A new investigation has revealed that six of Formula One’s ten teams are state-funded as the British government has handed $146.2 million (£112.2 million) of public money to them since 2012.
The investigation, which was carried out by this author for Britain’s Daily Telegraph newspaper, reveals that the auto racing teams received the money under a scheme which is perfectly suited to them.
The payments were made by the British government’s Research and Development Expenditure Credit (RDEC) scheme which rewards companies making technological advancements. It is designed to reduce their tax bill but if they have no tax to pay, the government gives them cash.
It is a winning formula for F1 teams as investment in research and development fuels their success and they have business models which drive heavy losses so they pay little tax as we have reported.
F1’s rules stipulate that every team must be what is known as a constructor which means that it must design and manufacture certain key parts of its cars including the chassis. It means that each team’s cars are unique which distinguishes them from the standard ones used by many other auto racing series. This has led to F1 team costs accelerating as the more they invest in their cars, the greater their chance of success.
Testimony to this, the teams’ average costs have increased by 33.7% to $204.1 million over the five years to 2016. It has dented their bottom lines as profit isn’t the yardstick of success for F1 teams as it is for most businesses.
Instead the teams judge their performance on racing results and tend to spend all of their revenue in a bid for victory. Some even spend more money than they receive with the difference usually covered by debt or the team owners. It explains why the teams’ financial statements show that they made combined net losses of $111.8 million in 2016 as we revealed.
Few individuals would lead their lives in a way which involves spending all the income they receive and then getting loans just to spend more. However, F1 teams actually benefit from doing this in Britain thanks to the RDEC.
The scheme was launched by Britain’s tax authority, H.M. Revenue & Customs (HMRC), in 2000 and was initially only open to companies in the Small and Medium-sized Enterprise (SME) segment. Two years later it was extended to large companies and the RDEC was launched for them in 2013.
The limit for being categorised as an SME is having 500 staff and as most F1 teams have more than this they can apply for the RDEC. It refunds companies up to 12% of their spending on research and development and gives the teams a valuable boost.
Since 2012, six F1 teams based in Britain have received research and development tax credits and although the full list wasn’t disclosed by the Telegraph, it can be seen below. It shows that the leader of the pack is Force India as it received $67.2 million (£51.6 million) according to its financial statements. This helped to boost the team’s performance from seventh in 2012 to fourth last year.
In July Force India crashed into Chapter 11 bankruptcy after being starved of funding by its owners, troubled Indian tycoons Subrata Roy and Vijay Mallya who is fighting extradition from Britain to his home country on fraud and money laundering charges. The team was saved last month when its assets were bought by a consortium led by Lawrence Stroll who helped to develop the Tommy Hilfiger fashion brand and is worth $2.7 billion according to Forbes.
A spokesperson for the team said that it has always complied with the tax laws and will continue to do so. “Year on year Force India has spent a greater proportion of its entire budget on R&D, which was illustrated by its on track performance. This explains the fact that the team received the largest R&D tax credit.”
There is nothing improper or illegal about F1 teams receiving the payments. In fact, it is completely endorsed by the government and this has sent sparks flying.
“It is outrageous that these teams and this industry, owned by billionaires and multinational companies, are receiving these generous handouts from the public purse,” says Margaret Hodge, a senior and highly respected British politician who heads a cross-party group focusing on responsible taxation.
She adds that Britain’s Chancellor of the Exchequer – the country’s Treasury Secretary – “will soon present his next Budget and he should use the opportunity to reform RDEC so that it can’t be used as another scheme for already successful and wealthy business people.”
This is perhaps the most pertinent point because people generally associate public funding of sports teams with amateur athletes who lack support, not outfits owned by billionaires and multinational organizations.
Most state funded sports teams are ones which represent their home country in international tournaments like the Olympic Games. The RDEC payments don’t put the F1 outfits on the same footing as they have to apply through a scheme, along with other eligible businesses, whereas national sports teams are often funded as a matter of course. Nevertheless, it is still public money which is being paid to professional sports teams with high net worth owners.
It seems particularly strange that the British government is happy for the teams to receive public money but has repeatedly resisted opportunities to fund the country’s flagship F1 race. As a result of this, the British Grand Prix has had to cut short its contract and next year’s race is set to be the last. We understand that $17 million (£13 million) would have kept it on track so it might have avoided the pits if only five of the teams had each given it just $600,000 of their public money every year since 2012. It could be argued that the race needed it more than the teams.
There is no doubt the F1 teams drive employment with the latest figures showing that they have total staff of 3,951 in Britain. However, it seems unlikely that they would cut staff, or that their research and development expenditure would reverse, if they were excluded from the RDEC as happened with universities in 2015. F1 teams need the staff to run their operations and need to do the research and development to compete. Likewise, it is highly unlikely that they would move outside Britain due to the upheaval it would cause.
The teams essentially receive the funding as a consequence of carrying out their normal course of business and this makes Britain an ideal target for new F1 outfits which drives employment. Over the past decade four new teams have joined F1 with three based in Britain. Two of them have since gone bust leaving only Haas, F1’s newest team.
Haas launched in 2016 and has an operation in Britain but, as we recently reported, a lot of the design work on its cars is done by the Italian company Dallara. Accordingly, the British outfit simply provides F1 team support services to its Kannapolis, NC parent. It has kept Haas’ research and development spending in the slow lane but also means it doesn’t get RDEC payments. Like all F1 team-owners, Haas has deep pockets regardless as it is owned by American tycoon Gene Haas whose engineering business has annual revenue of more than $1 billion.
Hodge has urged the government to take a closer look when RDEC payments are handed to companies with wealthy owners. “HMRC’s failure to aggressively pursue and challenge such companies is deeply depressing,” she says.
In her former role as chair of Britain’s public accounts committee Hodge was one of the fiercest critics of tax avoidance by companies such as Starbucks, Google and Amazon. Last year she also grilled the Chancellor about the details of deals done by HMRC which allow companies like F1 to legally use interest on internal loans to reduce their tax bills.
It raced into the spotlight when British television broadcaster ITV News revealed that in 2015 F1 paid $6.8 million (£5.2 million) of corporation tax on Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) of $485.1 million (£372.3 million). This gave F1 a rate of less than 1% and although it doubled in 2016 its tax bill still only came to $9 million (£6.9 million) on EBITDA of $456 million (£350 million).
F1 is ultimately owned by investment firm Liberty Media which is listed on the Nasdaq with the ticker FWONK. However, the company which owns F1’s valuable commercial rights is registered in London so it pays tax in Britain on its EBITDA. However, in April ITV News revealed that instead of paying corporation tax at the standard rate of 19%, Liberty’s chief financial officer Mark Carleton said in “2017 cash taxes for F1 were approximately 2% of UK EBITDA due to the occurrence of some one-time items and charges.” He added that “in 2018 we are expecting a mid to high single digit effective cash tax rate on UK EBITDA.”
It fuelled Hodge’s ire and she told the Telegraph that in 2016 “we discovered that Formula 1 paid a meagre £5.2 million in corporation tax on a massive £372.3 million profit in 2015. Now we find out that F1 teams are receiving more than £100 million in public money.” Time will tell whether HMRC curbs the payments and a spokesperson said that it “does not comment on identifiable individuals or businesses.”