Why tax case casts long shadow over Rangers and beyond

CASH flow issues, a tax tribunal and questions over funding sources have given rise to all manner of conjecture over the future of Rangers under Craig Whyte. Here we look at the three possible outcomes. None of them offers much comfort to followers of the Ibrox club.

Scenario 1. Rangers win tax tribunal over the use of employee benefits trusts (EBTs) and manage their cashflow successfully.

This is the best possible scenario but would depend on so many elements coming together in Whyte’s favour. In the recently concluded tribunal, which is expected to produce a decision in the next three weeks, HMRC’s case centred on there being documentary evidence the Ibrox club operated their EBTs in a manner that modified the scheme from being about tax avoidance to tax evasion. Instead of EBTs being paid on a discretionary basis, as would prevent them being subject to PAYE or NIC, they are understood to have been written into the regular salaries of players, and officials. That could leave Rangers subject to unpaid taxes of up to £35 million, plus penalties in the region of £14m.

However, even before this potential tax bomb has hit, Rangers have appeared to be running into problems with creditors. “It never looks good for a company when they starting delaying to the last minute all transactions and [it] suggests underlying issues with their cost base that might only be resolved by administration,” said one insolvency expert.

Those who want to believe Whyte has a cunning plan have suggested his determination to take in money – whether that be from transfers or his controversial securitisation of future season ticket sales – is a sign he is attempting to hunker down and weather the financial storm caused by the need to plug a £10m hole in annual funding of the club.

Consequences

Even in the unlikely event administration could be staved off, Whyte would still require to embark on a painful period of cost-cutting that would inevitably diminish Rangers’ on-field competitiveness.

Scenario 2. Rangers lose tax tribunal but are ordered to pay only around £15m and enter administration.

Ibrox sources, perhaps thinking wishfully, have been saying privately that the amount they may need to pay back to HMRC might be closer to £15m than £49m. “These tribunals take so long because there are such complexities about how the rules were, or should have been, interpreted on such schemes,” said the insolvency expert. “There won’t necessarily be a blanket decision that says all Rangers EBTs were ‘bad’, or alternatively that Rangers didn’t underpay any taxes. They could well win on some points and lose on others, so how much the final sum due might be could vary greatly. And the matter of calculating penalties is notoriously difficult.”

Whyte has talked about the need for Rangers to start afresh. Even a lesser tax bill would require him to stem the club’s haemorrhaging of money because even £15m is a sum that could trigger administration. The Ibrox hierarchy is said to have been preparing for that eventuality for some time. “Administration allows you to freeze your liabilities and gives you a time period to take stock and work out how you move forward,” the insolvency expert said.

In his takeover, Whyte essentially bought Rangers’ £18m debt from Lloyds and parked it in his company, then called Wavetower but now The Rangers FC Group Ltd. By doing so, he secured himself the position of preferred creditor status in the event of bankruptcy.

That can only be a chip to play if supportive creditors cover 75 per cent of Rangers’ liabilities. To come out of administration to satisfy the football authorities, a Company Voluntary Arrangement (CVA) would have to be obtained. That is when creditors agree to take a pence-in-the-pound portion of what they are owed. HMRC has a policy to vote against CVAs, so debts owed to those who would vote for a CVA would have to be three times what HMRC were owed. This becomes complicated by the £24m owed to Ticketus, which Whyte says has been underwritten by another of his companies. “It is impossible to know how all this could pan out for Rangers but exiting administration could be the real difficulty for them,” the insolvency expert said.

Consequences

As well as cuts even more savage than those outlined in the first case, Rangers would automatically be docked ten points from the Scottish Premier League. It is unlikely they could meet the SFA licensing criteria and so they could not compete in Europe next year.

Scenario 3. Rangers lose the tax tribunal and face a bill in the region of £49m and go down the pre-pack administration route.

If HMRC becomes Rangers’ main creditor to the tune of £49m, the club as we know it are frankly stuffed. The only end game then would be their liquidation. They can, though, strike pre-emptively. Before liquidation becomes reality Whyte can effectively agree to transfer all assets – players, stadium and training ground – from Rangers FC to The Rangers FC Group Ltd and form a ‘new-co’ or phoenix company. Creditors can whistle.

“I see this as the most likely outcome,” said the insolvency expert. “It is perfectly legal, but brutal and so often the poor tax payers are the losers. However, thousands of companies carry out pre-pack administrations each year.”

Consequence

Cataclysmic for the entire Scottish game, potentially. It would be unprecedented for a football club in Scotland to take the new-co path. It is expected Rangers would do it quickly if they thought they were out of the league race, negating the impact of a ten-point penalty. Assets can be transferred in a matter of days and if Rangers made the move this season, the insolvency expert says it would present the SPL with a major headache. “Rangers could risk doing the pre-pack without knowing for sure the SPL would allow them to transfer their league share from the ‘old’ Rangers to the ‘new’ Rangers. They could risk it because if the league didn’t, the whole season would be destroyed, with all results involving Rangers having to be wiped or become 3-0 defeats and TV and sponsors deals having to be recalculated. It would be a nightmare, and to know just how much the SPL would want to avoid it, look at their efforts to keep Gretna going to the final day of the season four years ago,” said the insolvency expert.

It is a decision for the six-strong SPL board “on which basis the transfer of a league share” is allowed. Even if there are no set rules governing a new-co, by rights a new Rangers should apply for SFA and SFL membership and join the Third Division. Yet there is an inter-dependency among SPL clubs, and a reliance on the four Old Firm games per season believed to be worth 30 per cent of central revenues. It is so great that the SPL board would be unlikely to destabilise the league by preventing the new Rangers taking the place of the current club.

However, to prevent other SPL clubs following this Whyte blueprint, sanctions beyond the ten-point penalty would have to be placed on the phoenix company. It has been suggested that Celtic would press for the new Rangers to be docked 15 points for the next three seasons. That probably would still allow the Ibrox club to claim second place. Therefore, other clubs would demand central monies being distributed more evenly.

In addition, the new Rangers would be prevented from playing European football for three years by UEFA, which has strict rules on new-cos, to stop clubs benefiting from the ‘financial doping’ that has become a crusade for president Michel Platini.

“It couldn’t be just a ten-point penalty for a new-co because if Rangers lose the tax case it will amount to them playing players they couldn’t afford and costing Celtic titles and other clubs television money,” the insolvency expert said. “Yet even ten points for the first season and 15 points for the three following seasons is unlikely to stop other clubs looking to clean up their balance sheets, and maybe that is no bad thing.” Hearts, for one, could follow suit, and who knows beyond that.