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:
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).
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!”