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Tax Intelligence

Formula 1—White Noise around Tax Structure?

Formula 1 receiving a tax refund of circa 180 million pounds earlier this year from the U.K. tax authority could only ever be deemed one thing —a “sweetheart deal.”

It is easy to understand why social justice warriors get hot under the collar when it comes to Formula 1. Multi-million dollar deals with circuit owners and sponsors, drivers residing in tax havens and, of course, private equity-backed leveraged buyouts running into the billions of dollars. Coupled with poor journalism and media coverage verging on the hysterical, there is plenty of ammunition to attack the parties concerned (including the U.K. tax system, which is forever “not fit for purpose”). In this light, F1 receiving a tax refund of circa 180 million pounds earlier this year from HM Revenue & Customs (“HMRC”) could only ever be deemed one thing —a “sweetheart deal.”

There is no doubt that there are vast sums involved and that, over the decades, tax has been an important element of the corporate structure. The acquisition of F1 by private equity house CVC in 2006 for US$2 billion from a trust established by Bernie Ecclestone’s non-domiciled (and now) ex-wife, is enough to get the blood of any campaigner boiling. However, the opprobrium that the recent HMRC 180 million pound settlement was greeted with was simply not justified.  Firstly, like the position of all taxpayers, the details of the agreement between the parties remain confidential and, given the available information, claims that the structure amounts to a sweetheart deal seem unfounded.

The history behind Bernie Ecclestone’s ownership of the commercial rights to F1 is well-documented and has taken many twists and turns over the past 40+ years. The current corporate structure is centered around three companies:


  • SLEC Holdings Limited (“SLEC”);
  • Formula One World Championship Limited (“FOWC”); and
  • Formula One Management Limited (“FOM”)


SLEC is incorporated in Jersey whilst FOWC and FOM are U.K. incorporated and resident. SLEC is the immediate 100 percent parent company of FOWC, which in turn owns 100 percent of FOM.

According to the accounts of FOWC, SLEC acquired the “commercial interests” in the FIA Formula One World Championship (the Championship) in 2001. From January 1, 2011, FOWC became the “commercial rights holder” (taking over from FOM) for a period of 100 years. FOWC’s activity is the exploitation of the commercial rights to the Championship and it achieves this by contracting FOM. This appears to be an OpCo / PropCo structure whereby the rights are licensed from SLEC to FOWC, which then subcontracts the active exploitation of the rights.  This would seem to ensure the rights are ring-fenced from the trading activities of the group.

CVC sold its interest in the Jersey group holding company (Delta TopCo Ltd) on January 17, 2018 to the U.S. group, Liberty Media, whose executives have been vocal in their praise for the tax structure they adopted.  The arrangements between SLEC, FOWC and FOM are not in the public domain, so it is impossible to draw any accurate conclusion as to how this drives the effective tax rate of the group. What we do know is that the operations are funded with debt from outside the UK and that the interest payable is a deductible expense provided the quantum does not fall foul of the UK’s transfer pricing regime and Corporate Interest Restriction regime. CVC is based in Luxembourg and funded the F1  group of companies with a revolving debt facility (as noted in FOWC’s 2016 accounts). Liberty has stepped into the shoes of DeltaTop Co and in doing so inherited a tax structure, at the heart of which was an Advance Thin Capitalisation Agreement (“ATCA”).

ATCAs, like Advance Pricing Agreements (“APAs”), give businesses certainty that their intragroup funding arrangements are in line with the U.K.’s transfer pricing rules (ATCAs falling within the same provisions) and that, importantly, the interest element of such arrangements is fully deductible. HMRC also gain out of such arrangements—they get to understand the nature of the businesses involved and save time and resources. The use of cross-border debt financing clearly contributes to the low effective tax rate of the F1 group, and the negotiation of the ATCA is a key component to this. It has been reported that the current ATCA expired on January 1, 2018. Such arrangements are far from unusual: in any one year, HMRC is likely to agree approximately 200 ATCAs, many of which are at the request of private equity houses. But does agreeing an ATCA amount to tax avoidance?

In our view, the answer is a categoric “no.” The U.K. has made and implemented specific policies to create a corporate tax regime that lends itself beautifully to a global business like F1.  So, what is all the fuss about, other than F1 being an easy target for the ill-informed and wilfully ignorant?

The U.K. Tax System

The U.K.’s rate of corporate tax is currently 19 percent. Despite claims that F1 paid tax at the rate of 2 percent, this is categorically not the case. The 2 percent referred to in the media is the effective tax rate. The profits, not revenue, of the U.K. enterprise will have been taxed at the prevailing rate and it is this tax cost, which, when divided by EBITDA (earnings before interest, taxes, depreciation, and amortization), gives the effective tax rate.

F1 is a global business with revenues generated from Grand Prix circuit owners, broadcasting rights and merchandising. There are approximately 30 companies in the group, of which 13 are in the U.K., including FOWC and FOM. The U.K. has a semi-territorial tax system: since 2011, U.K. resident companies have been able to elect for profits of their foreign branches to be exempt from U.K. taxation. In addition, foreign source dividends have been exempt from U.K. tax since 2009. It is quite possible that the F1 group of companies make use of these features of the U.K. tax system; indeed, they and their advisers would be remiss if they did not.

The F1 group is ultimately owned by foreign investors that have and will likely continue to fund it using non-U.K. capital in the form of leverage finance (shareholder debt or at least related party loans). There is nothing sinister about this—if the group did not fund the business using organic capital then presumably third party finance would be available. Either way, the owners have a choice to fund using debt, equity or a combination of the two. From a policy perspective there is clearly a balancing act to be had, hence the restrictions in place under domestic U.K. law to prevent abuse.  However, unlike equity, the debt will carry an interest charge that is deductible against the U.K. taxable profits.

The U.K. has various anti-avoidance measures to prevent excessive use of debt, such as transfer pricing (“TP”) regulations and corporate interest restriction rules. Compliance with the TP rules is addressed by virtue of the ATCA. The corporate interest restriction rules, which replaced the global debt cap provisions, are likely the reason why the F1 group ETR may now increase. With effect from April 1, 2017, a new corporate interest restriction (“CIR”) regime disallowed interest-like expenses to the extent that the net tax-interest expense for U.K. companies (broadly, finance charges taken from the U.K. tax computations) exceeds the interest capacity.  The interest capacity is based on a percentage of tax-EBITDA or, if lower, a modified debt cap limit, but is always at least 2 million pounds.

The Refund

Finally, there is the issue of the tax refund of 180 million pounds. Is this a sweetheart deal? Is it the smoking gun of tax avoidance? A resounding NO, on both counts. The refund presumably relates to an adjustment of the rate of interest applied to the financing costs over a number of years. It is simply the taxpayer and HMRC reaching an agreement as to the correct amount of tax payable under the prevailing laws.


The tax affairs of F1 and Liberty Media, are private and rightly so. HMRC are under no obligation to disclose the agreement they have reached with F1.  The reality is that F1 and Liberty Media are easy targets.  They, like numerous other economically literate global businesses, treat tax as a business cost and do what they can to reduce the effective rate within the bounds of the law—namely debt funding and transfer pricing.  The U.K. tax regime lends itself on various levels to businesses like F1 and whilst the U.K. loses out on corporate tax receipts, it wins significantly due to the numbers of people employed in the U.K. and the income tax, social security contributions and VAT receipts generated as a result (not to mention the economic upsides).

Is the F1 arrangement evidence of tax avoidance? The only evidence is that F1 has structured itself to avail of the U.K.’s semi-territorial tax system and advance clearance procedures, that it is a global business and that it is funded with debt.

This article was published in Bloomberg BNA

Reproduced with permission from Copyright 2018 The Bureau of National Affairs, Inc. (800-372-1033)


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May 16, 2018

Miles Dean

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Miles is a founder of Milestone having started his career in international tax in 1994.

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