customs.

The club owes HMRC as much as £20 million in potentially unpaid taxes and a further £75 million in respect of potential liabilities as a result of the use of its Employee Benefit Trust (EBT), and an employee share option scheme.

There had been talks to rescue the club earlier this year and a number of potential saviours came forward. One such consortium proposed a proposed a company voluntary agreement (CVA) with creditors, which would include HMRC as an normal unsecured creditor.

HMRC placed the club into administration in February this year, and now has decided to reject the CVA and has applied to liquidate the club – Creditors Voluntary Liquidation (CVL). This will allow the liquidators to consider and possibly investigate the actions of the directors in the management of the club.

Clearly HMRC must believe that in pursuing the the club and  potentially the directors/owners that it can get a better deal!

The details of the EBT have been strewn across the pages of many a website, journal and paper. So in order not to bore anyone further, I will not go into the mechanics of EBTs. It would appear that the reason the EBT’s integrity has been called into question is that the club gave certain players a written assurance that the loans advanced to them by the EBT would not be repayable. If it isn’t a loan, it must be earnings of some kind and that comes with a tax liability – PAYE and National Insurance. Let’s not forget that on top of this, there are interest and penalties of up to 100% that HMRC will also seek.

The share options scheme was worth less but nonetheless has become an issue. It seems share options were granted to players by offshore companies after the companies had received substantial funds. On exercise of the options, the players became the shareholders of their very own cash rich offshore company. Perhaps this is an over-simplification of the facts but hopefully you get the idea.

All this was under the scrutiny of a tribunal and it was long-published that a decision was due shortly after Easter this year, but it has been eerily quiet on this front.

So what of the footballing side of things?

The players and staff have suffered a 75% wage cut to help out the cash-strapped club but this isn’t going to last. I can only see the players that can securing contracts elsewhere and leaving the club. This is going to affect the on-field performances as adequate replacements will be hard to come by.

The club may well be sanctioned by the Scottish Premier League, or even receive a ban from playing in Europe, which will hurt financially.

There has been an invstigation into the club by the Scottish Football Association into alleged irregularities in player reghistrations.

The liquidation itself also throws up a number of uncertainties. There may be sanctions – fines, operating restrictions and possibly relegation from the Scottish FA. There is also the uncertainty that any rescue package will be able to buy the assets out of liquidation intact.

It’s hard to see how the club can get through these challenges intact and in the Scottish Premier League. Perhaps it will need to start at the bottom of the Scottish league structure and work its back up the pyramid, much like AFC Wimbledon did (although for other reasons!) but that’s going to be hard for the fans to take, especially given that this club is such an important part of Scottish football and culture.

The case continues…

 

The Curious Case of Rangers FC and the EBT

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I came across a news item earlier this year about Rangers FC and an ongoing tax enquiry into the football club’s use of an Employee Benefit Trust (“EBT”) to “remunerate” its players in a tax efficient manner. Having some professional experience of EBTs and sports clubs/players, I thought it would be interesting to take a brief look at the curious case of Rangers FC and the EBT. 

Rangers’ tax problem goes back to the 2000/01 tax year, when the club purchased a perfectly legal tax scheme (Employee Benefit Trust “EBT”) from a firm of lawyers. 

Generally speaking, a business can set up an EBT for the benefit of its employees and then transfer assets (usually cash) to the EBT. What then happens is the Trustee of the EBT who decides how to use the assets in order to meet the Trust’s objectives – in most cases the objectives are to seek to benefit the employees of the business that established the EBT.

More often than not, but not exclusively, the Trustee will receive a request for a loan back to the employees. The difference is that the loan is in perpetuity, i.e. no set repayment date, and the recipient of the loan (employee) pays a nominal amount amount of tax as a benefit in kind or a nominal interest rate as opposed to the higher 50% Income Tax rate and National Insurance. HMRC tried to close these down by pursuing long winded and expensive arguments through the courts. It failed. Then, last December it changed the underlying legislation, rendering EBT’s (for now) obsolete in terms of these loan arrangements.

Now bearing in mind that I have glossed over a lot of detail here, it is interesting to note a fundamental point. The loans must be loans in nature and intent with the likelihood of repayment, and not effectively payments masquerading as loans. It has been reported in the press that the problem for Rangers is that the payments were for contractual services by the players and they were in some form “guaranteed” never to be repaid.

I don’t want to rake over the finer points of the case. Both sides have some smart lawyers that have been retained (presumably without the use of an EBT!) and most notably Rangers FC have secured the services of Andrew Thornhill QC.  No doubt the technical arguments will be scrutinised, and I do not pretend to know all the facts of case, so I do not presume to judge. Rather, I want to look at the potential problem facing Rangers if the unthinkable happens and  Rangers lose their case to HMRC.

Why unthinkable? Simply because of the figures involved. A figure has been suggested as having been paid into the EBT over the years: £48m.  Assuming this is correct, and if Rangers lose, it is likely HMRC will argue these are pre-tax earnings and the total tax bill could be circa £24m. 

But it doesn’t end there. There is interest on the late payment of tax – some dating back to 2001 – and HMRC will almost certainly seek to impose penalties potentially amounting up to 100% of the tax – another £24m!

The tribunal is not the end of the road for Rangers should they lose. They should be able to secure grounds for appeal and, if HMRC lose, so should they. It is not necesarily likely that this will be the end if both sides decide to fight on.

However, what if Rangers were to eventually lose? I feel, there would be two potential repercussions.

The first is that the club will need all the commercial guile and skill of its new owner, Craig Whyte, and the Board to survive. A tax bill in excess of £50m has got to be a threat to it continued existence if not a threat to its Scottish top flight status.  

The second is that HMRC will almost certainly use this as a publicity coup and will probably seek to extrapolate the judgement to others. Strapped as the Government is for cash, HMRC is the main weapon in the armoury of the Treasury in its fight to raise revenue from taxes. I don’t believe that HMRC will do so successfully because of the specific and individual nature of the points of this case but what a gilt-edged opportunity this might prove for them.

One thing I haven’t mentioned so far and perhaps my overriding concern in the curious case of Rangers FC and the EBT is the fans. More than anything, I feel for the supporters. I feel for the supporters of any club that finds its existence under threat through anything other than results on the pitch. Perhaps this could all have been avoided had football not taken such a drastic lurch away from its amateur-based roots and launched itself in the cut-throat world of commercial business.