The Other Rangers Tax Case
01/04/2011 7 Comments
In amongst the furore resulting from the chaotic and amateurish handling of Rangers’ Interim Results today, many have picked up on the mention of another tax charge related to a different case than the EBT scheme we have been discussing here. True to form, the Scottish media have raced out of the blocks to confidently comment and are making a mess of it. So I thought that I would provide a bit of clarification and explanation.
Firstly, the full description is included in a note to the Exceptional Items in the Profit & Loss Statement within the Interim Results:
Note:
1. The exceptional item reflects a provision for a potential tax liability in relation to a Discounted Option Scheme associated with player contributions between 1999 and 2003. A provision for interest of £0.9m has also been included within the interest charge.
So, there are a number of points we need to go over to ensure that we understand what this means and what effect it has. (The standard caveat that this blog aims to help non-experts understand what is happening, so some simplification is necessary. Forgive me if I trample on any nuances).
- “Provision”
A provision is basically a charge that you take now for money you think you will have to spend later. So Rangers have reduced their reported profits by £1.87m for a tax bill which they have received, think that they have good chance that they will have to pay, but which they have not already paid. The purpose is to allow shareholders to know as early as possible that the company is worth a bit less. (Accounting is supposed to provide conservative estimates of value). This provision is in contrast to Rangers’ defiant pose on the greater issue of the EBTs. This is not an admission of guilt or an acceptance of the bill. It is a standard accounting convention and if they win their case, they will add this amount back to their profits as an Exceptional Item at that time. We will explore this in more detail below.
- “Discounted Option Scheme”
Employees (especially executives) are often given the right (but not the obligation) to buy a certain amount of shares in their own company in the future at a fixed price today. It provides an incentive for them to help drive up the share price. If the ‘strike-price’ (the price the employee will have to pay) equals the market price of the shares on the day the options were granted, there is not usually any tax implications related to the options themselves. However, some companies will try (wastefully in my opinion) to provide an extra boost to employee compensation by providing options with a ‘strike-price’ which is lower than today’s market price. However, HMRC takes the view that discounted options are a backdoor form of salary. They see it as almost as a giving the employee free money. (Long debates can be had on this view). So HMRC charges tax & NIC on the difference between the current market share price and the option ‘strike-price’.
OK. That is the theoretical primer for this post. What have Rangers done?
Firstly, I should point out that I do not have any non-public information on this particular situation. So the following are simply the logical inferences from the information provided by Rangers FC. It looks as if they have granted some executives Discounted Options while ‘forgetting’ to deduct PAYE and NIC from the difference between the market price on the day of issue and the ‘strike-price’. So if Rangers shares were trading at 30p today and I received options with a ‘strike-price’ of 20p, I should treat the 10p difference as taxable salary. Rangers appear to have not done this.
On its own, I would say that this is a trivial matter and that Rangers would be far from unusual in having tax issues related to options pricing. However, I am very surprised that Rangers are offering options at all.
Rangers FC shares have virtually no volume. (Over 90% of the shares are owned by directors who do not trade their holdings). An average week of trading will usually involve about £350 of shares changing hands. So few shares changes hands that there is no true market price for Rangers shares at all. This might be the root of the problem- that they have granted options at more realistic share prices than the official PLUS Market price. If HMRC are demanding that the PLUS Market price is used, there is actually a legitimate debate on both sides as to how these options should be priced and how they should be taxed.
However, I am surprised that I have been unable to find a reference to these options awards in any of Rangers accounts for 1999-2003. Regulations on how to account for options have been a fast-moving mess and I doubt that they should have been recorded as an expense at the time. However, I would expect sufficient transparency that would inform existing shareholders that their ownership was being diluted. Such declarations were not made. During this period, Rangers issued approximately 11.1m new shares. The years 1999-2003 included a £36.8m capital increase (the share issue which brought Dave King on to the board) so it is hard to sort out which directors bought more shares and which just awarded themselves more. As a matter of corporate governance, I think the lack of transparency on this matter reeks of insider “pigs at the trough”. The largest leap in shareholdings during this time is that of Sir David Murray. It will take some time to untangle who did what (assuming that the records are even sufficient), but I wonder if Sir David Murray has further enriched himself and left the club to pick up the tax bill in his wake? Perhaps the club or the former Chairman himself could answer this question?
The other great question raised is: “Why have Rangers made a provision for this tax bill and not for the EBT? Does this mean that they are more confident of winning the EBT case?”
No. As mentioned above, taking a provision is not an admission of guilt or liability. It is simply a conservative accounting approach for an expense that stands a good chance of happening. In the EBT case, Rangers simply cannot take a provision because the bills physically in their possession are in the region of £54m (tax, interest & penalty). To make a provision for the EBT case in the same way as the in Discounted Options case would render the club technically insolvent. The effect on supporter morale would also devastate much-needed season ticket renewals. So the Rangers’ board are taking a “might as well get hung for a sheep as a lamb” approach to the EBT case. This could have consequences for their personal liability too. As Alistair Johnston was reported to have commented to a Rangers fan who sat behind him on the flight from Newark, NJ to Edinburgh on Thursday morning: “Interesting times!”
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Excellent site. In the US, after the fall of Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom we introduced the Sarbanes-Oxley Act, commonly known as SOX. This basically means conservative accounting practices. Now I work for a US company and we make provisions for potential losses, unpaid invoice we feel will not be paid and possible litigation costs. These are nearly only ever taken if it is “highly likely” that the inevitable will happen.
Now I know that the UK is not the US, but with their legal fight against the HMRC coming up, surely they will be incurring significant legal costs in dealing with this. Do you know if any provision been made in their accounts for these “highly likely” litigation costs.
Thanks oisin71. Very good point.
Rangers have made no provision for increased legal expenses. It is just being booked as it occurs. Not very UK GAAP.
Telegraph 11:00PM BST 01 Apr 2011
It soon became clear, though, that settling accounts was more on the Ibrox chairman’s mind when he sat down in one of the stadium’s plush lounges to offer a candid appraisal of the club’s situation and the progress of the takeover bid being mounted by the London-based Scottish venture capitalist, Craig Whyte.
By the time he had finished, he had delivered blistering criticisms of Lloyds Banking Group and Donald Muir – one of the bank’s placemen on the Rangers board.
Johnston also confirmed that, if Whyte’s takeover is not concluded by close of business on Monday, Rangers are likely to go into administration if they lose their battle with HMRC over offshore payments to players.
The clue that this was not going to be a soporific drone through questions of disposable assets and amortisations lay in the text of Rangers’ interim accounts to Dec 31, 2010, released earlier in the morning.
They were pretty much in line with last year’s equivalent figures, although turnover was down by £4.1 million to £33.7 million, with the same reduction in retained profit.
The downturn was accounted for by home games postponed because of severe winter weather and by a five per cent reduction in season ticket sales, ascribed to the economic climate.
However, amidst a note on the extension of credit facilities it was remarked that, “while we appreciate the support of the Lloyds Banking Group … certain provisions imposed on the club continue to compromise, in our opinion, management’s ability to conduct its role with maximum efficiency.”
There was meat in that and, as soon as Johnston sat down with a small group of correspondents, it was served up in ample portion and more or less raw.
Asked how Lloyds had ‘compromised’ Rangers, Johnston said: “The bank look on us as a short-term project to the extent that at every opportunity they’re not willing to concede that there isn’t an occasion or a transaction where they might want to participate.
“If we sell players, do we have any certainty that we will get all the money, 90 per cent of it, 80 per cent of it, whatever? It makes it tough for our management to understand and to plan for selling players when we don’t know how much of the money we’re getting to keep.
“The management team is reluctant to sell players because they don’t know if they’ll get enough money to replace them. So when I say they compromise us, I mean
they compromise our ability to plan three-year cycles.
“They [Lloyds] have been fairly assiduous at saying, ‘While we are willing to look at this on a case-by-case basis, we’re never going to give you carte blanche to think it’s all your money – if you get into the Champions League we’ll want part of it’. Therefore our management team is wary of doing certain things that in the long run might come back and haunt them.”
But wasn’t the purpose of having Muir on the Ibrox board to ease communications between the directors and the bank?
“Let’s be very clear on the situation with Donald Muir – it’s a condition of our credit facility agreement that Donald Muir is the representative of the bank on the board.
“It’s very tough to engage in conversations at board level about strategies with the bank when we know that the bank guy is sitting there,” said Johnston who, when asked why it had been denied previously that Muir was Lloyd’s man, had a sharp retort.
“I think it was Donald that denied that. It’s been denied by a lot of people, but I’m telling you what the issue is right now. I decided that I might as well,” said Johnston.
“What happened when I got here was that the banker that was involved with us refused to talk to our chief executive or to our chief financial officer. It was one of the most stupid aberrations that I’ve ever come across and I said that to the bank.
“He had never met our chief financial officer. He had never met Martin Bain [Rangers’ chief executive], so all the communications had to go through Donald Muir and Mike McGill, the other director, although essentially it was more through Donald than it was Mike.
“So a lot of stuff got lost in translation.”
Would it be better for Rangers, therefore, if Muir – who is understood to have left the Murray Group on Thursday – also departed the club? “No question that his presence compromises things,” said Johnston, although he added: “I’ve always got on well with Donald Muir but I deal within the context of who he is.”
Johnston revealed that there were two HMRC issues, the latest – and much the smaller – being a claim by the tax authority for £2.8 million. “It relates to more than two or three players, but it relates to an issue 10 or 11 years ago – I don’t know the context of doing it,” said the chairman.
“As the Americans say, this one came right out of left-field. It really, really is frustrating. No one knew about it a couple of months ago – and let me put on record that if we did know about it we would have had to put it in our annual report and take liability for it in the accounts.
“I don’t think it is a deal breaker. It wasn’t in any plan, it wasn’t in our budgets or anything that we have been trying to do. We have a very disciplined approach and I didn’t like that appearing over the horizon suddenly.”
As for the Whyte bid, it is understood that Murray had set a deadline of March 31 for completion but that other delays – including slow delivery of the bank’s authorisation for the bid to go through – required an extension. Still, it is surely a case of deal or no deal by Monday?
“Exactly – that is the scenario that I am expecting,” Johnston said. “I have to share with you the fact that amongst my fellow board members we have different views – but the board are reflective of my view which is, if we can get this thing right it will be good.
“The club is the commodity – we don’t have a seat at the deal. We have to shove ourselves into the room. Our mission has been to represent Rangers Football Club and hundreds of thousands of supporters. We have no legal right to request it – but we have a moral right to request it.”
And if the deal fails and the HMRC judgment goes against Rangers in a few weeks?
“There’s a 10,000lb gorilla in the room and you don’t know what its appetite is,” Johnston replied. “Even accessing all the resources we have access to, we couldn’t pay the bill.”
From which the only conclusion is that, if there is no Whyte knight and if faced with an adverse judgment in the main HMRC case – which could amount to as much as a £30 million liability – Rangers would go bust after 139 years of existence.
Johnston’s silent nod of assent when asked that question was even more eloquent than any of the scalding words he had just uttered.
WOW!
Quite astounding. Even knowing what I know, it is still amazing to see this unfold.
I see Roddy Forsythe is saying the tax bill could amount to as much as ”a £30m liability”? Was it you, dear blogger, or someone else who stated that Rangers already have in their possession a bill for £54m?
I see the Sun today is apparently claiming the tax bill could be as much as £80m. I say apparently because I refuse to read the rag or click on to the evil organ’s website. Anyone confirm the figure or how they have calculated it — if indeed they have?
What a great day yesterday was. To see the beasties with their absurd sense of entitlement in such disarray was truly wondrous to behold.
Excellent blog. I never thought finance could be so interesting or enjoyable.
No one has asked why the interim resuts were so late. Jabba suggested the bill for the Discounted Option Scheme landed on the marble doorstep in the last week or so. Did the resulting panic over this bill mean the accounts had to be rewritten at the last minute?
On the point of the bills in Rangers’ possession, they do indeed hold bills of about £54m. So anyone who would publicly say that “Rangers do not know how much the bill could be” is lying. Let me be very specific: (at the point of wanting to face down anyone in any court, in any country), Rangers KNOW how much thei assessments in their possession amount to. The only doubt is actually that their pegregious lying to HMRC and to the tribunal could lead tl a larger penalty than which they have been billed already.
Let’s make this very clear: RANGERS KNOW EXACTLY HOW MUCH TO THEIR BILLS AMOUNT.
Anyone who says otherwise is either a liar or does not know the facts of the situation.
I will gladly meet any representative of Rangers FC in any court, in any venue to dispute this assertion.
Alastair, Sir David, Martin: as we say in Glasgow: “Come ahead!”