Leaks & Lawsuits
02/09/2011 495 Comments
It has been quite a busy few weeks for matters related to Rangers: a tense, and ultimately comical, transfer window; disgraceful acts of distraction involving the club’s PR “expert” to deflect from his embarrassment over the fact that he could not contain the Sheriff Officers story; the manoeuvrings related to ‘the other tax case’; and just a few hours ago, the posting of an MG01s filing onthe Companies House website revealing an assignment of the securitisation of the club’s catering revenues.
For the benefit of new readers to this site, I will recap the situation as it stands currently. We will then look at this new mortgage filing and discuss what it means for Rangers FC and its dealings with HMRC. Lastly (for today) we will discuss the accusations of leaks from HMRC related to the tax case and Rangers’ own conduct in this case.
- Recap: The “Big” Case
Rangers FC operated a tax scam called an EBT (Employee Benefits Trust) for a decade beginning in 2001. While EBTs could be operated legally, Rangers took this process beyond any established case law by making contractual payments that would normally be subject to PAYE and NIC through an EBT. This was no innocent mistake as several of Rangers’ directors were fully aware that what the club was doing was illegal but continued anyway.
This scam has resulted in combined bills for underpayment, interest, and penalties of about £60m being billed to the Ibrox club just over a year ago. Contrary to the lies disseminated in the Scottish mainstream press, the amounts ARE known to Rangers. They are printed on the tax assessments in their possession. Unable to pay such a crippling amount, Rangers appealed these assessments to a process called a First Tier Tribunal (FTT). An FTT began hearing Rangers’ appeal and HMRC’s evidence against the club, in October 2010. It did not complete within the scheduled two weeks and a three week continuance was arranged for April/May of 2011. Evidence presentation was not completed in this window either and another continuance has been scheduled for November 2011. I believe that the evidence against Rangers is overwhelming and that the club is simply dragging out this process as a way of effecting a stay of execution.
- The”Wee” Tax Case
Another tax case emerged on the 1st of April of this year. Rangers’ Interim Results for 2011 disclosed that there are additional tax bills for £1.9 million in underpayment, £0.9 million in interest, and, later, £1.4 million in penalties. (The closer the penalty comes to 100% of the underpayment, the more it signals the extent of consciously illegal behaviour and deception which HMRC believes was involved). Rangers claim that this bill was for a Discounted Options Scheme used to compensate players. This does strike me as odd. Directors and employees who expect to remain with a business for many years will accept options in the company as part of compensation packages, but footballers?
Not for the first time (nor the last) Rangers’ shareholders, supporters, and the British taxpayer are not being told the whole story. This tale, as told by Rangers, does not add up. I suspect that either club directors actually used this scheme to compensate themselves (leaving the business to pick up the tax bill) or Rangers were involved in a highly fraudulent scheme like stuffing offshore shell companies with cash and then issuing shares in such sham businesses to employees / players. Whatever the truth, it will be far from the simple story that has been fed to the media to date.
The £2.8 million for underpayment and interest for the Discounted Options Scheme has actually been agreed with HMRC. This means that it cannot be appealed. It simply must be paid per the required schedule or Rangers face debt recovery action. To this end, Sheriff Officers acting on the instruction of HMRC visited Rangers on the 10th of April to serve paperwork that represented a major escalation of this case: Rangers had until the 29th of August to pay this amount in full or face the start of court proceedings that could lead to an insolvency event. (The £1.4 million penalty can be appealed, and therefore delayed, as it was not part of the agreement between the club and HMRC). At the time of writing, the vast majority of the amount due for the “wee” tax bill remains unpaid, and after a day of feverish speculation, it appears that HMRC gave Rangers a final warning that court action to wind-up or put the club into administration is imminent.
- The Summer 2011 Transfer Window
Craig Whyte’s modest actions over the close season and in the final weeks of the transfer window confirm that he is not a billionaire who will spend whatever it takes to make his footballing fantasies come true. In fact, with a net spend that could have been financed purely from season ticket cash inherited when he took ownership of Rangers, Whyte might just as well be an unemployed security guard for all the investment of personal cash that has been required so far in his tenure as club custodian. (More on this in the coming days). The merits of the ins and outs of the player-trading will be borne out in time, but it is the bungling ineptitude that will be the lasting impression. In particular, the primacy of public relations over matters of substance may have contributed to yesterday’s turning of the screw by HMRC. I can only imagine that the debt recovery staff at the tax office would have watched with jaws agape as Rangers’ spin-meisters fed their media lapdogs stories of fantastic amounts being offered to secure the services of the club’s star striker, Nikica Jelavic. Boasting to the world of rejecting offers of £9 million in cash while pleading poverty to a creditor will generate a lot of dissonance. Frankly, even had the story been true it would have been remarkably stupid to make public. This event lays bare the extent to which Craig Whyte is being advised poorly by Jack Irvine and Gordon Smith. That the story was a transparent fabrication designed to burnish Mr. Whyte’s good-guy credentials for the most naive sections of the Ibrox support just makes the situation comical.
- Securitization / Assignment of Catering Revenues
With all of these issues taken together we can just cut to the chase: Rangers did not have the money to pay the “wee” tax bill. Whyte’s business plan was to hope and pray for Champions’ League qualification and the additional £18-20 million in revenue (which would be mostly profit) that would accompany playing on football’s top stage. Those of us who follow football closely could see that any plan that depended upon Champions’ League qualification for the Scottish champions through two qualifying rounds was madness. Craig Whyte appears to have thought differently.
So Whyte is left to rob Peter to pay Paul and to try to gather cash to pay the “wee” tax bill any way possible. Having spent a decent amount of the season ticket cash required to get the club through to when next season’s ticket renewals will start coming in, the club faces a cash flow crisis before the end of the season. Whyte is frantically exploring every financial device available to try to make ends meet.
A previous attempt to securitize future season ticket sales in return for a large amount of cash now fell through. (Possibly in part due to the excellent forensic detective work on the part of readers of this blog). Late yesterday, Rangers posted an MG01s Form on the Companies House website related to the assignment of a mortgage for Rangers’ catering revenues.
Regular posters to this site will doubtless apply their considerable expertise in dissecting this filing, but I will take a first stab at explaining this for the layman. The Rangers Football Club plc (i.e. Rangers FC) had previously “sold” its catering rights to Azure Catering Services, a division of Sir David Murray’s MIH Ltd. A few years ago, MIH sold Azure and Rangers reacquired the rights to their own catering revenues. These catering revenues have now been sold, for the indefinite future, to a finance company called Close Leasing Limited, a firm which Whyte and other Rangers directors have had dealings related to some of their other distressed asset purchases. A piece of the family silver has been sold off to fend off an insolvency event.
While the MG01s form does not specify the amount, Rangers’ 2010 Annual Report states that “events and catering income increased by 8% to £2.0m due to our participation in Europe.” (However, 2009 was also a Champions’ League season for Rangers). Without further European revenues, this income might be expected to be as low as £1.4m for this season. (We also do not have information on how much events contributed to this profit). Selling a cash stream under these circumstances is to present one’s posterior while bent over a barrel. The discount rates that will be applied to valuing this cashflow will be horrendously high- as much as 15-20%. This could see Rangers raise as little as £7 million in return for giving up this income every year into the future. Subtracting events money and Whyte could be left with less than £5 million for this transaction. However, £5 million would be enough to drive the wolf from the door for now.
So, I expect that Rangers will survive the immediate crisis presented by the “wee” tax case. Operating without a credit relationship with a bank, a cloud over the club’s ability to get to the end of the season without similar family silver sales remains. As for the “big” tax case? Unless there is a silver mine discovered under the Copland Road Stand, Rangers have zero prospect of being able to pay that bill when it hits.
- Leaks & Lawsuits
The last point to address for today is the recent spate of “Rangers angry at HMRC leaks” stories that have been spread by the usual suspects via their lackies in the Scottish media. As diversionary tactics go, I imagine this one will help develop a unifying sense of being under siege among Rangers fans, so it may serve its purpose. However, let us take a look at the facts.
The first journalist to publish specifics about Rangers’ tax crisis was Darrell King. He not only got his story correct in that Rangers’ existence is at stake, but he got the amounts bang-on too. Darrell King’s source? Rangers director Dave King (no relation). Dave King did not fancy Sir David Murray’s favoured takeover candidate at the time and was leaking to all and sundry to try to delay things until such time as his own tax troubles in South Africa might be cleared up. The recent breaking story from FollowFollow.com’s Mark Dingwall claiming that HMRC had moved to freeze Rangers’ bank accounts (which I now understand to be fundamentally correct despite Rangers’ denials); where did he get his information? Dingwall’s sources are invariably within Rangers FC. The news that Gordon Smith was going to become Ally McCoist’s new boss? Phil MacGiolla Bhain managed to tell the ordinary Rangers fan before McCoist himself knew anything about it. I don’t suppose that there are any disgruntled ex-employees armed with explosive information on Rangers?
Rangers have not hesitated to plant disinformation and outright lies about the case when they thought that it suited them. The downside of such short-sighted moves is that those who do have access to the facts have become increasingly angry that the truth- the mortal danger which the club faces- has been withheld from the only people who care enough to do anything about it. Blowback. The more Rangers’ executives have lied, the more people with access to the story have felt obligated to get the truth out. Leaking information about the tax case does not help HMRC. The case(s) will be determined through the normal legal channels and the outcome will be what it always would be. Many Celtic fans will enjoy the discomfort of their rivals’ realisation of the scale of this problem. However, a bit of glee would not be something that a wise Celtic supporting tax collector would risk a career over. However, leaks do serve to alert Rangers fans. Work it out.
My own motivations have always been primarily to highlight the corrupt nature of the Scottish media. (Remember Graham Speirs’ Rangers-fed dismissals of the tax bill amounts as being wildly too high?) My sources? Well, they have developed a lot since starting this blog, but I am not going to indulge in a guessing game with anyone.
Anyway. How are Rangers’ lawsuits against HMRC for leaking coming along? Why would Rangers be so angry about falsehoods? Afterall, this blog is “99 percent crap” according to Craig Whyte. Surely Craig is not admitting that the substance of these stories is in fact true?