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A Crisis Carol - Coda

FEATURE BY MAX NOBLE
01/01/2019

Dear reader. Following on from two rousing verses of a Crisis Carol, it only seems fitting that as the priest bids fond Christmas wishes to the departing congregation at the main door of the Church that the choir softly sings a Coda from the warm Christmas glow of the Eastern Transept.

So with the pipe organ on sotto and the choir in matching soft voice, let us catch this Coda before we hurry across the icy car park and back to our cars to waft swiftly home to fruit cake and port.

This coda, while having the same main themes as the verses is a meander all of its own... So come with me dear reader on a short journey into a relaxed thought exercise.

It is Christmas 2023 and our two teams, one from the top of the gird, one from the bottom, are preparing to be audited by Chase's money-people to ensure Cost Cap Compliance (3C rules).

We have McHades, part of a global car making and multi-industrial conglomerate, and we have McSharron, focused purely on Formula One racing, a much smaller private affair.

Editor's note: When asked where these names originated, Max replied: "McHades is a play on the sound of "Mercedes" who have given the other teams "Hell" this year... hence McHades.

"McSharron is a play on a girl's name, sounding a little like "McLaren" (whereas Zak is being a bit of a Shaz...) and makes as much sense as Racing Point Force India in so far as it is a name with no history or immediate meaning..."

The parent company of McHades employs around 280,000 people, of which about half, 140,000, are directly employed in car manufacture. They also make trucks, vans, buses, and have their own legal and financial staff. The wider McHades conglomerates also deliver services in the IT, defence, and medical arenas, employing yet more thousands of staff. McHades has a market capitalisation of 51bn Euro (around 65bn US dollars). Before the 3C rules in F1, McHades spent in the region of $600m a year on its racing team, directly employing around 1,600 staff. McHades is headquartered in a major European country, but much of the F1 operation is based in England.

Meanwhile not far from the McHades UK operation is the headquarters of McSharron, founded on a modest budget by a millionaire who made his money in drinks, or was it airlines or financial services? Anyway, McSharron is privately held, not floated on the stock market, and employs around 600 staff. This past season McSharron spent around $150m, a fraction of that spent by McHades.

The core finance team at McSharron consists of five people, who also run payroll and handle invoicing and purchase orders. They have created a spreadsheet of significant complexity containing many a macro hand-crafted after midnight over the past season. It links income, expense and cars parts into a complex web of expenditure that accounts for every dollar that flowed through the team last year. They are just preparing to have it audited by their regular external accountant before it goes off to the 3C team at the FIA, and Chase's audit team for checking. They are tired, but the data is complete and it confirms they spent $151m this year (using the base date for dollar to pound exchange as agreed in the rules on the 1st December the previous trading year; got to make these things precise...). This figure is well within the $200m cost cap that Liberty and the FIA are policing this year.

Job done, emails sent, files saved, the McSharron finance team get to the pub just in time for last orders, before some head homeward to join family for Christmas, while a couple head off for midnight mass and a hearty sing along.

It's a different story over at McHades. The UK racing operation is part of a local group of companies that roll-up into a partial holding company in the UK. This holding company in turn rolls-up to a regional holding company registered in the British Virgin Isles. In turn this rolls-up to a divisional hold company based in Switzerland. This in turn rolls-up to a global divisional holding company based in a major European country. This in turn finally rolls-up into the global top level registered company, also based in a major European country. In total the "McHades ABC Racing Team" spans seven legal entities, and four tax law regions.

The UK-based segment of the McHades racing team employs a legal department of six people, a contracts department of seven people, and a finance department of twenty people. It also retains one of the Big Four of the accounting world to work with them advising on tax and finance matters on a daily basis, and to audit them every six months. The accounts department is totally separate and covers invoicing and purchase orders, while payroll is out-sourced to a third-party.

This UK structure is mirrored to some extent across each of the seven legal entities that complete the entire McHades racing organisation all the way back up the tree to the top of their European headquarters. In total around 200 legal, finance, and contracts staff are involved in running the entire operation, plus a few dozen contractors, all from the relevant regional offices of the global accounting firm.

McSharron pride themselves on the bespoke manufacture of everything in their racing chassis. They have a key supply agreement with the engine and gearbox manufacturer (which amusingly enough until recently was McHades), and they have another major contract with their brake supplier. They then use a few dozen UK-based specialists for sub-assemblies, before integrating the entire race package in-house. They have a computing partner that provides them with rented time on a world-class super computer at a discount, and they have a basic simulator set-up. They also hire time in a scaled wind tunnel from another team.

McHades the racing team in the UK is really a system integrator. They fabricate nothing directly themselves. Every item they use in their racing package is manufactured elsewhere within the McHades empire.

The engine comes from their Research and Development division, which is also based in the UK, but rolls-up to a different legal entity. It receives tax credits from the UK government. It is partly funded by the parent division based in the USA, a sister division based in France, some German government assistance based around R&D dollar-for-dollar matched funding, a large oil company, and internal R&D investment from three divisional levels within McHades. It also off-sets costs against running an under-graduate programme for interns, and a PhD program for select engineering students from around the world (who also raise dollar-for-dollar matched funding from their home governments and universities).

Several different finance divisions pour cash flow and expenditure data into Oracle financials, SAP, and the Americans use a system called Deltek for reasons everyone has forgotten now. These three different accounting tool-sets are combined by the external finance consultants into a highly complex SAP-based report (because the European headquarters eventually tracks everything in SAP). No one within the McHades UK finance team has a clue how this report holds together because none of them see all the inputs, understand the international tax laws, or know where in the UK-based departments to defray and register costs.

This work of the Dark Arts and Quantum Mechanics is repeated at each of the seven legal entity levels, and across the four international tax regions for the McHades ABC racing team.

At each level the report only reveals those inputs and outputs required legally at that level for international compliance.

Finally at the European headquarters of McHades this report is prognosticated over by Arch Mage's of the highest order in the Dark Arts, who then have several of their equally arcane and hard to divine fellow Mage's review it for finance, legal, contractual and (only where necessary) factual content. Now capable of warping the very time-space continuum around it, and turning the minds of mere mortals to dust, the final report makes a Nuclear Arms Limitation treaty, or international tax laws, appear like easy-readers for toddlers just learning the alphabet.

Like the Death Star at its peak it is a thing of frightful and mind-numbing beauty and transfixing horror, both at the same time. No modest rule keeper can gaze upon it for more than a few moments without losing their mind completely, sanity never to return. And so it is that McHades know the 3C Report is ready to be submitted to the FIA and Chase's gang of bean counters... those audit teams built of people who did not get interviews at McHades, and could not get jobs at the Big Four global accounting firms.

McHades executive management stroke the report with delight crooning like Dark Wizards petting a newly born Dark Dragon. Just like their Dark Wizard counterparts, the McHades executives know this perfectly formed dragon is going to fly into the night and perform just as planned.

So it is, that some weeks later the McSharron spreadsheet (having been reprinted on A3 to make the figures mostly readable) is confirmed by the FIA and Chase's bean-crew as 3C rule aligned, and they confirm McSharron spent $151m the previous season running a racing organisation of 602 staff.

A week later - backs firmly up against the audit reporting deadline - the FIA folk, and Chase's confused crew grudgingly admit that while they do not follow the entire detail of the 2,500 page report submitted by McHades (paper copy only, as Chase forgot to ask for soft-copies in a format his team could read, manipulate and analyse) it would appear, based on the data supplied, that they probably did spend only $170m running a racing team that some suggest now comprises nearly 2,000 staff. The UK segment of McHades ABC racing only has 204 staff on the books, so surely their budget and that of McSharron's must be around the same level?

After all, they submitted the reports and Chase's experts have read it. So it must be true.

As choirs around the world sing in exultation, and all good folk enjoy the festive season, the Masters of the Dark Arts of International Accounting climb back onto their Wargs and Nazgul, returning to their caves, mountain tops, and troll holes another accounting season successfully at an end. When the season rolls around again, refreshed by whatever dark relaxations they enjoy, they will once again be eager and ready to ensure their pay masters (who always run at a loss) will have their reports delivered in order.

Everything shall be accounted for, and all shall be recorded. It's just as Douglas Adam's noted, knowing the answer is 42 is only useful if you actually know precisely what the question is.

Turning off the lights in the nave, and locking the church door, the priest smiles as he whistles God Rest Ye Merry Gentlemen, and heads back to the rectory with top quality gifted port tucked safely under his arm (other gifts remain safe in the vestry for now). So much easier to accept gifts in kind than bequests that need to be accounted for he muses, shaking his head and wondering briefly at what sounded like scaled wings flapping high overhead in the midnight blue sky.

Max Noble

Learn more about Max and check out his previous features, here

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1. Posted by DBCooper, 18/01/2019 14:46 (moderated by an Adminstrator, 18/01/2019 15:10)

"This comment was removed by an administrator as it was judged to have broken the site's posting rules and etiquette."

Rating: Neutral (0)

2. Posted by Uffen, 11/01/2019 22:11 (moderated by an Adminstrator, 18/01/2019 15:10)

"Sir Frank Williams famously said that F1 is, and should be, a meritocracy. That's true. But, prize money (for want of a better term) should be more evenly distributed. The "merit" gained from winning should be more weighted toward the value a team can present to sponsors and partners. The blank space on a winning car is worth far more than the blank space on a tail-ender. That's where merit lies.
After all you only win by beating someone else - the losers still have to be there and they still have to offer visibly valid competition. Spending $x500 and beating a team spending $x10 is not seen as particularly praise worthy. Close the gap!"

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3. Posted by sagosac, 07/01/2019 17:59

"It would be so interesting to see the pure effect of evenly spread prize money, without any other monetary adjustments. Just more open tech-regs, i.o. to cater for diversity in performance & design of the cars. Let the genius of engineers propel ! THESE bright brains shall be stimulated to the max; instead of firing them. The sheer size of teams is not the problem; it's just the surreal unfair allocation of the sport's income that hurted and still hurts this sport, more than anything else. If it ain't broke, don't fix it (hence, any debate about changing weekend or even race format is unnecessary, too) "

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4. Posted by Max Noble, 04/01/2019 1:43

"@imejl99 - LOL! Great chuckle on the suggested numbering. :-). And I agree that government in-kind funding and/or tax breaks, and/or free rent/no pay roll tax/what ever from government is going to totally cloud the issue. It will be impossible to untangle...

@SpinDoctor - love that phrase “Deliciously cynical”. I will aim to add the right amount of this ingredient to future musings...!"

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5. Posted by Spindoctor, 03/01/2019 15:21

"Deliciously cynical. Horribly prophetic! An excellent fable for (of) our times. "

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6. Posted by imejl99, 03/01/2019 13:44

"Don`t forget that McHades Research and Development division, which is also based in the UK, will receive £112.2m from H.M. Revenue & Customs (HMRC) courtesy of the Research and Development Expenditure Credit (RDEC). On the other hand, McHades the racing team in the UK is really a system integrator. As they fabricate nothing directly themselves, they are not eligible for H.M. Revenue & Customs (HMRC) tax return.

McHades obtained special permission for both their racing cars to have a #42 (in different color) for entire 2024 season."

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7. Posted by Max Noble, 02/01/2019 10:32

"@Greg and Uffen - quite agree. Just how one ensures compliance and what one does about job loss... it is going to be very awkward to manage at best... and possibly impossible.

@jasman - many thanks for the information! Wow... 34 people to run the team. That’s hard to believe now to say the least!

@Lapps - yes. Very much my point that a global conglomerate such as “McHades” is going to be impossible to monitor. Glad it’s not my problem. I believe putting a cash floor in place by a redistribution of money to the teams is a great help to the smaller teams. But beyond that let capitalism work as a “free market”!"

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8. Posted by Lapps, 02/01/2019 10:16

"Any Company using other Group Companies/Assets to source Parts or Services can drive a Coach and Horses through this System just on the basis of inter-departmental pricing.
Totally pointless! "

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9. Posted by jasman, 02/01/2019 6:13 (moderated by an Adminstrator, 18/01/2019 15:10)

"There is a lengthy 90 min podcast on the net where Alistair Caldwell from McLaren back in the day is interviewed. He stated that back in 1974 when they won the F1 championship, the Indy 500, and other notable accomplishments, there was a group photo taken of the ENTIRE company staff which was a total of 34 people including two receptionists. McHades probably has more lawyers than that. A sign of the times I guess, but it's not the the "show" has been improved by all the $$$. Part of me would be OK with a grid full of Cosworths."

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10. Posted by Uffen, 01/01/2019 19:01 (moderated by an Adminstrator, 18/01/2019 15:10)

"Sounds as though every team will be required to have on staff an independent "Financial Chancellor" who will pay all team bills and debts from a secret FIA account which is limited to a common, capped amount. Once the funds have run dry there is no more to be had. Advances on the account are not allowed."

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11. Posted by Greg, 01/01/2019 16:42

"Excellent story with very much a foreboding of what will happen with the budget caps that may/not eventuate. I suspwt tat the bottom teams will comply pretty much to the letter whilst the richer teams use there machiavellian guile to hide costs. As stated elsewhere the cap will cost jobs and that is a blow. Lets hope there ia some way to level the field without the job loss and have a cleaner racing without all the fake extras to make it more entertaining. Back to basics"

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