Written by TJ
We previously called the SFA’s failure to examine this issue properly an open, festering wound on the game. This may well divide opinion, but today I’m not going to write on the eligibility of players, campaigns for title-stripping or whether there was a ‘sporting advantage’ gained. In a gambit of questionable folly and audience alienation, I decided to take on the boring subject of responsible tax planning and morality. I’ve noticed that punters, press and pros alike all don’t really seem to get it. Many shy away from talking about it as it is complicated. Many more speak about it ignorantly with the vigour of righteousness.
Your writer today is the same Falkirk fan that wrote yesterday’s piece. He has also spent most of his last two decades working in the world of international tax planning structures and 15 of that working in an ‘offshore’ environment. Still there will be those that shoot the messenger rather than the message I’m sure. Today all I aim for is to make the issues and their ramifications more accessible to the public and to understand why we feel the way we do about the situation in Scottish football. I’ll try and make this as pain-free as an article on tax strucuturing can be.
Background (entry level – feel free to skip)
First off – the difference between tax evasion and tax avoidance. I’ve seen them used interchangeably, wrongly and concurrently. They are different things and the difference is important. Tax avoidance is the lawful structuring of tax affairs so as to minimise the tax burden on the entity or individual – i.e. legitimately minimising liabilities. It is arguably immoral (Jimmy Carr, Amazon etc) but it is inarguably legal by its very definition. Tax evasion is the illegal evasion of taxes that would otherwise be due. It is by definition illegal. Tax loopholes in a jurisdiction are often exploited by fine upstanding accountants like myself (okay I deserve whatever stick I get for that) to legally minimise tax liabilities. Cross the border into ‘illegal’ territory and you are a party to tax evasion. There is a greyish area between them. Sensible tax planning avoids the grey area. Aggressive tax planning goes ‘gung-ho’ into it and to hell with the risks. You charge in knowing that what you are doing might be illegal and no mistakes about it.
Relevant to this discussion is the two known ‘disguised remuneration’ schemes used by Rangers. The first was the Discounted Option Scheme (DOS) – which led to the ‘wee tax case’ – and the second the Employee Benefit Trust Scheme (EBT) which led to the ‘big tax case’. As of today it is actually not that important to a discussion on legality how they operate (as they were both determined to be disguised remuneration on which tax should have been deducted) and I’m sure most readers will have at least a vague notion. It is important to the issue of morality though so I’ll briefly explain.
Instead of paying money as wages and deducting tax/NI, the employer puts the cash it would have otherwise spend on wages into a company that’s effectively a ‘money-box’. The employer holds nearly all the shares and the employee very few (say 99:1). The taxable benefit if this were all is very small to the employee since they have very few shares. But on top of this there are options available to all the shareholders to acquire, say, 1000 new shares for every share they currently hold for a nominal price. This doesn’t affect the taxable benefit if all were above board, since both hold options of value equivalent to their shareholding. No matter how many shares are in issue, the company is only worth the amount the employer paid over in the first place. However if the employer agrees not to exercise their option but the employee does, they all of a sudden become virtually 100% owners of the cash but are only received a taxable benefit on 1% of it. Unsurprisingly as a sham arrangement, these were quickly deemed to be disguised remuneration that should have had tax deducted up front.
In the context of Rangers the DOS scheme ran between 1999 and 2003, closing when it became very clear the scheme would not achieve the tax savings being pursued and would only cost more in interest and penalties in the long run. To be fair to Rangers at the time it was started these schemes were in the ‘dark grey’ part of the border between legal and illegal. But the part that you’d be fairly certain was over the line if there was a pattern of it and it all came to light. I believe (and I’m writing from memory here so don’t crucify me for any honest mistakes!) that Craig Moore, Tore-Andre Flo and Christian Nerlinger were the three paid this way at Rangers with potentially more Executives within the Murray Group also.
The tax and interest directly from earnings avoided through use of this was not repaid at a time where it could have been with little recourse, ending up with a penalty doubling the overall quantum due, from £1.4m at the date of demand to £2.8m. This liability forms the crux of the ‘Resolution 12’ campaign by interested parties of a Celtic persuasion, over the timing of the liability and granting of UEFA licences in 2011/12. Option schemes are not illegal. Abuse of option schemes for the purposes of avoiding tax is. Rangers accepted liability for this in early 2011 (i.e. that it was unlawful disguised remuneration).
It worked by money coming into an over-arching trust. I think this might even have been the same trust owning the money-box companies for DOS but its not important enough to the principle for me to want to look into it. In this case ‘sub-trusts’ instead of companies are set up for each employee who is to benefit from them. There is nothing wrong with this and they are extensively used to house shares and share options on behalf of both named and pooled employees totally legally and often not even with the aim of avoiding tax – just effective structuring. Think about a pool of shares set to one side for future employees as performance related pay for example. Where the dishonest use of these comes in relates to the nature of a trust more than anything else. When gifting something to a trust, you grant the asset to the control of the trustee (for an intended purpose) and give up a say on it. When you don’t control something you don’t get taxed on it. When you do eventually benefit from it; then you do. So the money comes into Mr X’s sub-trust and the trustee holds it. They receive a request (which they can choose not to approve) to pay from the funds in it money to Mr X. Mr X is only taxed on it when he receives it. Again this can be used perhaps lawfully – normally a pretty grey area, but lots of variations – to defer income until a time when Mr X is not paying tax at 50% for example. A footballer’s career is short.
Where the line gets really pushed out though is when instead of declaring it a benefit at all when the cash is received, its called a loan. A loan with no intention of being paid back while Mr X is alive and simply repaid (if any left) from his estate after death. That is not just paying less tax by deferring; that’s avoiding income tax altogether. It is clearly disguised remuneration where its the clear intention to transfer wealth for services rendered by Mr X. Proving this is where the grey area normally comes in, but when you’ve got contractual letters detailing the payments it becomes a lot easier.
EBT’s are legal. Offshore EBT’s are not only legal but actually good business sense since they frequently don’t attract capital gains tax. At the time Rangers started doing this there was no outright clear legal ruling on the illegality of this kind of remuneration. To be fair that’s the way with all ‘loopholes’ though. Its a game of cat-and-mouse where those seeking to exploit them are out front and the tax authorities running behind them closing the doors. The tax framework wouldn’t work if you needed to wait for retrospective closing as people like myself would be forever through the next door before they entered the room. It is actually the beauty of the new general anti-avoidance approach for anyone interested.
Getting to the point
What is important to this though is that when you’ve clearly crossed the line – whether there is existing rulings in place or not – you know as an advisor that the tax authorities will hold the client accountable for it with no quarter given. Examples must be made. You manage risk by staying well clear of the grey areas and having massive indemnities on the advice given. When a client wants to edge closer to the grey its high risk, high reward – but you have a long wait to know if you won or not. In the meantime the client reaps the short term benefits of cash flow. That is what happened at Rangers. They took a big risk knowing that there’s a good chance what they were doing was illegal. Murray made it worth his while by remunerating himself well for being the guy willing to throw the dice and they all knew that by the time the grey settled into a clear black/white division, they’d be on one side of it or the other. If they lost they were all in. It came up black. Illegal.
A lot of people bang on about it being ‘legal at the time’ or ‘cleared as no sporting advantage by LNS’. On the other side of the fence people demand ‘title-stripping’ or ‘retrospective punishment’ and that the players and staff are ‘tax cheats’. To me though, they are all missing the real crux of this.
Morality and the club
Entering into these arrangements is effectively corporate gambling but where the odds are stacked a little in favour of the player not the house. If you play conservatively you go home with the house’s cut. If you play aggressive then you’re a mug. A game of roulette has more to bet on than all you own on red or black. You don’t need to go all in. It’s fiscally irresponsible to do that. It’s morally compromised to do it knowing fine well that there’s about a 50:50 chance what you are doing is illegal and virtually a 100% chance ordinary people would find it repulsive. The board of a company has responsibilities to its shareholders to manage the risks of their investments – is this what they would want? How much of a Messiah-complex would you need to have to walk into that sort of gambit thinking you’ll come out smelling of roses?
Morality and the players
Neither the DOS nor the EBT scheme would have worked without the explicit consent of the person being remunerated to be paid this way and an employer willing to gamble everything they’ve got. The employees take less risk. They know if they lose (it is illegal) that they’ve stepped into territory that society doesn’t accept. They know if they win they’ve got away with something borderline illegal. But all they are really doing in the game is guaranteeing the stake that the employer is gambling. If the employer loses they are all on the hook. The employer has told them he’ll cover their share though. What they don’t know is that the employer has his whole stack on the table already. Does not knowing that make their choices more moral? Seems to me it just makes their losses bigger.
So when we have a go at Eck, Boyd, Cannigia, McCann or any of the others for their participation in the EBT scheme it is not motivated by one-upmanship or bragging rights. It is an accusation that they knowingly morally compromised themselves for money in a way that turned out to be illegal and would have been reprehensible anyway. They also have advisers who know all of this as well as I do. It would have been more moral of them during their contract negotiations to ask for normal payment and if it couldn’t be afforded to a level they were satisfied without potential illegal activity – sign for another club. The sympathy the press gush on this is unfounded and the wilful ignorance of the SFA to it is a blight on the game.
Morality and the SFA
One of the principles of sporting governance is financial fair play. Regulators have a responsibility to make sure clubs are responsibly run. The SFA has presided over decades of financial disasters without doing anything meaningful to adjust the course. Even the UEFA financial fair play rules they seem to see as more of a rule of thumb. That they were ineffectual in preventing this after a number of warm up events is gross negligence. That they’ve done nothing about it since needs a whole new phrase. I’m going with “Aegri Somnia”. This isn’t the place for a discourse on how we’d like to see the game run differently here, but there’s clear guidance out there that the SFA ignore.
“The Scottish FA is firmly committed to the principles of good governance: we ensure that fairness, transparency, equity and integrity are at the heart of all we do.” – SFA website
The SFA has failed utterly in the commitments it makes to us, the football fans.
My role in this
So what of the advisers and accountants that are involved in this? We aren’t playing the game. In the routette analogy we are the croupier. We know the houses rules, we help the players understand the rules and the risks and we let them play. When they win we get bigger tips. If you don’t like gambling, you don’t blame the croupier.
I can tell you that there absolutely are other clubs that use offshore structures to acheive tax advantages. All that I know do it fairly and within the rules of the game and out the grey areas. I’ve worked with some and know of plenty more. Same goes for people in football and their personal wealth. No problem with any of it so long as its above board. Structuring your affairs to minimise the tax burden within the law is fine. Hell, in moving offshore I save myself 20% on all my earnings. I don’t owe the UK anything because I don’t earn there any more. I pay all the tax I’m due to where I am. Money doesn’t have a home jurisdiction. Its best to reside where it works the best for you. International tax treaties are being effective in making sure there is fairness in this (google BEPS) but its a path still being walked.
It barely matters whether the tax avoidance plans used were illegal or not. What matters is the recklessness and moral bankruptcy that allowed all this to happen in the first place. Sure, that they turned out to be illegal might give legs to an argument for unfair advantages (titles won by breaking the law aren’t very sporting after all) but the regulator fell down on their duties so much that all this was allowed to happen on their watch. Remember the banking crisis? When you allow greed, risk taking and financial irresponsibility to go unchecked – and then unpunished when it comes to light – then you’ve really morally compromised sport. From the board table down to the boot room, isn’t that the very essence of sporting competition that the best-man-wins?
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