GUEST BLOG: Rangers – washed up offshore

As they say, football isn’t Scotland’s national sport, it’s much more important than that. Today as Scottish Football League clubs gather at Hampden for a vote on whether New Rangers should play First Division or Third next season, Brian Smith (@Einveldi on Twitter), a Glaswegian now living in Edinburgh, blogs here about the pay, taxes, and corruption off the pitch.

Taken at face value, the business case for a successful Rangers F.C. is compelling. 46,000 punters paying between £23 and £42 for a ticket 20 or more times a season. The lion’s share of a £16m-per-year television contract. A place in the lucrative Champions League almost guaranteed due to lack of domestic competitiveness. Sponsorship deals. Manufacturing deals. Replica kit sales. Lunchboxes, bedspreads and alarm clocks bearing the Rangers logo.

Rangers FC beanie bear Rangers FC lunchbox Rangers FC duvet set Rangers FC alarm clock

All of these figures seem impressive but all pale in comparison to the expansion of finances in the English Premier League.

Against a vastly more successful set-up down south (complete with oligarchs and sheikhs propping them up) Rangers tried and struggled to keep up. In order to keep their most talented players, Rangers resorted to paying them English Premiership-type wages.

The finer details of footballers’ contracts are tricky to obtain or decipher but the notoriously detailed fan-researched Football Manager games by Sports Interactive (SI) suggest that even in 2009, when Rangers’ financial situation was becoming increasingly precarious, it was paying at least three members of its playing squad in excess of £25,000 a week.

You have to stop and think about just how much money that is. £25,000 a week is £1.3 million per year, pre-tax. In addition to that, like for any employee Rangers F.C. make a National Insurance contribution on their behalf – in this case, it calculates to £3,430 per week, or an effective increase of payment for that player’s employment of 13.7%. A playing staff of approximately 25 senior players will cost, at an average of £11,000 per week according to SI’s figures, is a wage bill of £14.3 million per year and an accompanying NI bill of, according to this crude calculation, almost £2 million.

That’s not even including the costs of junior players, non-playing staff, boardroom and executive pay.

Offshore accounts – tax free “solution”

It doesn’t take an accountant to work out that this is unsustainable. It does take one to implement the solution that they hoped would make the majority of that tax bill disappear; organising payment not as wages into players’ accounts, but as Employee Benefit Trusts (EBTs) into a pot located in an offshore account.

Simply put, instead of paying that employee their wages on payday and repaying the appropriate tax on it, a contractually-agreed large portion of that payment is instead sent to the EBT account, abroad where it accrues no tax or NI. It is legally (in so much that it is barely legal at all) considered a tax-free “loan” from the employee to the fund. At a later date, usually some years in arrears, it finds its way back into the employee’s pocket when the “loan” matures.

As far as Rangers were concerned, they weren’t paying their players this money at all; therefore it was not taxable. The trouble is that HMRC, unsurprisingly, disagreed.

Because the EBTs are enforced by way of the employment contract (one player, Jean Alain Boumsong, objected to the terms to such a degree he almost refused to sign it), the tax authorities consider it part of that employee’s salary, to be taxable at the normal rates of basic pay.

HMRC’s decision to confront EBTs head on was the start of Rangers’ problems. The March 2011 Finance Bill not only outlawed them, but worked on the assumption that they were always illegal and provided a framework for HMRC to open litigation against its users for lost tax and subsequent penalties.

£47.65 million

By this time, Rangers’ EBTs had operated for at least nine years and the trust’s total sum was a staggering £47.65 million, spread across 111 employees ranging from the club’s long-time chairman, David Murray, to former managers and players, including Graeme Souness whose EBT matured some ten years after he left the club’s employment.

Even with the EBTs hiding away potential deficits in an Enron-like display of creative accounting, Rangers were struggling financially, had all but stopped expending capital on new players, and were being chased by Lloyds TSB for loan payments to the tune of tens of millions.

David Murray could cope no longer (in reality he had been trying to get out for years and was being pressured behind the scenes from Lloyds TSB) and passed over the reins to Craig Whyte, who mistakenly (astonishingly, perhaps) believed he could win the tax case and validate the EBTs. Whyte himself was far from a squeaky-clean character; he hid the fact he was disqualifed from being a company director; this was aired amongst other allegations in an October 2011 BBC documentary.

One of his first acts as Rangers chairman was to finance the Lloyds TSB repayments by mortgaging four years of future ticket sales to a company called Ticketus for some £23.5 million; in essence, paying for his takeover of the club by charging, to the club itself, the proceedings of one of its primary revenue streams.

Despite promising to invest £25 million in Rangers over 5 years, he instead plundered its own revenues to fund improvements from the playing staff down to refurbishing the kitchens.

Valentine’s Day Administration

With the money running out, and HMRC baying for blood at the Edinburgh Court of Session, Rangers were finally placed in administration on 14 February, by which time it was running annual losses of £10 million and facing a £75 million bill from HMRC were it to lose the so-called “big tax case”. As the web of accounting lies continued to unravel over the upcoming months, the figure owed fluctuated between £49 million and a preposterous £140 million.

Rangers’ only hope was to propose a Compulsary Voluntary Agreement and have the creditors – all 276 of them – accept an offer of around 9p in the pound for their debts owed. HMRC would get less than £7 million of its £75 million.

Having fought tooth-and-nail to make an example of English club Portsmouth for less than £2 million, it was never going to accept the terms and duly vetoed the CVA. Ergo, Rangers enter liquidation. Only at this point – about ten years too late – do the football authorities grow a conscience, refusing to readmit a “newco” Rangers to the SPL despite the fact that it hamstrings their potential revenue for years to come.

But before today’s meeting Stewart Regan, chief executive of the Scottish Football Association said:

“The economic impact and social unrest are all things that could result as an impact of having no Rangers. That matter will be considered next week by the Scottish Football League and, hopefully, there’ll be an outcome whereby Rangers will be accepted into Division One of the SFL; which would allow some financial stability for clubs in the country.”

Could bankruptcy have been avoided?

Sadly, it could all have been so easily avoided. It was well known HMRC were on the case of dodgy accounting in football; Portsmouth had been a very high-profile case two years ago. They were one of 25 clubs in England and Scotland served with winding up orders in 2010 and 2011. Almost all reached settlements without the need for administration or CVAs.

Another Premier League club, Gretna, had been wound up in 2010 after living outwith their means with regards to player wages. Motherwell, Livingston and Dundee (twice) have all spent time in adminstration in the 21st century. Scottish football has been hanging on to the coat-tails of the expansion of wages in England, but without the crowds and the TV deals, it simply can’t keep up, and should never have tried to. No club is too big to fail. There’s only one club as big in Scotland – and they nearly died in 1994:

With his transatlantic accent that blurs the distinction between Scottish brogue and Montreal twang, he castigated the secretiveness with which debts had spiraled and the bank that had allowed receivership to become such a pressing option.

But McCann made a promise that was sweeter than bagpipe music to the ears of the eastern half of Glasgow. “I can now tell the fans that the club is safe,” he announced. “We have been able to resolve the critical short-term financing at Celtic, and shortly will be able to discuss long-term packaging.”

Football is a money game now

Football, like any sport, is a money game now, and with these levels of money comes corruption. Everything that Rangers did wrong has been done wrong somewhere else too.

The richest football club in the world (by annual revenues), Manchester United, were purchased in 2005 by US businessman Malcolm Glazer using payment-in-kind loans, secured not against Glazer’s business but against the club being purchased. EBTs have been at the centre of a number of high-profile tax cases, including the recent case of comedian Jimmy Carr. Sadly there are even more creative accounting methods used for tax avoidance out there.

There is the thorny issue of image rights, where a player’s face and television appearances – often carefully controlled in employment contracts – are legally treated as an asset and traded to a company in the player’s name, making them liable only for 28% corporation tax instead of 50% 45% income tax and NI.

Equally thorny and infinitely more shady is the world of player agents, who take massive cuts of transfer fees in return for seeing their client receive a new, more lucrative contract at another club. Some £71.9 million disappeared from the English Premiership alone in a 12 month period ending September 2011; it was claimed in a high-profile BBC documentary that much of this figure was passed under the table as “bungs”.

One of the sport’s most popular figures, Harry Redknapp, faced two separate tax cases regarding underhand payments from his chairman Milan Mandaric into a Monaco account named after his pet dog. He was also getting percentage cuts of transfer fees giving him a financial incentive to trade his own players on the open market.

And it’s not like the game’s governing body is white-as-white either.

Wages are continuing to increase across the game, even though there is some light at the end of the tunnel in the form of financial fair play rules at lower levels. The payment to the highest-paid player in the world increased from £16 million a year in 2007 to £27.5 million a year for 2011. So as in any free market system the desire to maximise profit will overtake fairness and legality.

And we all know how good an idea that is.

John in Mirfield (BBC Sports Live, 12:08 today):

“As a Rangers fan we should be asking The SFL to be included ONLY in Division 3 and then we would become part of the new found Sporting Integrity ‘Spring’ that has suddenly evolved in Scottish Football! Tell them that we want Div 3 for our own integrity! Footnote to all of the other clubs: be careful what you wish for because it might just happen!”

Update, after the SFL voted New Rangers to the Third Division, @RangersTaxCase:

There is a now a golden opportunity for creative minds to remake the game. Instead, we have intellectual pygmies telling us that everything in Scottish football is fantastic and must be saved at all costs. What is worth saving? Declining attendances? A terrible set of TV contracts that do not realise the full value of the Scottish game? A national team that cannot qualify for any international competitions? We have a game that is viewed with universal contempt for both its lack of technical quality and the lopsidedness of its top division. This is where our game finds itself almost three decades after the “Souness Revolution” started at Rangers. The false economies started by David Holmes, and placed on steroids by David Murray, eventually devastated all around it. Rangers embodied the ideas that financial might made right and reckless spending was the key to success. Their demise should be a cautionary tale to others to get their house in order. Instead, the Scottish football establishment wants to send the signal that if you are going to fail, make sure you do it on a spectacular scale: we will make everyone else carry you if it goes wrong. – The Last Drink in the Last Chance Saloon

Update, 3rd August: Dundee are now officially members of the Scottish Premier League: The 12 members clubs unanimously approved the transfer of Rangers’ SPL share to the club which finished second in Division One last season. Dundee were invited to take the Ibrox club’s place on 16 July after their new owners’ failure to avoid liquidation. But the SPL had to wait until now to ratify the decision.

Update, 5th August: Gerry Hassan writes “The Wave of Democratic Protest that Changed Scottish Football will Change Society“:

We have now seen something stupendous and yet already the football authorities are attempting to engage in restoration of the old order. They are looking at league reconstruction this year to aid getting Rangers back into the SPL as early as possible.

More damning is that they are actively trying to conserve the old failed ways. Football has become infected by the short-term, massive debt and an addiction to Sky TV money which is related to the unsustainable bubble of the economy. Scottish clubs for the last decade have spent more than they could, binged on expensive second-rate imports, and ignored community and youth development. And yet this is the model the authorities and most of the teams are desperate to keep on the road.

Update, 11th September

From STV Sport:

Nine Scottish Premier League clubs, and Rangers, have received a slice of a €100m payout by UEFA for their contributions to Euro 2012.

Celtic will receive the most, €568,226 (£453,325), after having both Mikael Lustig and Georgios Samaras involved in the final tournament. Rangers meanwhile will receive the second highest payment, netting €339,623 (£270,948).

No Rangers players played EURO 2012 matches, only qualification matches, so all monies should be payable to the oldco.

The money paid out by UEFA relates to players released for qualification matches played between 3 September 2010 and 11 October 2011 (248 matches at the lower rate) and UEFA EURO 2012 matches played between 8 June 2012 and 1 July 2012 (31 matches at the higher rate).

The player registrations were held by Rangers F.C. (the oldco) until late on 14 June 2012, at which point they were purchased by Sevco 5088 (the legal name of the newco), during EURO 2012. Since no then-Rangers players participated at UEFA EURO 2012 – Nikica Jelavic having left the club on 31 January 2012 – no money will be paid to the newco.

Update, 24th September

Tom English in the Scotsman :

The bottom line in the EBT case is that we need a conclusion, not the kind of half-arsed solution that the SFA and SPL were shovelling at Rangers. As a football nation, we need to know what happened, when it happened, how it happened and whether it was dodgy or not. We need to know if there is substance to the world of rumour. We need to know precisely how Rangers applied their EBTs and precisely what they did or didn’t do with the double contracts.

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Filed under Guest Blog, Scottish Culture, Tax Avoidance

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