Tax Case Result

The tax case result released yesterday afternoon was obviously a surprise.  After reading the findings, it is still difficult to understand how  two of the three judges arrived at such a decision. The third dissenting judge’s opinion was clearly more in line with expectations. However, in the First Tier Tribunal it is a case of majority rule.

If an appeal is launched, it will take several more months before we get the next level of decision. Appeals are not automatically granted, but in this case- with a dissenting judge and where a dispute over legal interpretation exists already- it seems certain. At the Upper Tribunal, new evidence is not introduced and the case is not re-argued. The judges at the Upper Tribunal will hear legal arguments over whether the First Tier Tribunal judges made an error in interpreting the law and will rule accordingly.

This blog brought light to a matter of public interest.  This blog has been accurate on all of the major points of the case except the one that matters most to date- the FTT outcome.

We thank everyone who has participated. Hopefully, we will see the result reversed on appeal.

Rangers Insolvency: Is it inevitable?

Sleep has become a precious and rare commodity in recent weeks and I find myself trying to pry my eyes open to absorb the details of a data-packed Excel spreadsheet. For any normal, well-adjusted person, thoughts of forcing one’s eyes to move cell-to-cell, checking formula-after-formula, deep into the small hours of the morning would evoke a dystopian nightmare from A Clockwork Orange. However, this is not just any spreadsheet. This material has me transfixed. Commonsense says “leave it until the morning”, but I cannot sleep.

This is Rangers’ cashflow projection for season 2011/2012.

Naturally, I cannot disclose the origin of the data in the spreadsheet. However, I have confidence in its authenticity and its accuracy. I believe that it portrays genuine insight into Rangers’ cash flows for the current season. While I anonymise the data and figure out a way of presenting it on a blog, I will just give you the conclusions.

  • Rangers FC face a cash shortfall by the end of this season of about £19m
  • Without a fresh cash injection, Rangers will run out of money in October / November

And most significantly:

  • Without a fresh cash injection-

Rangers will be insolvent before the result of the EBT tax case is even known

Whyte’s new-found candour has him admitting that there is a crisis at Rangers, and that insolvency is a distinct possibility. However, it is tempered with the narrative that he inherited a mess. Any crisis, according to Whyte, is a result of the EBT dispute with HMRC which goes back to a time before owning Rangers was even a gleam in his eye. Whyte has started to spin insolvency as drawing a line underneath the club’s longterm problems. His hints that he might not appeal a decision against Rangers in the First Tier Tribunal (FTT) could be a clue to his real strategy.

To blame the previous regime at Ibrox requires that insolvency can be staved off until the judges sitting on the FTT return with their findings. However, Mr. Whyte will probably be mistaken if he thinks that the tribunal will return a result within a few days of it concluding. An insolvency event prior to that point would reveal the nature of the immediate problem: Rangers’ failure to qualify for the Champions’ League group stages. The arrestment of almost £3m by HMRC and Bain & McIntyre (ex-directors) intensifies matters.

Readers of the replies section of this blog will be aware of the complicated permutations that face Whyte. Delaying an insolvency filing to beyond 60 days after an arrestment weakens the claims of a secured creditor (himself) to reclaim that cash. Delay also requires Whyte to up the ante and provide additional working capital. In return, his reputation would survive the mauling that would accompany a filing without an adverse result in the FTT to hide behind. Whyte also faces uncertainty over the timing of a response from the judges. If Rangers maintain a staunch defence to the end, it is possible that the FTT findings might not be published until February or March 2012. That would require pouring in more cash to survive to this point. (Surely Whyte would not countenance “throwing the game” in the last days of the tribunal to arrive at a speedy conclusion?)

It is worth explaining cash flow for anyone who has not spent much time thinking about the monetary needs of a football club, it is extremely uneven. Cash accumulates over the summer months as season ticket holders renew in great numbers and drops over the autumn as players are paid their monthly salaries and bonuses. A good European run bolsters cash receipts in the short evenings and if post-Christmas European football is on the calendar, then a good season is had by all. Without significant European cash after September, Rangers (like Celtic) face a long period of outgoings being in excess of incoming cash. This funding gap can only be filled by a bank overdraft (short-term debt), a loan, or with the shareholders throwing in more equity. Traditionally, Rangers (and Celtic) have dipped into their overdraft facilities to pay wages and other bills during the months of negative cashflow. There is a problem this season however: Rangers do not have a credit facility with any bank.

Since buying Rangers’ debt to Lloyds Banking Group (who were desperate to escape from the headache of being Rangers’ primary creditor), Whyte has failed to open another line of credit. It would appear that no bank wants to lend to a club facing crippling tax bills or one that has a fan base who will organise a boycott if it has the nerve to ask for its money back. (While discussing Rangers’ debt, a much forgotten fact is that Lloyds were not Rangers’ only creditor. An additional £4m in creditors is still on Rangers’ books bringing to total debt to about £22m when we include the money owed to the club’s parent company).

Are Rangers facing imminent insolvency? If Whyte, or his backers, decide to pour in cash to delay the filing then obviously not. Without additional cash infusions insolvency seems inevitable within the next month.

In coming posts, we shall examine the cash flow projections for Rangers in more detail and ask some of the questions that naturally follow about this case:

Did Whyte really just gamble on Rangers qualifying for the Champions’ League group stages? Was insolvency part of Whyte’s plan from the beginning? How can Whyte hope to make a profit from his £18m + £1 investment in Rangers?

As this blog has maintained from the outset, the story being parlayed from the top of the marble staircase does not make sense. We now have a few more pieces of the jigsaw and will be able to make more sense of this case as time goes on.

In the meantime, I need some sleep.

Rangers’ tax case: outcomes and scenarios

My thanks again to the many great contributors to this board. It is said that politics makes for strange bedfellows and it appears that this blog has brought an unusual array of interests together. Information sharing, fact checking, and the inevitable rumour mongering is going into high-gear while as diverse a cast of characters as could be imagined collaborate on piecing together the mysteries surrounding Craig Whyte’s ownership of Rangers FC. If the enemy of my enemy is my friend, someone has managed to make a lot of enemies in a very short time.

In today’s post, I will try to stimulate some discussion on likely end-games to the tax case and what that would mean for Rangers. By definition, this cannot be anything more than informed speculation, so I welcome alternative views and scenarios from all readers.

There are three broad types of outcome from Rangers’ appeal of the assessments from HMRC:

  1. Complete win for Rangers: no payments on the assessments
  2. Complete win for HMRC: Rangers face bills of £36m immediately with £18-24m in penalties to follow
  3. Some midway point where tax is due but Rangers have managed to get the amounts reduced- let us suggest to £18m

For simplicity of analysis we will ignore possibility 3. that there would be some intermediate level bill. It would take a book to go through all of the permutations for this, but until we know more about how the tribunal has gone, we will not know how applicable this might be.

Option 1: Rangers get a complete win

Obviously, this would be great news for everyone attached to Rangers FC. Craig Whyte’s company could sell its shares which it acquired for £1 for a price anywhere between £5 and £10m. Even if the reported £700k in legal and PR costs during the takeover process are true, this would still be a tremendous return. With UK gilts yielding about 2.5% this year, any investment that could provide an APR return of over 1000% would be worth having a small stake flutter. Whyte would have the option of retaining the £18m bank debt on his own books and charging a commercial interest rate. Or it could be sold to another banker for par value (£18m). Rangers would still have to deal with the fundamental problems that lead them to the nadir in the first place: the ‘benefactor’ model for football club ownership is not sustainable. Everyone will eventually tire of pumping cash in without any prospect of a payoff. However, if Rangers were to end up with an owner who at least balances revenue and outgoings, the club would be stable and in a relatively healthy position compared with many others in Scotland and around Europe.

Option 2: HMRC have their bills for underpayment and interest of £36m confirmed, with £12-18m in penalties to follow.
I am going to discount the possibility that Craig Whyte and his partners are really so naive or so stupid that they really believe that there is no risk of this happening. (It is the perception that the new owners are trying to mislead Rangers fans that is at the heart of the growing disquiet among the club’s more sentient supporters.) Whyte’s team will have gone into this venture with their eyes open and will have a strategy for dealing with this outcome. Whether it is a smart strategy will remain to be seen, but I believe that they will have one. We can look at a few of these possible approaches to dealing with such a monumental problem:

a) Fathomless Wealth:

If Whyte and his backers are men of fathomless wealth who are willing to pay any price for the personal honour of being custodians of their beloved club, then simply paying the bills would be an option. Nothing in the available public records indicates that Whyte would have even a fraction of the wealth required to do this. If the rumours of James Mortimer’s involvement are true, does he have that kind of wealth? He will have accumulated a considerable fortune over a career at the top of the nightlife business in the West of Scotland that has spanned about 25 years. However, does he have the kind of wealth that would allow you to spend about £80m before you have even bought a single player? Are there other mystery backers? We do not know, but it seems unlikely that any group would be willing to have this amount of cash tied up to just retain control of their beloved football club. Certainly, it would not be a business decision to bail Rangers out of trouble as such an amount could never be recovered.

b) Liquidation:

As we have presented on here several times, by being assigned Rangers’ debt to the Bank of Scotland/Lloyds, Whyte’s group will have retained Lloyds’ security interest (floating charge) in Rangers’ assets. If HMRC decide to be difficult, Whyte’s only way to enforce these rights would be via liquidation of Rangers FC. Could a group of lifelong Rangers fans really do this to their club? If forced to liquidate, a receiver would sell Rangers assets to the highest bidder and pay Whyte & partners off with the proceeds. Whyte & partners would likely recover all of their £18m debt from Rangers.

c) Make A Deal:

It is known that the previous Rangers’ board made two offers to HMRC to settle the tax case. These were rejected. If Rangers are hit with bills totalling £54-60m, and no one is fronting the cash to pay them, insolvency becomes inevitable. Yet, given its unsecured creditor status, HMRC is unlikely to receive much, if anything, from the liquidation of Rangers FC. From a narrow financial perspective, HMRC should accept a settlement offer of almost anything. Whyte & partners cannot (rationally) offer much as they would find their investment marooned by having over-invested in a business that would never be able to produce a sensible return on invested capital. Balancing this impetus to settle is HMRC’s need to ‘save face’.

HMRC has in recent years faced considerable public criticism for perceived weakness in the face of large corporations disputing massive tax bills. In particular, Dave Hartnett, the Permanent Secretary for Tax, has faced public ridicule and media innuendo over claims that he “caved in” on the £6 billion tax dispute with Vodaphone and agreed a sweetheart deal for investment banking giant, Goldman Sachs. Famously labelled “Whitehall’s most wined and dined mandarin” by The Daily Telegraph last year, Hartnett was also in the firing line over the PAYE fiasco that saw many millions of tax payers face claw-backs from HMRC. These public disasters have captured a greater public mindshare than the larger number of enforcement successes.

In the face of early hints of tax troubles ahead for Rangers, the conventional wisdom amongst radio talking-heads and the man in the street was that “they will just do a deal for pennies on the pound. They always do in the end.” The widespread perception that “taxes are for little people” and previous public disasters may limit HMRC’s room for manoeuvre. In a time of fiscal difficulty for the country, anything that provides an encouragement to businessmen to engage in (yet to be declared illegal) tax avoidance schemes or conscious tax fraud in the belief that they can agree to pay a smaller amount in a decade’s time will not be good for revenue collection. Certainly within Scotland, HMRC’s credibility could be said to depend upon how the Rangers case is handled.

Assuming that Rangers’ lose their appeal of the tax assessments in their possession, Rangers’ future appears to be in the hands of Whitehall mandarins. The continuity of the football club incorporated in 1873 would depend on whether HMRC looks at the low probability of receiving much from Rangers or agrees to accept whatever crumbs Whyte and his friends decide to throw its way. If HMRC feel that a deal could damage the public sense that it is best to pay to taxes, in-full and on-time, the public display of the metaphorical corpse of The Rangers Football Club plc could follow swiftly thereafter.

Lies, damned lies, and Scottish football journalism

Being privy to many of the facts related to Rangers’ tax ordeal, the last year has been a revelation to me.  I find it hard to believe that every journalist in Scotland is naive enough to believe the nonsense being fed to them.  In their hurry to publish, they shamelessly rush from fax machine (or whatever PR firms use these days) to the press without editing or critical thought.  In short, readers are paying to read PR-fluff written and produced by people with agendas.

Then there are a number of hacks who surely cannot claim, after all of these years, to have simply been hoodwinked by purveyors of succulent lamb?  Some Scottish journalists’ track record of doing the bidding of the country’s more media savvy businessmen goes back to a time where a simple loyalty to their favourite football team cannot explain everything.  This has the odour of  “bought and paid for” reporting.  A passionate and diehard Rangers fan could not go along with this fakery. Only the most naive or corrupt of journalists could continue to do the bidding of people whose interests are diametrically opposed to Scottish football as a whole, and most specifically, Rangers FC.  Yet Rangers fans are fed this diet of regurgitated lamb and foolishly lap it up like it is a kebab at closing time.  It seems that any bearers of bad news, regardless of allegiance, are dismissed as troublemakers (and worse).

That brings us to today’s topic.  We will take a quick look some of the myths and lies that our national media have helped weave into the popular debate on the subject of Rangers’ financial and legal woes.

We can see in the link below as fine of an example of journalistic creativity as you will ever find.  It is clear that even Graham Speirs- Scotland’s most erudite sports journalist- can resort to just filling his pages with a collection of random ‘facts’ with no relevance to the actual story:

http://www.timesonline.co.uk/tol/sport/football/scotland/article7110036.ece

Let’s put a few of these myths to rest:

Image Rights:  Absolutely nothing in the case against Rangers has anything to do with image rights.  The hacks must have just picked up some detritus from stories about  English clubs.  This is completely irrelevant to the matter at hand.

“The tax bill is a matter for MIH”:  Rangers’ Chariman, Alistair Johnston, started this myth with some artfully worded statements. It is pretty obvious that he was trying to be “economical with the truth”.   However, the Laptop Loyal took his inferences and fed them to the masses.  Today, a large number of Rangers fans still believe that the tax bill will be paid by the parent company, MIH.  Let me state without fear of contradiction, the tax assessments (bills) are addressed to: “The Rangers Football Club plc”.  Rangers FC are responsible for these bills.  If they cannot pay them, no one else is obligated to contribute: not MIH; not Lloyds Banking Group; and not Sir David Murray (more on this later).

“No one has been accused of doing anything illegal”: Yes they have.  Rangers FC have been accused of breaking UK tax law.  The First Tier Tribunal process is a civil matter, and there is no current criminal case against anyone.  However, that is at the discretion of HMRC and it will remain at the discretion of HMRC whether to bring criminal charges in the future.  In cases not involving lawyers or financial professionals, it is unusual to go down the criminal path as the burden of proof is much higher.  Depending on how things turn out, and how much of the bill is actually extracted from Rangers, it is mot impossible that individuals could be pursued.  However, that would be quite some way down the road- if it ever happens at all.

Murray / Lloyds will guarantee the tax bill to facilitate the sale of Rangers”: Let me also give my opinion on the notion that someone will underwrite a tax bill which could be up to £60m.  It is absurd in the extreme and just laughably stupid.  As things stand, no one else has to pay this bill.  If Rangers cannot pay it, they will end up filing for insolvency.  The creditors, which would include Lloyds, HMRC, and holders of The Rangers Bond, would carve up the proceeds of a sale of the club.   If it does not cover all of the bills, then tough.  No one else pays.  (I will discuss some potential risks to the personal wealth of Sir David Murray and other directors in a future post).

By what financial alchemy can someone create a logical argument for Lloyds, MIH, or Murray accepting this liability?  Even if the numbers being touted for a Rangers sale were true (which I don’t believe for a second), £33m would be divided between bank debt (about £20m just now) and money for Murray (£13m). I am laughing as I type because the idea of anyone paying this price is hilarious!  It is not unusual in corporate transactions for sellers to provide guarantees of accounts receivable and tax liabilities.  However, these are made when there are no known issues or where the risk represents a tiny fraction of the total deal.  In Rangers’ case, the tax bill is almost the entire deal.

We are supposed to believe that Lloyds, who would probably recover the full value of their loans to Rangers through the administration process, would accept this risk and have nothing to gain?  We are supposed to swallow the idea that Murray would, even if he received the fabulous sum of £13m, run the risk  of having to pay £60m?

Murray might want to give away ‘his’ shares just now, but they are not his to give away.  85% of Rangers’ shares are held by MIH.  MIH is a vassal company for Murray.  Lloyds own MIH in everything but name.

So where are the members of the Fourth Estate to bring sanity to this madness?  Why has every Scottish media outlet: print; radio; and TV, lined up to give this story credibility?

No story about Rangers’ financial position is credible without a discussion of the tax case.  Until the tax case is resolved, the equity in Rangers FC is worth nothing.  Without the tax case, Rangers’ current financial position would be quite healthy.  All of the problems being blamed on bankers (with foreign sounding names) and “enemies within” really just begin and end with Rangers’ attempts to gain a financial advantage through a tax dodge.  Rangers’ fans could put their energies to better use planning for the worst case scenarios.  It would do all of Scottish football some good if they ensure that the individuals who brought their club to the brink do not duck the blame for their own incompetence and maladministration.

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