Making a bad situation worse

If you bought a badly run business that had defrauded the national treasury for a decade, and which had frustrated legitimate enquiry into its tax affairs at every turn, you might want to turn over a new leaf. If you planned on running the business for the medium or long-term, you would want to normalise your relationship with HMRC. A couple of goodwill gestures would not go amiss. Certainly, you would not want to make things worse.  Would you?

Of course, divining the thought processes of Craig Whyte is not an easy task. Trying to see a path for making an “on the radar” profit from his ownership of Rangers is even more difficult. Whyte’s strategy for keeping Rangers alive in the short-term is a little easier to see.  No bill of significant size gets paid without legal action. Lawyers, tax advisers, or even the taxman himself, Whyte does not appear to play favourites.  Since taking over Rangers on 6th May of this year, Whyte’s Rangers have been deducting PAYE and national insurance from  players’ salaries. However, the club has not been passing this money on to HMRC.  In fact, the club has fallen behind on current remittances by an amount that is fast approaching £2 million.

This is aside from the “Big Case” and its £36m in tax and interest (with penalties to be added). This is aside from the “Wee Case” and its £2.3m (tax and interest) that remains to be paid (plus approximately £1.4m in penalties). This is a new and completely separate dispute between Rangers FC and Her Majesty’s government.

If these new (and accumulating) amounts are not paid soon, it is inevitable that the well trodden path from Ibrox to The Court of Session will once again be taken to force Whyte to make good on the legitimate debts incurred by his company. This will mean that yet another law firm shall be getting paid handsomely, up-front, for a bill that cannot be sensibly disputed.

The obvious question: is this fraud? The answer is no- it is not. One thing about Whyte is clear: he is not short of advice on where the edges of the law exist.  By simply neglecting to submit monthly tax returns, Whyte is able to avoid criminal charges i.e. Rangers are making no declarations to HMRC about how much they are paying employees. Rangers can continue failing to pay the tax withheld from wages to the government for quite a long time without risking fraud.  In the meantime, HMRC will be able to take Rangers to court and press for a winding up order or an arrestment. These measures would seek to obtain the money that should have been paid already (plus interest and penalties), but would be a civil process.  The pattern seems well established: Whyte would pay this bill on the court steps if it does not suit him to file for insolvency at that time.

In fact, Whyte has until 19th May 2012 before he has to submit a P35 Annual Return. It is only at this time that Rangers must submit an accurate accounting of what salaries have been paid and what taxes are due. If Whyte was to lie on this form, he would be exposing himself to the wrath of an organisation that must surely be enraged by all things Rangers.  By not making a declaration of what taxes are due, Whyte avoids fraud charges on a technicality. Yet, money is being taken from wages and not being submitted to government as employees would expect. From April 2012, HMRC will have the power to demand that businesses involved in the deliberate non-payment of PAYE & NIC effectively pay tax up front in the form of a bond.  If The Rangers Football Club plc is still trading at that time it will be a prime candidate for this treatment. Likewise, these new powers apply to phoenix companies. So Rangers, in whatever form they exist by the end of this season, will run out of rope to continue disregarding UK tax law.

If we took the integrity of our national game seriously, the sport’s administrators would intervene when things got this extreme. However, this is Scotland and our game has been rotting from more than two decades of maladministration. The financial crisis in which Scottish football finds itself today is such that sporting integrity would not merit a second thought if it meant keeping the root of the problem alive. Only the most naive would believe that any meaningful punishment will ever be applied against Rangers’ myriad wrong-doings. However, the SFA/SPL need to concern themselves with the long-range problem of how many people will continue to pay to see a competition in which certain clubs are insulated from the consequences of their own actions.

The Case: Q & A

With just a single day left of Rangers’ First Tier Tribunal (Tax) dealing with the Employee Benefits Trust scheme that has brought Rangers to the edge of insolvency, I notice a surge of posts from people asking basic questions about what is going on. My first advice for anyone trying to understand what Rangers have done would be to read the following blog posts:

• What Rangers Tax Case Is All About
• Lies, Damned Lies, and Scottish Football Journalism

With apologies to our old lags who will know most of what follows already, I will attempt to address some other commonly asked questions below:

How many tax cases are there?

Rangers have several outstanding tax issues currently. Most of the publicity has been focused on the “Big Case” dealing with Rangers’ use of a trust to pay employees’ salaries and bonuses without paying income tax or National Insurance. There is also the “Wee Case” which covers an innocent sounding Discounted Options scheme. This involved stuffing cash into the bank accounts of offshore companies and granting Rangers players options to buy shares in the firm. The players would end up with shares (for which they effectively paid very little) in a company whose only asset was the cash in the bank. The players could then could then help themselves to the money without paying UK taxes.

There are more tax issues?

Currently, the biggest other issue Rangers face in their tax affairs is simply failing to keep up with remittances on time. Every employer is required to submit the taxes deducted from employees’ salaries (and VAT receipts) promptly and on a set schedule. Rangers made the late payment of creditors, including HMRC, into an official policy before the takeover even occurred according to documents in my possession. Whyte seems to have embraced this policy of late payment as his own. We will later see how this policy will likely have artificially boosted Rangers’ cash and reported Net Debt in their 2011 Annual Report.

What are Rangers chances of winning the Big Tax Case?

Low, but not zero. Their chances are not zero simply because no legal procedure involves a certain outcome. However, the case against Rangers is overwhelming. A newspaper journalist, whose career has been built entirely upon relaying information that Rangers employees (past and present) want to see in the media, claims to have seen side-contracts effectively telling Rangers players that loans from the EBT do not have to be repaid. That would make a conclusive case against Rangers in its own right. However, it could be worse for Rangers. If documentation exists that would prove that Rangers’ executives knew that what the club was doing was illegal, that would be bad news. If any Rangers executives took “extraordinary steps” to try to disguise the true nature of the EBT scam, that would be bad news too.

How much could the Big Case cost Rangers?

The Martin Bain papers stated a figure of £49m. However, Bain’s legal representative may have mangled this issue. It looks to me that the Bain Papers only referenced the assessments for underpayment and not the penalty. The bills are for: underpaid PAYE; underpaid National Insurance; interest (compounding and going back 10 years); and a penalty. ( At Rangers’ request, the penalty is not part of the current tribunal. If Rangers lose the underlying case, the penalty assessment would be confirmed in a separate tribunal). The original assessments sent by HMRC were for amounts that assumed that contributions to the EBT were made post-tax. This argument stands virtually no chance of succeeding and the amounts paid to the trust will be viewed a pre-tax (i.e. gross salary) amounts. I introduced this issue in one of the responses to an early blog and it resulted in much confusion! Therefore, it is likely that the final tax bills due will be very close to £24m in underpayment and £12m in interest. The penalty amount, given the documentation trail demonstrating executive knowledge that their actions were illegal and steps taken to disguise the illegal nature of the payments, will likely be confirmed at about £12-18m.

When will we know the result?

There is no set schedule for the judges to post their findings. (It will be posted as an anonymised entry on the tribunals service website. Rangers will not be named. However, you can be sure that I will help decode anything that is not clear). It is probable that we will learn the outcome sometime in March 2012. A little earlier is possible, as is the answer coming much later. All of this assumes that the FTT does indeed conclude on schedule next week.

Is it just Rangers who have been doing this?

No, but Rangers have been especially egregious / stupid in their use of the EBT. I can kill two birds with one stone by explaining this in terms of how the rest of the Murray group are affected. The current case is an appeal by a number of subsidiaries of Murray International Holdings Ltd. All of these companies used a variation of a similar scheme to have their staff withdraw money tax-free from The Murray Group Management Limited Remuneration Trust. (Rangers also used another trust named for themselves, but abandoned it several years ago, presumably to reduce administration costs. It should be clear that the trusts are not owned by the companies who contribute cash to them. They could have been called the Mickey-Mouse Trust for all of the relevance of the name).

There were differences in how Murray group executives from other divisions used the trust and how money was dispersed to players and executives at Rangers. In the case of Sir David Murray, he would have had no need to have a contract with himself. So he could just send a fax to the trust administrators requesting a loan of, say £100,000, and they might say “No. Just the £90,000 this time, Sir David.” Murray would understand what was happening i.e. the trustees have to prove their independence from MIH and Murray himself. However, what footballer would agree to seemingly arbitrary payments? They would wonder if they were ever going to get paid in full and fear that someone will ask for these loans to be repaid. So, there would be a need for a side-contract explaining that this was really their real salary and to not worry about repayment. Interestingly, claims that they also received indemnification from Rangers about future tax bills could open another can of worms. A contract to engage in illegal behaviour is not enforceable. So depending upon the wording, players may find themselves engaged in a legal mess. However, all of that would be long after the dispute between HMRC and Rangers had been resolved. It is the employer who bears the responsibility for deducting and paying payroll taxes.

The point above is that MIH executives (especially Murray) may have been using the EBT within the limits established by the Dextra case i.e. HMRC failed to prove that the loans were disguised remuneration when there was no contract or promise of payment for any particular purpose. So Murray’s own very substantial withdrawals from the trust might be deemed legal while those of Rangers’ players and executives will likely be found to be illegal. This point opens an interesting question about the legal services for Rangers’ appeal.

The contract that sold Rangers to Craig Whyte explicitly states that Rangers do not have to contribute any money to the legal costs for the current tribunal. Rangers cannot communicate directly with HMRC on this case and Rangers have to accept the legal counsel appointed by the Murray group. A generous offering from Murray? Or more likely that Murray sees financial advantage in paying the legal costs for a business which he no longer owns? Most people have a hardwired tendency to want to find a middle-ground in any dispute, We all would like to be thought of as being reasonable. Tribunal judges are unlikely to be much different. Therefore, with the Rangers issue looking like a lost cause and the Murray group having a fighting chance of ducking a large part of their bills, there could be a tactical element in keeping Rangers as part of the wider Murray case. It provides the judges with a target for venting their righteous vengeance on behalf of the state and for them to demonstrate their fairness and balance by letting Murray off lighter than might otherwise have been the case had the Murray group gone into the latter stages alone. Whyte? Winning the tax case is unlikely to have ever been a central part of his plans.

So back to the question: Who else has been doing this? Is this just a test case?

EBTs became quite widespread in the 2000s. However, almost all of the usage was for executives operating without written contracts. The Rangers case provides little or no utility in collecting taxes from these firms. There are a number of other clubs in England who will have had similar arrangements, but none were into it for as long or for as much as Rangers. It will have been the scale of Rangers’ scam and their duplicity that has put the club in the cross-hairs. The claims that HMRC’s only interest in this case will be in setting a precedent and that they will just forget about enforcing any decision will be proven false in time. Likewise, the idea that after the decision, Hector and Whyte will gather for a sup on the Loving Cup and negotiate a sensible settlement like gentlemen. There is no post-FTT stage for negotiation. I am sure that Whyte will try. I would be absolutely certain that he has been trying to negotiate a deal in recent weeks. However, this case is too high profile for HMRC to make a humiliating climbdown now.

Whether insolvency results in HMRC collecting anything or whether Rangers bounce back stronger than ever will be irrelevant to the fact that should they lose the case, The Rangers Football Club plc will be in very serious trouble.

Confidence Trick

Those with an interest in the outcome of Rangers’ appeal against HMRC’s assessments in the ‘Big’ Tax Case might be justified in feeling a little confused.  When the story first broke in April 2010, Alastair Johnston gave this statement to the media: “Tax issues are never clear-cut but all I can say is we have taken a lot of legal advice on the issue.  I do not think it should be a material concern for us in the longer term but we can’t say for sure yet what might happen.”

Between breaths of fire and vitriol directed at former Rangers directors after Mark Daly’s recent BBC Scotland documentary, Craig Whyte said: “At this point the club’s advice from tax advisors has been that the club has a good chance of succeeding in the tribunal but it would be wholly irresponsible not to consider the potential consequences for the club should the decision be made against us”.

Yet an array of tax professionals say that if Rangers provided its players with side contracts assuring them that loans taken from an Employee Benefit Trust (EBT) would not have to be repaid, then the club’s chances of succeeding in appealing the assessments in their possession would be very slim.

Opinions- it is (famously) all about opinions.  One opinion probably matters more than most.  It is that of Andrew Thornhill QC, Rangers’ Counsel in the EBT case.  He seems to be a little less bullish than Johnston and Whyte.  In correspondence with their legal expert, Rangers received more nuanced advice.  The following is an excerpt from internal Rangers communications prepared to inform Whyte about a range of matters:

No one would expect a lawyer to tell his client that a favourable outcome is guaranteed. Even this blog has always gone to pains to point out that there is no such thing as certainty in court cases. (Although Rangers may be destined to prove the old saw “the only sure things in life are death and taxes” correct on both counts). However, I would have expected more uplifting advice to have been communicated internally to justify the optimistic pronouncements from Ibrox.

This advice is tantamount to saying “there is definitely a possibility of winning the case”. I would agree! It is logically equivalent to “there is a non-zero probability of winning our case”.

Of course, the case is a bit more complicated than just Rangers versus HMRC.  As we have covered previously, the case involving the Murray Group Management Limited Remuneration Trust goes beyond just Rangers: it deals with several current and former subsidiaries of Murray International Holdings Ltd.  Each subsidiary is legally responsible for paying its own employment taxes and each will be held individually liable for any negative outcome from the case. Yet not all of the subsidiaries will have been guilty of the same scam as Rangers.

Those who have been reading all of the posts and replies on this blog (a monumental task these days) will understand that any cash that Sir David Murray withdrew from the trust might well be deemed to be a legal loan.  As Chairman, majority shareholder, and in effective control of MIH through most of the years in question, he would have had little reason to write himself a side letter saying that he did not need to repay any loans.  If this is what he has done, then he will likely have been within the operating limits established in the Dextra case.  So anyone seeking to provide ambiguous advice to a prospective buyer of Rangers FC might well point to grounds for optimism on aspects of the case involving the Murray Group Management Limited Remuneration Trust.  (I look forward to comment on this point from our unpaid team of legal experts!)  Yet, those familiar with the case cannot conceive of a possible defence in Rangers’ case. (Assuming that the club did indeed provide side-letters to players).

Is Thornhill speaking only to the Rangers case?  Was a sunny-side-up opinion procured to help smooth the sale of the club?  Did Whyte decide to make his move on the basis of a seemingly optimistic legal opinion that in fact says nothing at all?  Whyte’s purchase of Rangers seems to defy all logic and business experience.  We have to include the possibility that he has been legally duped.  Of course, the contract that sold Rangers to Whyte includes a gagging order preventing Whyte from commenting negatively on the previous owners.  So we are unlikely to learn if Whyte is experiencing any buyer’s remorse.

As the quote above also points out, the resumption of the case is near at hand.  Next week will see the closing stages of the case begin.  The window for speculation is fast closing and real answers to the mysteries of this case will start coming thick and fast.  The 8-12 week period from the conclusion of the case is realistic.  The stuff about “a period to discuss the affordability of any settlement” is not.  There is no stage in the formal process after the tribunal to negotiate.  The bill for the underpayment & interest (about £36m) will have crystallised and would be legally enforceable.  Rangers can appeal (through the MHL subsidiary of MIH) to the Upper Tribunal.  HMRC do not normally enforce payment if it will result in insolvency while an appeal is underway.  However, there has been a hardening of hearts recently, and in cases where it is felt that the appeals process is being abused to delay the inevitable, they will be more likely to enforce their legal right to demand payment shortly after the First Tier Tribunal (Tax).  HMRC can elect to do a deal at any time of their choosing.  However, a pennies on the pound settlement in the wake of recent publicity seems unlikely.  Public punishment of a Draconian nature might do more to fill the public treasury than any smattering of repayment which Rangers could muster.

The question remains whether Whyte can keep Rangers solvent long enough to divert blame for the disaster that is almost certainly about to befall Rangers.  A post-Big Tax Case fall will be so transparently the work of the previous management and owner that Whyte will not need to comment.  Falling earlier will leave Whyte with a lot of responsibility for Rangers’ problems, and he will not be able to openly throw any mud in the direction of the real culprit: Sir David Murray.

Borrow Borrow

The revelation that Craig Whyte’s Rangers is selling off more of the family silver to stay in business just a while longer answers a few questions about this puzzling situation.  It is now abundantly clear that Whyte’s tardiness in paying creditors is more than just a bad habit.  It is also clear that there are no vast pools of wealth on which Whyte can draw to keep Rangers on life support.

For those of us who have indulged in reading entrails to try to understand Whyte’s actions, it is becoming ever more clear that there is no plan.  Any semblance of a grand design evaporated into the Scandanavian air on 3 August when Rangers failed to qualify for the group stages of the Champions’ League.  Even the booby-prize of Europa League qualification would not have come close to filling the chasm in Rangers finances that opened that night.

With records released on the Companies House website confirming that Rangers have given a fixed charge security over their assets to an English finance company called Close Brothers, it is clear that Whyte is selling the family silver in return for delaying insolvency.  The news that Rangers came within a few hours of having a winding up petition approved against them yesterday is quite remarkable.  That Whyte has had to resort to the desperate end of the corporate finance spectrum shows how close to the edge things have become.

We do not know how much has been borrowed.  Therefore, we do not know if this was just a small amount of funding that keeps the wolf from the door for a few weeks or whether he has established the line of funding that will see Rangers through to the opening of the transfer window in December.  If Whyte’s negotiation tactics have improved since the summer, he might not over-price his sellable players again.  He might even attract an actual offer for Jelavic this time.  To ignore the transfer window and fund Rangers through to the First Tier Tribunal (Tax) returns its findings (possibly as late as March 2012), Whyte would need to have borrowed about £15m.  Only at this time could Whyte legitimately claim that insolvency was caused by the legacy tax issues rather than his inability to run Rangers.

Borrowing against Rangers’ assets now not only reduces Whyte’s prospects of making a profit on Rangers (as faint as they were), but this greatly complicates any insolvency filing.  The odds of a Rangers liquidation and a disorderly meltdown in insolvency have now risen from the fanciful hopes of dreaming Celtic supporters to something that needs to be given serious consideration.

Whyte seems to be either holding out hope of Rangers getting an against-the-odds result in its dispute with HMRC or is trapped in the ‘bargaining’ phase of grief: trading all he has for more time.  Until now, Whyte-watchers had to consider the possibility that the Motherwell-born-billionaire had a plan that would outfox everyone.  It looks increasingly clear that he has just been making it up as he is going along since the Malmo game.

Promises Promises

My last post seemed to cause a bit of confusion on the Interwebs.  I guess that the big cheesy ironic grin on my face did not translate to these dull, grey pages.  Some seemed to think that I was saying that Sir David Murray is poised to make a comeback in the lives of Rangers supporters.  In fact, I was suggesting nothing more than he has the ability to selflessly act to help Rangers.  I say selflessly because there is no path for Murray to return the  £1 he received for his shares.  For the avoidance of doubt (a phrase we will meet again), Sir David Murray’s only path back to Rangers is to buy his way back in.  There is more chance of Neil Lennon wanting to own Rangers than Murray.  That part of the club’s history is well and truly over.  (Few seem to understand the extent to which Murray has lost control of MIH and its subsidiaries.  It was Lloyds who wanted a deal with Whyte on these terms.)  Before moving off this subject entirely, we will take a look at some of the other details of the contract that sold Rangers to Craig Whyte’s Wavetower.

A section of the Share Purchase Agreement (SPA) labelled 8. CONDUCT OF THE TAX CASE sheds light on how the (Big) Tax Case is being managed now and clarifies who is responsible for what.  I will summarise this section below:

• The Seller (i.e. Murray MHL Limited) is responsible for negotiating with HMRC “and agreeing a full and final settlement of the Tax Case on behalf of the Company” 
• Rangers shall not make any admission of liability regarding the Tax Case without the written permission of MHL.
• Rangers shall make no attempt to communicate directly with HMRC regarding the (Big) Tax Case
• MHL is paying for all of the legal costs of Rangers’ appeal and Rangers must use MHL’s chosen advisers / lawyer
• Rangers promised to not terminate the employment of Key Witnesses- one of whom is Martin Bain!
• Rangers still have the right to settle with HMRC on terms of its choosing (presumably communicated through MHL)

We can discuss the significance of these points (and its apparent contradictions) in the replies section of this blog).

After a seemingly coordinated attack on bloggers from the mainstream media this weekend, I was especially tickled to read that the SPA also states:

For the avoidance of doubt, the Seller shall not be required to make any payment on behalf of the Company in respect of the Tax Case.

This will doubtless be a revelation to the long line of print and radio hacks who reassured Rangers fans for months with tales that David Murray (personally or through the company that bears his name) would pay any tax liability.  I have been keeping an electronic scrap-book where I maintain clippings of the articles and audio from these professional beacons of truth.  It will make a fun coda to this project to post this material online once the dust has settled.  This site can become a permanent monument to quite how wrong Tom English, James Traynor et al have been for so long.  We will also be able to compare their writings of late to the early revelations of this blog.  Interesting?  Maybe not, but it will amuse me no end.