28/04/2014
NEWS STORY
An investigation by the BBC has apparently revealed that Formula One boss Bernie Ecclestone "has avoided a potential £1.2bn tax bill as a result of a secret deal with HMRC," the UK's tax authority. However, in fact this doesn't seem to be the case according to in an article in Forbes magazine written by Christian Sylt.
Given the fact that Ecclestone's family have amassed more than £2.4bn ($4bn) from F1 it is no surprise that they have been investigated by HMRC over the years. The BBC report is about the channel's current affairs programme Panorama which is tonight due to broadcast an episode devoted to Ecclestone.
The programme claims that HMRC "spent nine years investigating the Ecclestone family's tax affairs before offering to settle in return for the payment from the family trusts in 2008." It quotes one of the lawyers who helped run the Ecclestone family trusts, Frederique Flournoy, who says that "in summer 2008, the Inland Revenue offered to conclude the matter if we paid £10m. We decided to pay up."
Panorama draws the conclusion that as a result of this allegedly secret deal, Ecclestone "avoided a potential £1.2bn tax bill." The first point made by the Forbes article is that the deal was far from secret. In fact, it was revealed in the most public of places, a court room.
Last year Ecclestone was sued in London's High Court by German media rights firm Constantin Medien which claimed that it lost out when F1 was sold to its current owner the private equity firm CVC in 2006. Constantin claimed that Ecclestone and his family's Bambino trust paid a £26.2m bribe to steer the sale to CVC. The recipient of the money was Gerhard Gribkowsky, the banker in charge of the sale, and Constantin believed that CVC was Ecclestone's preferred buyer as it had agreed to retain him as the boss of F1.
Constantin claimed that if the sale to CVC had not been engineered then other buyers would have come forward and offered more than the £1.2bn paid by CVC. Constantin had an agreement to get a share of the proceeds which is why it claimed to have lost out as a result of the alleged bribe.
The verdict did not go in Constantin's favour, as the judge ruled that, in fact, it did not suffer any loss, but the case gave a great deal of insight into Ecclestone's finances. As the following transcript shows, under testimony on 6 November 2013 Ecclestone confirmed that he had been investigated by HMRC from 1999 to March 2006 and that it had also investigated his ex-wife Slavica from the end of 1999 to March 2008. Philip Marshall, QC for Constantin, put it to Ecclestone that Slavica "ended up with a settlement where she paid GBP 10 million. Do you remember that?" He replied "yes. And she reminded me of it."
So, according to the court transcript, in addition to the £10m deal not being secret it was also not made by the trust but by Ecclestone's ex-wife Slavica. These two points seem to contradict the BBC's report but you might say that they are no big deal. You might be right but you would be hard pressed to say the same about the third point.
The BBC report claims that as a result of the £10m payment Ecclestone has avoided being chased by HMRC but in fact it is doing just that right now. In March last year Pitpass revealed that in 2012 HMRC launched an investigation into Ecclestone and, according to F1 company documents (which can be seen here:), its purpose "is to identify if there are any amounts of underpaid tax." Mysteriously this is not mentioned in the BBC report.
In January this year Ecclestone told Pitpass that the HMRC investigation is still going on and said "they could still come after me now. It is 100% a real risk." He added that "it is logic. They will see money. They will see the fact that if they do have a go at me I have got the money to pay." Accordingly, it does not seem that he "has avoided a potential £1.2bn tax bill as a result of a secret deal with HMRC."
Perhaps the Panorama programme will fill in the blanks to explain the apparent contradictions above but if not then one is left wondering what is the origin of this confusion. To be in a position where we could get to the bottom of it we need to look at the origin of the Ecclestone family's wealth.
The £2.4bn in the bank accounts of the Bambino trust came from the sale of stakes it owned in F1, dividends paid by the sport and proceeds from a bond it secured on the future revenues of the business. Slavica set up the trust in December 1997 and its other principal beneficiaries are Tamara and Petra - her two daughters with Ecclestone.
At the time that Bambino was founded Slavica, who is Croatian, had not lived in the UK for long enough to be domiciled there. As a result of not being a UK domicile, if Ecclestone had died she would have had to pay 40% inheritance tax on money received from him whereas spouses are usually exempt from this.
The concern about Ecclestone dying was driven by his poor health. He turns 84 this year and during the late 1990s he suffered from heart problems which led to him having a triple bypass in 1999.
To prevent his income from being taxed if he had died he transferred his most valuable assets, the entire share capital of F1's parent company, to a Jersey-based business called Petara which was ultimately owned by Slavica. She then put the shares in the trust and as it is located in the tax haven of Liechtenstein no tax has been paid on the money raised from selling them.
As Slavica was a non-domicile she did not have to pay tax in the UK on earnings made outside the country and this is of course where her wealth is located as Bambino is based offshore. It means that UK tax did not need to be paid on the £2.4bn so HMRC got a nice windfall by extracting £10m from Slavica. It is nothing compared to what HMRC could get from Ecclestone if he was found to be in control of Bambino.
As Ecclestone is a UK resident he is not allowed control over the trust otherwise it would be declared a sham and he would have to pay tax on it. The reason for this lies in the UK's Income and Corporation Taxes Act 1988, which has since been carried over to the Income Tax Act 2007. It states that if a UK resident transfers assets to a non-domicile and income becomes payable to the non-domicile, the transferor must not at any time have "the power to enjoy" it otherwise it will be deemed to have been his own. The bottom line is that if Ecclestone was found to be in control of the trust he would have to pay 40% tax on its assets which would come to around £1bn.
The High Court transcript reveals that HMRC was investigating Ecclestone as well as his ex-wife and it is crucial to differentiate between them. Although HMRC closed its enquiry into Ecclestone in 2006 there is no evidence that he paid a settlement like Slavica. In fact, as pointed out above, the very fact that HMRC is still chasing him is proof that he did not settle.
If HMRC suspected that he was in control of the trust, and there is no suggestion that it does, then it would assess that he owes around £1bn of tax so a settlement in the order of £10m would be a tremendous tax dodge. In contrast, as has already been explained, the settlement paid by Slavica was a nice bonus for HMRC.
The accusation that Ecclestone controlled Bambino is at the heart of his defence to the charges against him which are now being heard in a German court. Ecclestone denies paying a bribe and says that Gribkowsky threatened to tell HMRC that he controlled Bambino if the £26.2m was not paid.
In 2011 Ecclestone revealed to Pitpass that Gribkowsky's threat of informing HMRC came in the "very early days when they were dealing with the trust before it was set up." HMRC was looking into the proposed structure for Bambino and this coincided with its investigations into Ecclestone and Slavica.
Ecclestone denies that he has ever controlled Bambino or had the power to enjoy its income. However, he says he paid Gribkowsky because if the unfounded allegations had been reported to HMRC it would have extended its investigation thereby incurring huge costs for him.
In January Ecclestone told Pitpass that Bambino's former lawyer Stephen Mullens said at the time "you need to get rid of this bloody guy because if he had written a letter and said Ecclestone runs the thing, which I didn't and don't, [HMRC] would have had to assess me which is what they might do now." Ecclestone must be wishing that a deal really had been done to stop HMRC coming after him but it certainly doesn't look like this is what happened.