On the back of Labour’s calls for a review of Formula One’s tax affairs after the company banked a settlement with HMRC worth £180 million last year, tax lawyer Miles Dean, Managing Partner at Milestone International Tax, explains the fragile relationship between the industry, tax and debt.
The tax affairs of F1 and its owner, Liberty Media, are private and rightly so. HMRC are under no obligation to disclose the agreement they have reached with F1.
Tax campaigner Richard Murphy states categorically that the arrangement is evidence of tax avoidance – the only evidence we see here is taking an assumption and turning it into a fact. If it is avoidance then why have HMRC refunded £180 million of tax?
The simple fact is that the UK companies within the F1 structure are, it appears, funded with debt and equity. The debt will carry an interest charge which is deductible against the UK profits. The UK has various anti-avoidance measures to prevent excessive use of debt, such as transfer pricing regulations, the worldwide debt cap and corporate interest restriction rules.
It should be noted that when it comes to the battle against tax avoidance, the Government is on the front foot and the tax courts have become very pro-HMRC in the past few years. It’s fair to say that tax avoidance has taken a hammering.
The refund presumably relates to an adjustment of the rate of interest applied to the financing costs over a number of years. It is simply the taxpayer and HMRC reaching an agreement as to the correct amount of tax payable under the prevailing laws. It is therefore remarkable that this is claimed to be a sweetheart deal by individuals without knowledge all the facts.
The UK’s rate of corporate tax is currently 19% – F1 categorically did not pay tax at the rate of 2%. The 2% referred to is the effective tax rate. The profits, not revenue, of the UK enterprise will have been taxed at the prevailing rate and it is this tax cost, which, when divided by EBITDA (earnings before interest, taxes, depreciation, and amortisation), gives the effective tax rate.
Murphy and McDonnell are, it seems, cut from same cloth. Both want an enlarged state that has powers which infringe basic human rights of privacy. Neither appear to want a tax system where the taxpayer has any right of appeal against HMRC, which is a scary thought. Not as scary, however, as McDonnell being the next Chancellor.