the tax case and possible claim against the auditors

[Guest thetruthwill0ut]

GT have been RFC�s auditors for well over 20 years. During this time they have not given anything other than a normal, completely unqualified audit opinion. That opinion is that RFC�s financial statements give a true and fair view of the company�s affairs.

 

Auditors work to a concept called materiality. Essentially, that means that an auditor is not expected to find every single error, misstatement or fraud in the companyâ��s accounts. They are, however, expected to find material misstatements. For example, if someone had stolen �£100 from a till at RFC, the auditor doesnâ��t need to concern himself. �£100 in the context of a �£30+million turnover company is immaterial. However, if the auditor misses an accounting error of �£1 million, then he has an issue. �£1 million would be material and the audit opinion that the accounts are true and fair could be wrong.

 

In performing the audit at RFC, GT would need to satisfy themselves RFCââ?¬â?¢s payroll costs (including PAYE and NI etc) are not materially misstated (after all, payroll is by far RFC's biggest outlay). The first thing they would do would be a quick sense check ââ?¬â?? say player salaries total Ã?£2 million a month. A quick fag packet calculation would suggest that PAYE deductions would be Ã?£800K per month (assume all players on high rate 40% tax) and employers NI would be Ã?£256K (assume all 12.8% rate).

 

Now if the speculation about the HMRC investigation is correct, PAYE and NI on players� salaries would be minimal. As an auditor, GT would need to understand why this would be the case and they would need to be sure that whatever scheme was in place at RFC would not give rise to a future liability, otherwise not recording any PAYE/NI etc would be a material misstatement in the accounts.

 

If HMRC do win the case they have mounted, then based on the figures being thrown about, RFC�s accounts will have been materially misstated for nearly ten years, and GT would have missed it.

An indemnity claim against GT would most likely come from shareholders and/or the bank. If the HMRC investigation does rule against RFC, then, prima facie, there is a case for a claim against GT for negligence

[Bluedell 5,376]

Disagree. It's obviously a very technical area and if GT reviewed and had reasonable grounds for thinking that the tax scheme stood up then they will be OK. It can all be about interpretation and there tends to be shades of grey. There isn't necessarily a right and wrong on this.

 

I'm very involved in some complicated corporate tax planning and I have a reasonable argument for everything that I do, but that's not to say that there isn't a reasonable alternative viewpoint. Auditors can't see into the future and they can't be held liable for a company losing a court case whose decision could be almost 50:50 as to how the judge interpretates the law and interpretates the facts of a case. It comes down to emphasis.

 

For example, let's say there is a question of image rights. Rangers say that 25% of a contract relates to image rights and HMRC claim that it's 5%. A court subsequently finds that 15% is reasonable, and there is an additional 10% for rangers to pay. Can a firm of auditors be held liable for thinking that 25% isn't reasonable and 15% is? As long as they have a rational explanation for it and they can prove that they gave it due consideration then they would be OK. However if they argued that 95% was reasonable then there could be claim against them. It's all questions of degree.

 

If the facts of this case, of which few are known, are that GT came down at the 95% level then there may be a case against them but I tend to think that this will not be the case.

[Guest thetruthwill0ut]

Agree, it is a big "if" as to whether or not GT will have done (and documented) enough work to justify their position in . The auditing world in the early 2000's was a very different place to now, so there are no certainties that they will have...

 

That said, I do agree with you. It's good to get another opinion.

 

Aside from an PI claim against GT, surely there would be grounds for one against the tax advisors (assuming RFC followed their advice to the letter).

[Bluedell 5,376]

(assuming RFC followed their advice to the letter).

 

Again that's the big question. It will be presumably be difficult to prove that everything was done exactly as recommended.

 

I'd agree that the likelihood is that there is a better claim against the tax advisors than the auditors.

[Frankie 8,200]

Thanks for the input gents - it's good to have some sensible debate on questions that people will be asking about these cases...

[craig 5,199]

As BD says, just because the tax case is "material" and there is no doubt that it is, this does not mean there would be a case for negligence against GT just because RFC lose the case.

 

1. 1 million is not necessarily material. Materiality is very much dependent upon the size of organisation - you state it as if 1 million would be material to ANY company, not so. I have some major oil companies as clients where the tens of millions would not be considered material. It is a relative term dependent upon the parameters set forth by the audit firm themselves.

2. It is fairly obvious that RFC have sought legal, accounting and tax expert advice when creating the EBT's. This being the case GT would have requested sight of the opinions of all of the above to satisfy them that the financial statements were materially correct. Had any of the experts used not opined that they felt the EBT's were legal then GT should have either had the company accrue a contingency for the PAYE & NIC on them OR they should have issued an "except for" opinion.

3. What GT are NOT obligated to do is find out from HMRC whether this scheme was legal - given they would have been using the opinion of experts in the field there is no obligation to go to the authorities to determine their position.

4. In fact, given GT gave a clear opinion, including the EBT's, would actually lend credence to RFC being legal in this matter - it is so material to the financial statements (moreso in recent years as the possible liability would have been creeping, depending on whether the audit work was done as if it were a possible liability) that you cant imagine that GT would not have had their own tax department looking at this, and you can only imagine they had their senior tax partners involved given the high public profile of RFC. That they still issued an unqualified audit opinion would suggest that their tax department felt that there was no liability to consider. To caveat, we all know that accounting firms CAN get it wrong. But RFC would likely NOT have used GT for their original tax opinion, they would have sought the opinion from a different firm to retain independence from their auditors (or at least they should have).

 

Again, as BD says, it would be very hard to prove a case against GT when other professionals will have provided an opinion on the legality of the EBT's. GT would have used their opinions to determine their audit opinion. If you are looking at someone to litigate against you would have a far better chance (but still just a remote possibility) in chasing whichever firms (legal, tax, accounting) who provided their opinions on the status of the EBT's at the time of their creation. But that is a HUGE IF - simply because, again as BD says, with tax legislation it is often shades of grey rather than black and white. And those shades of grey would make it very, very difficult to prove a case against the professional firms providing their opinions, including GT.

[Frankie 8,200]

Someone should be answering for these debacles and that person should be Sir David Murray.

[craig 5,199]

Someone should be answering for these debacles and that person should be Sir David Murray.

 

I dont think the EBT position is a debacle though Frankie.

 

HMRC have their own legislation and it is prone to being exposed by loopholes. There is a decent chance that this was a loophole that was exploited (and not just by RFC, plenty other clubs in England also used it I believe, including Arsenal I think) and HMRC are obviously none-too-happy at losing revenue (especially given the financial crisis).

 

HMRC will then try to recover those monies by trying to establish that these were illegal - tax legislation, almost by design, is not a simple set of rules, in certain areas it is very complex.

 

I know what you are saying, but I am not as convinced that it is a debacle per se.

[Frankie 8,200]

Once can be attributed to bad luck. Twice is bad practice.

[craig 5,199]

Once can be attributed to bad luck. Twice is bad practice.

 

Disagree. Two completely different scenarios. And when you deal in shades of grey, which much of tax legislation is, then you cant assume that if you get it wrong once (still unproven I might add) then you should get it right next time, unless dealing in the same part of the legislation.

 

This one relating to the Advocaat era though, given we have made provision for it, would suggest that someone somewhere has screwed up. I dont think that someone is SDM though, unless he is providing his own tax advice. The buck does stop at him I will admit, but he would or should be using the opinion and recommendation of the tax advisors.