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A take on the tax query.

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Most lucid article yet.

 

 

Tax move may come back to kick Rangers where it hurts

Published on 28 Apr 2010

 

 

ANALYSIS: Chris Watt

 

IF it seemed too good to be true, that�s probably because it was.

 

A scheme employed by Rangers to cut wage bills has come back to bite the club where

 

it hurts.

 

Employee remuneration trusts ââ?¬â?? beloved of Premiership sides and City slickers alike ââ?¬â?? have been a stock tactic in the armoury of cost-cutting firms for years.

 

A legal, if controversial, means of shaving costs without hitting players in the pocket, the trusts are a tempting way to make the tax burden disappear from high earners� pay packets without breaking the rules. Built on a legal tightrope, however, the penalties can be significant for those who fail to toe the line.

 

Arsenal were perhaps the highest-profile casualty when HM Revenue & Customs started taking a closer interest in such dealings six years ago.

 

A House of Lords ruling made clear the legality of such trusts was shaky and the club scrapped its own payment scheme and accepted a quadrupling of its tax bill year-on-year. It is the club that suffers when HMRC makes approaches for cash back, because foreign players are likely to have left the UK when the dust settles, and as such have no duty to pay back anything.

 

Celtic scrapped its own small-scale scheme in 2006 after one year of operation. Nonetheless, such payment options have remained popular with bigger clubs both north and south of the Border. Players at Aberdeen, Hearts and Hibs are rumoured to have been remunerated in such a manner, while it is still relatively commonplace in the Premiership.

 

HMRC yesterday refused to confirm or deny whether it was looking into other clubs, saying it would never comment on any business dealings unless court action was approaching.

 

However, Rangers are understood to have paid a total of

 

�£46 million through the employee remuneration trusts between 2001 and 2009, with an input of between �£1m and �£10m each year. Payments peaked at �£9.19m in 2006, but fell to �£4.9m the following year, with further drops to �£2.29m and �£2.36m in 2008 and 2009. This coincides with

 

a period when the club was

 

pursuing wider cuts to its wage bill. It is not known which players benefited.

 

One tax expert said that based on those payments, the bill from HMRC could top �£24m, almost doubling the clubâ��s �£30m debt.

 

The tax revelations come as the club struggles with a grave financial outlook.

 

Some board members fear Lloyds is about to ring-fence incoming season ticket cash from supporters ââ?¬â?? in the region of Ã?£20m ââ?¬â?? to be used to reduce the clubââ?¬â?¢s debt.

 

They are also concerned that most of the �£15m windfall brought in from next termâ��s Uefa Champions League ties will also be taken by the bank as Rangers are forced to work under a crippling business plan.

 

Both of these concerns were dismissed by the club last night.

 

Director Dave King, in a meeting with fans in Johannesburg last week, said he wanted to buy the club. It has been suggested he was prepared to offer �£18m to Lloyds and �£1 to Sir David Murray for his shareholding. It is understood Mr King will not return to the table until the bank agrees to take on the warranties over this tax probe.

 

The SPL champions ââ?¬â?? who retained their title on Sunday ââ?¬â?? were told last October that administration could be an option. The Heraldââ?¬â?¢s sister paper, the Evening Times, revealed there was only a 5-4 boardroom vote to accept the Lloyds business plan. It has been overseen by controversial turnaround specialist Donald Muir, who joined the board at that time.

 

Some prominent figures at Ibrox believe the recent bid made by London-based property developer Andrew Ellis to take over the club is ââ?¬Å?dead in the waterââ?¬Â.

 

A spokesman for Rangers said: ââ?¬Å?The club can confirm that there is an ongoing query raised by HMRC, which is part of a pending court case.

 

ââ?¬Å?On the basis of expert tax advice provided to Rangers, the club is robustly defending the matters raised. It would therefore be inappropriate to comment further at this stage.

 

ââ?¬Å?There is endless speculation about the future of the club, much of it ill-informed. It is to no-oneââ?¬â?¢s benefit to comment on every speculative opinion.ââ?¬Â

 

However , an insider within the club described it as the ââ?¬Å?ultimate poison pillââ?¬Â at Ibrox, adding: ââ?¬Å?The bill for this, when HMRC completes its investigations, could be double figures in the millions.

 

ââ?¬Å?No-one knows the exact figure, but who is going to buy the club unless someone agrees to pick up that bill?

 

ââ?¬Å?There are people who want to buy Rangers, but not under the current conditions.

 

ââ?¬Å?The business plan expected will see no investment in new players. The club is about to be squeezed even further.ââ?¬Â

 

 

 

Thin blue line

 

Q. What exactly have Rangers done?

 

A. The club have been paying some players in part through an employee remuneration trust. Instead of incurring hefty income tax and National Insurance (NI) bills, Rangers have paid the money into an offshore account.

 

This is then ââ?¬Å?loanedââ?¬Â to players at a low interest rate, currently 4.75%, with no expectation of players repaying it.

 

 

 

Q. Why would they do this?

 

A. Players often negotiate wage deals based on take-home pay, rather than pre-tax income. Using trusts allows the club to afford better players.

 

 

 

Q. Is this legal?

 

A. Yes, although it is a matter of opinion. HM Revenue & Customs has pursued cases against firms that do it, claiming they are breaking the law. Either a negotiated settlement is reached or the case becomes bogged down in court with both sides arguing the toss. It is very common, with big City firms and larger sports teams across the UK adopting

 

the practice.

 

 

 

Q. How much money would be involved?

 

A. About �£46 million at Rangers, according to figures obtained by The Herald. The tax man could potentially try to get back all the PAYE tax and NI contributions that would be due on this balance; assuming all the players were on the top rate of tax, this would be roughly �£24.3m, effectively doubling Rangersâ�� debt.

 

 

 

Q. Which players could be involved?

 

A. Neither Rangers nor HMRC will comment on this. After accountantsââ?¬â?¢ fees are taken into account, however, it would only make sense to pay top earners in this way ââ?¬â?? players on at least Ã?£6,000 a week would be the most likely candidates. And since the fund has been running since 2001, this could mean any number of Rangersââ?¬â?¢ biggest names from the past decade, including (above left to right): Fernando Ricksen, Peter Lovenkrands, Ronald De Boer, Dado Prso and Pedro Mendes.

 

 

 

Q. Shouldn�t it be the players who pay the money back?

 

A. Some would argue so, but for foreign players, at least, any such attempts would be easy to avoid, simply by leaving the UK.

 

 

 

Q. And why could this make Rangers ââ?¬Å?unsellableââ?¬Â?

 

A. Given the potential for a �£24m can of worms to open up a year or two down the line, any buyer will be cautious about making a bid. If thereâ��s any danger, it is going to rule out all but the most foolhardy of investors.

 

 

 

Dispute could end up in Lords or Supreme Court

 

COMMENT: Mark Houston

 

This type of tax planning is widely used by Premiership clubs, because there�s a high concentration of high-net-worth individuals on their payrolls.

 

There�s nothing illegal about it, but the Revenue�s position is that it doesn�t work and it sees it as aggressive, because it believes it has legislation that counters this. Tax planners disagree and feel the legislation allows this type of planning. Rangers have clearly taken advice and appealed.

 

There are upwards of 3,000 schemes under scrutiny in the UK, and in the recent Budget, HMCR announced steps to stop this planning with effect from April 2011.

 

I understand that it is used at a number of clubs down south, and there have been stories about Wayne Rooney, for instance, using it. It appears to be routine.

 

The HMRC has been pursuing a lot of cases, and there�s a bit of a log-jam. If there isn�t a negotiated settlement, this may end up in a courtroom down the line.

 

I think whoever was looking to buy Rangers would definitely look closely at the potential tax liability that may be there and may seek to be indemnified by the vendor for this liability.

 

 

 

Mark Houston is a tax specialist at Johnston Carmichael.

 

 

PS where do the "agents" fit into this ?

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bmck

bmck 117

Posted
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Another classic piece of turning soft news into hard news. Nothing new has happened. This article could have been written (indeed approximately was) at any time in the last few months.

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