32 replies to this topic

[Wiggy]

Just watching FP1 and there was some chat about George Osborne being in the McLaren garage... And they mentioned that McLaren had managed to use their £100million fine as a 'business expense' to lower their tax bill... Clever accounting and basically negates the fine doesn't it?

Always wondered how they managed to shoulder such a big 'one time' hit.

[george1981]

I had heard the exact opposite. They had tried to use the $100m fine to offset against tax but weren't allowed to.

http://www.f1times.c...s/display/09000

It's debateable whether the fine could be offset against tax. If McLaren had injured someone and had to pay $5m as compensation, then I believe that could be offset against tax.

From what I recall at the time the fine was applied differently to how you might expect. McLaren's prize money (~$50m) was deducted at source and the remaining ~$50m was paid was a cash fine. That could have an impact on how much tax relief they could claim as McLaren would have to argue how much the fine was.

[DriveFastLiveSlow]

Depends on the tax rate. They might save 20-30 million.

[ionutf1fan]

I don't know were he got this information, because I think it's exactly the oposite:

http://uk.reuters.co...N0OZ3MA20140618

 

And anyway, even if this could have been recorded as a deductible expense to lower the tax bill, this doesn't mean that the reduction in the tax bill would have been equal with the amount of the fine, but probable something like 20%. Someone with a better understanding of UK law could be more exact.

[smitten]

Depends on the tax rate. They might save 20-30 million.

 

Depends on the tax rate.  They might be fined 70-80 million.

 

They aren't "saving" anything, they are offsetting one thing against another and it is still costing them money.  And offsetting against tax only works if you are making a profit anyway....

[Maustinsj]

They didn't get tax relief at all.

"Offset against tax" isn't really a correct description. "Offset against profits", more like it.

Your tax bill is paid on your profit. As mentioned above, your tax bill would be lower if the fine were allowable - ie $100m x tax rate in force.

You'd still be worse off than of you hadn't been fined though.

[Risil]

Surely the fine was the cost of doing business with Max Mosley when Max Mosley doesn't like you

[F1matt]

The fine was deducted from the company's tax bill, they took it to court as it had never been done before as it was a professional fine as opposed to a cheating or criminal fine. The details will be on the net somewhere, the fine wasn't even that much in the end, sure it was less than £30 million over so many years??????

[Maustinsj]

Tax relief is different to "deducted from your tax bill".

Expenses are NEVER deducted from your tax bill. They are deducted from your PROFIT, on which you pay tax.

Edited by Maustinsj, 05 July 2014 - 12:49.

[Force Ten]

The net sum they finally had to cough up was something as ridiculously low as 8 millions or so.

[Brother Fox]

Tax relief is different to "deducted from your tax bill".

Expenses are NEVER deducted from your tax bill. They are deducted from your PROFIT, on which you pay tax.

 

It seems people wont listen to that fact. I guess made up story that 100m came off their tax bill sounds much cooler.

[george1981]

Tax relief is different to "deducted from your tax bill".

Expenses are NEVER deducted from your tax bill. They are deducted from your PROFIT, on which you pay tax.

 

As you say expenses are never directly deducted from a companies tax bill. The difference between revenue and costs is the profit on which the tax is calculated. People commonly use the term offset against tax, meaning offset against revenue/profit on which the tax is calculated. I don't know what year McLaren are trying to claim for but corporation tax has been around 20-25% for the last few years. So a $100m fine if it were allowed to be offset against the profits would save $20m-25m in tax, thereby costing McLaren $75m-80m.

It's more complicated because McLaren's fine was in the form of a loss of prize money (loss of revenue) and a cash fine (cost). It's not clear on which parts McLaren tried to claim tax relief.

[Ferrari2183]

Where I hail from the expense would be written back on the tax computation. Meaning no tax benefit would have been derived from said transactions.

Highly doubt it would be deductible in the UK.

[jjcale]

Surely the fine was the cost of doing business with Max Mosley when Max Mosley doesn't like you

 

That was pretty much Macca's argument .... 

[Ferrari2183]

As you say expenses are never directly deducted from a companies tax bill. The difference between revenue and costs is the profit on which the tax is calculated. People commonly use the term offset against tax, meaning offset against revenue/profit on which the tax is calculated. I don't know what year McLaren are trying to claim for but corporation tax has been around 20-25% for the last few years. So a $100m fine if it were allowed to be offset against the profits would save $20m-25m in tax, thereby costing McLaren $75m-80m.
It's more complicated because McLaren's fine was in the form of a loss of prize money (loss of revenue) and a cash fine (cost). It's not clear on which parts McLaren tried to claim tax relief.

It would depend on the accounting treatment of the transaction. I very much doubt that the tax authorities would allow that to slip.

It is my opinion that they'd have to account for all the prize money so the entry would like something like this.

Cr Revenue 100,000,000
Dr Fines and penalties 80,000,000
Dr Bank 20,000,000 (which would be their payment net of the fine)

That 80,000,000 would then be added back on the tax computation

Net Profit as per SOCI 10,000,000 (made up amount for eg purposes)

Permanent differences
Add: Fines and penalties 80,000,000

Total taxable income = 90,000,000

Hence tax would be paid on 90,000,000 instead of 10,000,000.

Edit: The legal fees they incurred regarding the matter would be tax deductible as it would be seen as taking place in the generation of income.

Edited by Ferrari2183, 05 July 2014 - 14:16.

[New Britain]

It would depend on the accounting treatment of the transaction. I very much doubt that the tax authorities would allow that to slip.

It is my opinion that they'd have to account for all the prize money so the entry would like something like this.

Cr Revenue 100,000,000
Dr Fines and penalties 80,000,000
Dr Bank 20,000,000 (which would be their payment net of the fine)

That 80,000,000 would then be added back on the tax computation

Net Profit as per SOCI 10,000,000 (made up amount for eg purposes)

Permanent differences
Add: Fines and penalties 80,000,000

Total taxable income = 90,000,000

Hence tax would be paid on 90,000,000 instead of 10,000,000.

 

Why would they have to account for prize money that they never received?

[Brother Fox]

There'd be an arguement over whether they earned the money, then the fine came separately

[Ferrari2183]

Why would they have to account for prize money that they never received?

Because they earned 100,000,000 of which 80,000,000 was paid as a fine. You can't make an argument that they only earned 20,000,000 because that is false.

Look at it this way. Let's say you earn 20K gross per annum but of that 20K you pay 5K back to you boss for a loan you took due to some family emergency. You can't now argue that you've only earned 15K. 20K will be used in your tax calculation.

[New Britain]

Because they earned 100,000,000 of which 80,000,000 was paid as a fine. You can't make an argument that they only earned 20,000,000 because that is false.

Look at it this way. Let's say you earn 20K gross per annum but of that 20K you pay 5K back to you boss for a loan you took due to some family emergency. You can't now argue that you've only earned 15K. 20K will be used in your tax calculation.

 

Repayment of loan as per your hypothetical example draws on different principles from the ones underlying the McLaren/HMRC dispute.

 

Having now read the decision (link to pdf via: https://www.accounta...ng-mclaren-fine), it appears that indeed HMRC agreed that the portion of the penalty comprising Constructors' Points money that should have been but was not paid to McLaren ($35.6m) was "lost income" and therefore no tax was owed on that amount.

 

The amount in dispute is, rather, the $100m less the points-money-never-paid, namely a remainder of "$64.5m" (sic), or £32,313,341. The tax owed on that amount, assuming that McLaren's marginal tax rate for 2007 was 30% (and it may not have been exactly that), would have been about £9.6m, to which interest since then would have accrued.

Edited by New Britain, 05 July 2014 - 17:33.

[pingu666]

i remmber on radio le mans there where rumours that macca actually got the money back from the fia or ended up paying way less

that was ages ago though

[New Britain]

i remmber on radio le mans there where rumours that macca actually got the money back from the fia or ended up paying way less

that was ages ago though

 

That would not have been possible (not saying that you did not hear it!), because for last 6 years McLaren have been battling w HMRC to have it count as a valid business expense. They could not have made that argument if the FIA had done a volte face, which in any case was very unlikely considering that Mosley as much as admitted that his aim was to put McLaren out of business, and it was only Bernie's ability to dissuade the majority of the World Motor Sport Council that prevented Mosley from getting his way.

[george1981]

Repayment of loan as per your hypothetical example draws on different principles from the ones underlying the McLaren/HMRC dispute.

 

Having now read the decision (link to pdf via: https://www.accounta...ng-mclaren-fine), it appears that indeed HMRC agreed that the portion of the penalty comprising Constructors' Points money that should have been but was not paid to McLaren ($35.6m) was "lost income" and therefore no tax was owed on that amount.

 

The amount in dispute is, rather, the $100m less the points-money-never-paid, namely a remainder of "$64.5m" (sic), or £32,313,341. The tax owed on that amount, assuming that McLaren's marginal tax rate for 2007 was 30% (and it may not have been exactly that), would have been about £9.6m, to which interest since then would have accrued.

 

Thanks that's interesting. I don't see why HMRC agreed that the constructors prize money was lost income and not taxable but the rest of the fine was taxable. They both originated from the same event and it seemed to be an arbitrary decision by the FIA how the $100m fine was paid. Had the FIA decided to deduct $100m fine over two years of constructors prize money then McLaren would be able to use it to offset tax, because they're profits were lower in those two years. But had the FIA given McLaren the prize money and then fined them the full amount McLaren wouldn't be able to offset any of it against their profits.

[ClubmanGT]

I recommend everyone read the PDF at the link posted a few posts up. There are a few issues - whether McLaren incurred it as part of their trade and the nature of the punishment. 

 

And yes, tax is paid on gross profit less expenses, you don't offset tax with your expenses

[New Britain]

Thanks that's interesting. I don't see why HMRC agreed that the constructors prize money was lost income and not taxable but the rest of the fine was taxable. They both originated from the same event and it seemed to be an arbitrary decision by the FIA how the $100m fine was paid. Had the FIA decided to deduct $100m fine over two years of constructors prize money then McLaren would be able to use it to offset tax, because they're profits were lower in those two years. But had the FIA given McLaren the prize money and then fined them the full amount McLaren wouldn't be able to offset any of it against their profits.

 

It was "lost income" because McLaren never received it, or any consideration in its stead, in the first place.

 

 Construction firms will undertake big projects (airports, naval vessels) for government authorities. It is standard practice in the contracts for these to include penalty clauses such that, if the project is not delivered on time, there will be a reduction in the total payment owed to the construction firm.

In the frequent case that a penalty clause is invoked, such that the firm is paid, say, 5% less than the projected full amount, HMRC does not assert that the firm owes tax on then full 100% that it would have received without the penalty.

 

Not exactly the same thing but, of a similar principle: If your customer falls behind in payments to you, and the deficit crosses the 5th April year, your calculation of income tax owed would not include income that you are owed but have not yet received.

[New Britain]

I recommend everyone read the PDF at the link posted a few posts up. There are a few issues - whether McLaren incurred it as part of their trade and the nature of the punishment. 

 

And yes, tax is paid on gross profit less expenses, you don't offset tax with your expenses

 

An interesting (at least to me) element of the judgment was that the judge appeared to have no particular knowledge of the penalty and its context. Deprived of that insight, he was obliged to accept at face value the official story of why the penalty was imposed.

To the extent that people who followed it at the time, and read all the documentation including the FIA's "Final Report" of I think December '07 (the one that was put together months after McLaren had been fined the $100m, the one in which the FIA made noises about barring McLaren from being allowed to race in '08,  the one that was Mosley's second attempt to put them out of business) are aware, the "official" story of what happened was a fairy tale. One wonders if, had the judge been familiar with that context, the appeal would still have been upheld.

[Collombin]

Not exactly the same thing but, of a similar principle: If your customer falls behind in payments to you, and the deficit crosses the 5th April year, your calculation of income tax owed would not include income that you are owed but have not yet received.

I'm not sure I follow any of this paragraph.

You might mean corporation tax or VAT for your example, but income tax??

If an amount is legally owed (invoiced and the associated service or product has been provided) then the tax is due whether or not the customer has paid yet - unless it gets to over 6 months overdue and has been written off as a bad debt. I'm also unclear as to the relevance of whether it straddles an income tax year or not.

[Ferrari2183]

Thanks that's interesting. I don't see why HMRC agreed that the constructors prize money was lost income and not taxable but the rest of the fine was taxable. They both originated from the same event and it seemed to be an arbitrary decision by the FIA how the $100m fine was paid. Had the FIA decided to deduct $100m fine over two years of constructors prize money then McLaren would be able to use it to offset tax, because they're profits were lower in those two years. But had the FIA given McLaren the prize money and then fined them the full amount McLaren wouldn't be able to offset any of it against their profits.

This is my understanding too. However, we need to read the FIA decision as to just which amount constitutes the fine. Is it by definition the full 100M or was the loss of income defined differently to the fine.

[Ferrari2183]

It was "lost income" because McLaren never received it, or any consideration in its stead, in the first place.

Construction firms will undertake big projects (airports, naval vessels) for government authorities. It is standard practice in the contracts for these to include penalty clauses such that, if the project is not delivered on time, there will be a reduction in the total payment owed to the construction firm.
In the frequent case that a penalty clause is invoked, such that the firm is paid, say, 5% less than the projected full amount, HMRC does not assert that the firm owes tax on then full 100% that it would have received without the penalty.

Not exactly the same thing but, of a similar principle: If your customer falls behind in payments to you, and the deficit crosses the 5th April year, your calculation of income tax owed would not include income that you are owed but have not yet received.

Your construction example is good one but hardly the same thing. As I've said, it would depend on what the FIA defined as fine.

Edit: I read the PDF and the fine is defined as "a sum of USD 100 million (less any sum that would have been payable by Formula One Management Limited on account of McLaren’s results in the 2007 constructors championship had it not been excluded).”

So yes, fine is defined as 100M less "lost income". Which is fair enough.

Also, reading the wording, I accept that "lost income" not be accounted for due to McLaren being excluded from the championship.

And your example regarding the customer depends on the basis of accounting. In South Africa we account for transactions on the accrual basis which means the dates of the transactions are what matter and not when the cash is received. The other basis of accounting is the cash basis where transactions are only accounted for once monies has changed hands.

Edited by Ferrari2183, 05 July 2014 - 23:19.

[New Britain]

Your construction example is good one but hardly the same thing. As I've said, it would depend on what the FIA defined as fine.

And your example regarding the customer depends on the basis of accounting. In South Africa we account for transactions on the accrual basis which means the dates of the transactions are what matter and not when the cash is received. The other basis of accounting is the cash basis where transactions are only accounted for once monies has changed hands.

 

You're correct that I was referring to cash accounting. It has never been obvious to me how, under accrual accounting, if you had only one sale during a year, and had not been paid by your customer within the same tax year as the invoice, nonetheless you would have a tax bill even though through no fault of your own you would have zero funds with which to pay it.

[Ferrari2183]

You're correct that I was referring to cash accounting. It has never been obvious to me how, under accrual accounting, if you had only one sale during a year, and had not been paid by your customer within the same tax year as the invoice, nonetheless you would have a tax bill even though through no fault of your own you would have zero funds with which to pay it.

Should that be the case then you're perfectly within your rights to write the debt off as bad debt which is deductible for tax purposes.

[ClubmanGT]

You're correct that I was referring to cash accounting. It has never been obvious to me how, under accrual accounting, if you had only one sale during a year, and had not been paid by your customer within the same tax year as the invoice, nonetheless you would have a tax bill even though through no fault of your own you would have zero funds with which to pay it.

 

That largely depends on when you count the sale as being made. If you've sold goods on credit, for instance, you haven't been paid but you've usually despatched the goods. 

[Brother Fox]

You're correct that I was referring to cash accounting. It has never been obvious to me how, under accrual accounting, if you had only one sale during a year, and had not been paid by your customer within the same tax year as the invoice, nonetheless you would have a tax bill even though through no fault of your own you would have zero funds with which to pay it.

It's quite simple. The income is recorded in the period it is earned, the payment in actual money is irrelevant.

And I doubt McLaren is running a cash based accounting system

[New Britain]

Edit: I read the PDF and the fine is defined as "a sum of USD 100 million (less any sum that would have been payable by Formula One Management Limited on account of McLaren’s results in the 2007 constructors championship had it not been excluded).”

So yes, fine is defined as 100M less "lost income". Which is fair enough.

Also, reading the wording, I accept that "lost income" not be accounted for due to McLaren being excluded from the championship.
 

 

Okay, now we agree that the "lost income" should not have been taxed. That's the straightforward part, which was not contested by HMRC.

 

The more interesting part IMO is whether the court was right to overturn the lower court's ruling and accept HMRC's position that the penalty was not paid "wholly and exclusively for the purposes of McLaren's trade".