Bear With Me

Once again I have to apologise for being a terrible host. The number of unmoderated replies piles up, readers become frustrated at the lack of updates, and I have started receiving complaints saying that I am letting people down with teasing with promises of exposés that are always in the future.

On the moderation issue, I put my hands up. Between real life and researching materials for this project, it leaves me with little time to participate in discussions let alone referee them. All I can say just now is ‘sorry’, but there is not a lot I can do in the short-term. If someone wants to start a messageboard to allow the various discussion topics from here to be handled by a larger number of people, we can talk about how we could manage this technically. If seriously interested, let me know. However, I can see this presenting difficulties and distracting from the blog itself- which (no surprise) is the bit I like most, but this project has grown to become something in which many people have an emotional claim. So I am open to ideas from anyone who thinks they can solve the concurrent problems of my penchant for privacy, the need to have several people act as moderators, and maintaining a sense of togetherness for both blog and replies.

On the charge that I am not delivering on the teasers that I throw out, I have always said that most information will be withheld until after the FTT findings are published. Nothing has changed. Do not expect a deluge of information in FTT+1. There is value in timing the release of information to apply pressure on those who would rather that this story not be told.

Be assured that there is a lot of information to come out. Some will come out in the mainstream press, some on here and other blogs, and other details will be best explained in a book. Just be patient. Pulling a lot of disparate threads apart to understand what has happened at Rangers over the last decade has been exhausting. The hit-and-run nature of Twitter has made it easier to try to communicate while doing several different things at once- and I did throw out some new information about the extent of Rangers’ use of the EBT scheme- How many players in the Rangers squad (1st team and subs) that won the SPL title on the last day of the season on 22 May 2005 had an EBT?  That is correct- every single one of them.

Most commentators on this saga believe that Rangers will be found to have acted illegally and were breaking UK tax law in their implementation of the EBT scheme. If / when this is formalised, the SFA & SPL face an issue which cannot be parried away without causing permanent damage to the Scottish game. The widespread use of the EBTs at Ibrox means that there cannot be any serious debate that Rangers fielded players who they could not afford during this period. Using illegal means to fund their playing staff was cheating. It is that simple. If by some miracle a CVA happens and Rangers survive intact or if the SFA/SPL allow Rangers’ membership share to be transferred to a newco, then punishment must be meted out. That punishment must be proportional to the fact that other clubs suffered huge financial losses as a result of that cheating. The punishment must also include consideration of the damage to the reputation of the Scottish game as well. Anything less and there will be little point in watching Scottish football. Anything less and it will be clear that it is a rigged game with a tilted table and loaded dice- all for the benefit of just a single club.

Balance of Probabilities

As we wait (impatiently) for the First Tier Tribunal (Tax) to report its findings on the legality of how the EBT used by Rangers was operated, it might be of interest to discuss some common misunderstandings about the legal processes that will determine the outcome.

The case that will seal Rangers’ fate is governed by Scottish civil procedure.  Years of our lives wasted watching television has armed most of us with a basic understanding of criminal procedure- concepts like “innocent until proven guilty” are infused throughout popular culture. However, civil courts have very different rules.

Rangers FC have been accused by HMRC of operating an illegal tax avoidance scheme (see link for common myth about avoidance).  Following a long investigation, in early 2010 Rangers were sent a number of assessments (tax bills). Rangers appealed them.  In the several tribunal hearings that followed, evidence was presented by both sides and now it is for three judges to establish whether or not Rangers pursued an illegal scheme for more than a decade. I have heard lots of people (including Scottish journalists) make the mistake of assuming that “Rangers are innocent until proven guilty“. They are not. The standard for determining the outcome of a civil tribunal is the balance of probabilities. It is simply a question of whether it is more likely than not that Rangers’ were using the EBT as sham to pay money to players and executives on which they should have deducted income tax and national insurance.

In this case, it seems that the Rangers’ directors, and MIH staff in charge of running the scheme did not understand this distinction. Much of their behaviour appears to betray a sense that all they had to do was establish “reasonable doubt” to avoid getting in trouble. Currently, within Edinburgh’s golf club circuit, there is a widely held view that Rangers will be held accountable for some tax liability, but that the quantum will not be anything close to the huge assessments presented by HMRC. People close to Sir David Murray acknowledge that there was some sloppiness with regards record keeping in specific cases.  They seem to think that the resulting tax bill will be limited to these “one-off” errors- situations where there is no doubt that a contractual obligation was paid through the EBT.

However, the standard for determining the outcome of a tax tribunal is the balance of probabilities. If there is a significant volume of such transactions, the entire scheme can be judged to be a sham.

What determines whether there are enough illegal payments to cast the entire scheme as a sham? It will not require proof beyond a reasonable doubt or any of the other concepts burned deep in the minds of TV crime series viewers. There simply comes a point where there is so much evidence that it is clear that someone is “at it”. I expect that Rangers will be held by the judges to have been “at it”. If (or when) that happens, the real fireworks will begin.

Assuming that Rangers’ actions of the last decade are officially deemed illegal, Scottish football authorities will face the greatest moral dilemma in the history of our game. If I am correct, it is likely that the following facts will soon be firmly established:

  • Rangers provided many players with second contracts in violation of SFA rules
  • The provisions within these second contracts were in violation of the law of the land
  • Rangers fielded players whom they could not have afforded without resorting to illegality

Under these conditions, the debate about ‘helicoptering’ a newco into the SPL to replace Rangers FC would surely change. The idea of transferring the last decade of Rangers’ history to a new company would be like asking for a toxic waste dump to be moved beside your house.

I have developed a genuine empathy for the many decent (but largely silent) Rangers fans whose beloved club has been ravaged by Sir David Murray and his hand-picked lickspittles.  Much of what has been revealed on this blog in the last year serves the common good of all Scottish football fans. However, I expect that whatever common ground exists will open into a chasm over the subject of what the SFA & SPL should do about the recent history of their club.

22 May 2005- is a cherished memory for all Rangers fans. Rangers beat Hibs at Easter Road to clinch the SPL title. Neil Doncaster needs to ask: “How many members of the Rangers squad that day were, or would become, beneficiaries of the EBT scheme?” (Let me help him out- it will be a lot easier to count those who did not participate). The truth is that many of the Rangers squad would not have been anywhere near Easter Road that day without the use of the EBT scheme. If the EBT scheme is deemed to be illegal, the SFA and the SPL cannot pretend that the second contracts held by the vast majority of the Rangers’ first team players during the middle of the last decade were just a procedural transgression of no material impact. On the balance of probabilities would Rangers have been crowned Scottish Premier League champions that day without the use of the EBT scheme?

The future value of winning a championship in Scottish football is in the hands of Stewart Regan and Neil Doncaster. They will face intense pressure from those close to the old regime at Ibrox- and their friends in the media- to sweep these issues under the carpet. That would be a huge mistake.

Quick Recap

Rangers’ administrators yesterday released a communication intended to clarify the club’s financial position for creditors. It is a well written document that clearly lays out Rangers’ recent financial history in a way that does not require any financial training. Yesterday’s posts, on here and across the internet, have covered most of the detail, so I will spare you a redundantly thorough analysis.

With Rangers’ debt level potentially as high as £134m (more likely in the £95-110m range), the only hope of the club avoiding liquidation is to convince more than 75% of the creditors (by value) to accept less than the face value of their debt through a CVA. Much less. If media reports are to be believed, The Blue Knights consortium have offered just £8-10m to keep Rangers alive through a CVA.  The administrators brushed over Craig Whyte’s claim to any of this money with just a casual nod to the minimum legal requirements: “the Joint Administrators will conduct an exercise to establish the validity of such security and the quantum of any monies which may be secured in this regard”. Yet Whyte claimed to Channel 4’s Alex Thomson that he is due £30m from any sale of assets. Another series of court dates looms.

In the meantime, assuming that £10m was distributed evenly among the creditors, if the final figure is, say £95m, then for every pound you are owed, you will receive 10.5p. Better than nothing? I am not sure. If Whyte’s claims are rejected, it is likely that a greater sum could be obtained in liquidation. (It has been reported that others have bid as high as £25m on the basis of an asset sale to a newco and the liquidation of The Rangers Football Club plc).

In short, it is hard to make sense of the claims that a CVA is still a viable option. In Duff & Phelps first legally binding communication, they elected to not repeat the intimations spread through the media by Rangers’ PR firm that HMRC was ready to do a deal that would save the day and that the Treasury had lent its support for such plan. Why did they miss such a golden opportunity to calm the fears of fans and other stakeholders? Is it possible that the same people who brought us Craig “billionaire” Whyte were not telling the truth? 

For all of the fascinating detail provided yesterday, the reality is still that Rangers’ most likely exit from the administration process is through an asset sale to a newco and with liquidation of the existing Rangers FC. The administrators have done a fine job of trying to put ‘lipstick on a pig’ by talking about hybrid liquidation and keeping ‘the business’ going while allowing the company to die. It is their job to maximise the money raised through this process and, despite widespread grumblings from all sides, they appear to be doing a reasonable job in difficult circumstances. (Though suspicion over their motives and every move is quite understandable). In the end, reality will have to hit and all of the spin in the world will not change Rangers’ trajectory).

With 4,000 EBT cases coming along in Rangers’ wake, HMRC will surely be hoping for an example to be set that encourages most of them to settle. Doing a deal with Rangers that accepts 10% of what is owed after allowing a decade of fiddling will do little to dissuade others from appealing their cases to the bitter end. The actual amounts received from the Rangers case will likely be immaterial to HMRC’s hopes for collecting on EBT users as a class.

On a lighter note, my Monday afternoon was rudely disrupted by tweets and texts telling me that this site was down. Initial investigations seemed to confirm my worst fears that we were the recipients of a Denial of Service (DoS) attack. For the princely sum of about £3,000, hackers can be persuaded to deploy a variety of tools designed to prevent anyone from accessing a web site. After a flurry of phone calls and emails to a number of experts in this field, it turned out that we were not a chapter in a spy-thriller after all. A mis-configured host server is apparently to blame. So no James Bond action here. Just a problem that was uncovered through boring geekery,

We don’t do walking away either

The tedium of being an executive secretary at Ibrox in recent years:

The more you refuse to hear my voice. The louder I will sing.

On to more pressing matters: yesterday’s excitement- the deal with Ticketus and The Blue Knights. As the emotional pendulum takes its swing to the other extreme, we will try to place this event its proper context.

For those who wish Rangers to complete a CVA and maintain the continuity of 140 years of history, it is certainly good news. It was one of four major walls that needed to be scaled. However, the other three are much higher.

– Craig Whyte’s Debt & Floating Charge
Even on this board, debate has raged over whether the Ticketus deal would extinguish Craig Whyte’s floating charge over Rangers’ assets. At best it means a knock-down drag out court fight. If Whyte wins, then his only practical way to extract repayment is to force the liquidation of Rangers FC. If he loses this claim, it would be another wall scaled. We would need to see the actual Ticketus contract to place odds on an outcome and neither side have made a convincing argument in public so far.

– Craig Whyte’s Shareholding
Whyte holds all of the good cards as long as he owns 85% of the club’s shares. There are those who say that this transaction can be nullified due to ‘financial assistance’ rules against borrowing against a firm’s assets to buy its shares. They might be confusing debt with equity! While Mr. Whyte now freely admits that he is not a billionaire, I am quite sure that he managed the princely sum of £1 to buy his Rangers shares from his own pocket. Even the SPA (still available on this site) does not offer negation of the contract as a remedy for any failure to fulfill promises. (There is a chance of Whyte’s debt and floating charge being cancelled as a result of certain terms, but these are so loosely worded that it is hard to imagine that they can be enforced). Short of an as-yet-unpublished aspect of the agreement surprising us, it would appear to me that Whyte’s grasp on 85% of Rangers shares should be quite secure. This means that he will demand a price for giving up control.
I am quite sure that Whyte’s treatment from the directors of the old board and the assorted supporter banners blaming him for all of Rangers’ ills will have done little to warm his heart about the need for ‘the big hoose to stay open’.

– HMRC & The Big Tax Case
With about £15m owed in unpaid PAYE, NIC and VAT from just the last year, Rangers are in quite enough bother with HMRC. Then there is the Big Tax Case. Allowing for trimming at the edges, my estimate is that Rangers will owe about £20m in unpaid taxes and about £20m in accumulated interest. With a total of about £55m plus a penalty tribunal still ahead, the only way anyone in their right mind would buy The Rangers FC plc as a continuing entity would be if HMRC were to do a deal that paid them pennies on the pound and forgot all about the penalty (which could add £15-20m more to the bill). Many point to the logic of “something is better than nothing”. This might be true, but this situation is more complex. If Channel 4’s reports are correct and Rangers directors were engaging in activities such as document shredding, it will mean that ill-will to the club will stretch back further than just the arrival of Craig Whyte. If Rangers have been involved in a decade of persistent lying to the government, it could make a deal difficult. A pennies on the pound deal for such a company would signal that paying taxes in-full and on-time is for mugs; the smart money takes advantage of every dubious scheme going and pays a tiny amount even if caught. There is an issue of ‘moral hazard’ in letting Rangers get off lightly.

To assess the odds of Rangers avoiding liquidation you would take the probability of Rangers scaling each of these walls and multiply them together. As any smart 14-year old can tell you, when you multiply numbers smaller than one together you get a smaller number. The arithmetic of this compound probability problem does not favour Rangers’ survival. With one wall scaled already, their chances of survival are not zero either. However, playing the odds, avoiding liquidation does seem improbable.

Evading Avoidance

We have seen a few old faces and themes emerge overnight in the light of the surprisingly excellent Channel 4 exposé on Rangers. Annoyingly, an old myth has been repeated by some posters: “tax evasion is illegal, tax avoidance is legal”. Another one is that Rangers have not been accused of tax evasion- ergo they have not done anything illegal. This is absolute rubbish on both counts.

This is the sort of ill informed mythology that gets repeated by the idiots who told us Craig Whyte was buying Rangers for £33m. It is a bit like the story about Eskimos having lots of words for snow: just because a piece of untrue nonsense is repeated often does not change its central essence. It is still untrue nonsense.

So by way of a bit of a filler post while we are waiting on events to further unfold, we shall do a bit of revision for those who might have missed this first time around. The laws covering tax evasion and tax avoidance are identical. The only real difference is that in cases of tax evasion, such overwhelming evidence will exist that HMRC believes it can prove that the people involved planned to commit fraud. The perpetrators must also have known that what they were doing was criminal when they did it. (Our lawyers friends will provide a more precise definition, but this will be good enough for most purposes). This is a pretty difficult standard to achieve. In fact, it is so difficult to prove, criminal prosecutions for tax evasion are normally reserved for accountants and lawyers- people whose knowledge of tax law is easier to demonstrate. This explains why several high profile tax fraud cases, such as the recent one involving the canine pet of a football manager, ended in acquittals despite evidence that looked pretty impressive to the general public. In Scotland, this high hurdle is elevated further by the requirement for corroboration.

Tax avoidance can be illegal. It is a term used to describe tax schemes that simply will not be pursued in a criminal court. Some avoidance schemes are illegal, while others have been deemed to be legal if implemented correctly. HMRC even have a tax avoidance scheme registration plan (DOTAS). Tax payers can use DOTAS registered avoidance schemes and be sure that they will not be accused of criminality. Those who are deemed to have breached tax law through an illegal avoidance scheme are pursued through a civil process i.e. a tax tribunal- rather than a criminal court. This is where Rangers are. They are not accused of any criminal action at this point (and it is unlikely that they will), but they have been accused by HMRC of pursuing illegal tax avoidance practices. This resulted in them being sent tax assessments for underpayment, interest, and penalties. Rangers have appealed this determination by HMRC and the First Tier Tribunal (Tax) will decide whether to uphold Rangers’ appeal or not. The First Tier Tribunal will effectively rule on whether Rangers’ tax practices were legal or illegal.

You might wonder why criminal charges would not be pressed if someone was found to have shredded key documents in a tax investigation. Surely this would be criminal? Well, mibbees aye, mibbees naw.

It could be deemed criminal if you could prove that the person who requested the shredding was knowingly destroying a document to subvert an investigation by a government body. Proving this degree of intent will often be impossible. So, tax collectors will settle for collecting taxes- through the civil courts. In the tax tribunal process, interest payments and penalties are used to ensure that tax avoiders (that is ones deemed to have broken the law) do not gain an advantage by paying a smaller amount later. In cases, where there is the possibility of criminal behaviour by ‘minor cogs’ in the machine rather than the ‘big gear’, there would also be a reluctance to prosecute.

Is Channel 4’s report of document shredding relevant to Rangers’ tax cases? I do not know. That would be for Rangers FC and its former directors to comment.

There must be some kind of remedial teaching award available to anyone who is able to explain any of this to a Scottish sports journalist.