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Red Bull fined $7m for cost cap breach

NEWS STORY
28/10/2022

Having exceeded the cost cap by 1.8m, Red Bull is fined $7m together with a limit on aero testing for 12 months.

Following the submission of all required documentation by all ten Formula One Teams, the Cost Cap Administration carried out the first ever Review process under the FIA Formula One World Championship Financial Regulations. These new Financial Regulations are a very complex set of rules that competitors were required to adapt to for the first time.

Red Bull Racing was found to be in breach, however, the Cost Cap Administration recognised that Red Bull Racing has acted cooperatively throughout the review process and has sought to provide additional information and evidence when requested in a timely manner, that this is the first year of the full application of the Financial Regulations and that there is no accusation or evidence that RBR has sought at any time to act in bad faith, dishonestly or in fraudulent manner, nor has it wilfully concealed any information from the Cost Cap Administration.

In these circumstances, the Cost Cap Administration offered to RBR an ABA to resolve this matter. That offer was accepted by RBR.

An Accepted Breach Agreement ("ABA") dated 26 October 2022 was therefore entered into by and between the Cost Cap Administration and Red Bull Racing pursuant to Article 6.28 of the FIA Formula 1 Financial Regulations ("Financial Regulations").

Summary of the terms of the ABA as provided for by Article 6.32 of the Financial Regulations

An Accepted Breach Agreement ("ABA") dated 26 October 2022 has been entered into by the Cost Cap Administration and Red Bull Racing F1 Team ("RBR") pursuant to Article 6.28 of the FIA Formula 1 Financial Regulations ("Financial Regulations"). The Financial Regulations are issued by the FIA and form part of the terms and conditions of participation in the FIA Formula One World Championship.

The Cost Cap Administration recognised that RBR has acted cooperatively throughout the review process and has sought to provide additional information and evidence when requested in a timely manner, that this is the first year of the full application of the Financial Regulations which are a very complex set of rules that competitors were required to adapt to and that there is no accusation or evidence that RBR has sought at any time to act in bad faith, dishonestly or in a fraudulent manner, nor has it wilfully concealed any information from the Cost Cap Administration.

The Cost Cap Administration considered it appropriate, in these circumstances, to offer to RBR an ABA to resolve this matter on the terms set out below, given the limited nature of the Procedural Breach in issue and the fact that the Minor Overspend Breach falls at the lower end of the <5% minor overspend range, and RBR's willingness to accept the breaches and to cooperate with the Cost Cap Administration. That offer was accepted by RBR.

The ABA concerns:

• RBR's submitted Relevant Costs reported in its 2021 Full Year Reporting Documentation of 114,293,000;

• Subsequent to the findings of the Cost Cap Administration, a Procedural Breach committed by RBR pursuant to Article 8.2(e) of the Financial Regulations due to the submission of inaccurate Full Year Reporting Documentation in respect of the Full Year Reporting Period ending on 31 December 2021 because it inaccurately excluded and/or adjusted costs amounting to a total of 5,607,000 in its 2021 Full Year Reporting Documentation; and

• Consequently, a Minor Overspend Breach committed by RBR under Article 8.10(b) of the Financial Regulations because its Relevant Costs, as adjusted by the FIA, exceeded the 2021 Cost Cap of 118,036,000 by less than 5%, namely by 1,864,000 (i.e., 1.6%).

Summary of ABA terms and sanctions

In accordance with the findings of the Cost Cap Administration, RBR has acknowledged that the Reporting Documentation submitted by it included the following incorrectly excluded and/or adjusted costs:

1. Overstated excluded costs pursuant to Article 3.1(a) of the Financial Regulations (concerning catering services);

2. Costs pursuant to Article 3.1(w) of the Financial Regulations (concerning consideration and associated employer's social security contributions);

3. Costs pursuant to Article 3.1(h)(i) of the Financial Regulations (in respect of Non-F1 Activities), as those costs had already been offset within Total Costs of the Reporting Group;

4. Costs pursuant to Article 3.1(k) of the Financial Regulations (in respect of bonus and associated employer's social security contributions);

5. Understatement of Relevant Costs in respect of a gain on disposal of fixed assets by failing to make the necessary upwards adjustment;

6. Costs pursuant to Article 3.1(q) of the Financial Regulations (concerning apprenticeship levies);

7. Costs pursuant to Article 3.1(h)(ii)(i) of the Financial Regulations (concerning consideration and associated employer's social security contributions);

8. Understatement of Relevant Costs in respect of provisions set forth by Article 4.1(a)(i) of the Financial Regulations (concerning the cost of use of Power Units);

9. Costs pursuant to Article 3.1(h) (i) of the Financial Regulations (concerning consideration and associated employer's social security contributions);

10. Understatement of Relevant Costs in respect of provisions set forth by Article 4.1(f)(i)(B) of the Financial Regulations (concerning use of inventories);

11. Clerical error in respect of RBR's calculation of certain costs re-charged to it by Red Bull Power Trains Limited;

12. Certain travel costs pursuant to Article 3.1(r) of the Financial Regulations;

13. Costs of maintenance pursuant to Article 3.1(i) of the Financial Regulations.

and further that consequently its Relevant Costs for the 2021 Reporting Period exceeded the 2021 Cost Cap by 1,864,000 (1.6%). RBR has therefore accepted that it has breached: (i) Article 8.2(e) of the Financial Regulations due to its failure to file accurate Full Year Reporting Documentation in respect of the 2021 Full Year Reporting Period, and (ii) Article 8.10(b) of the Financial Regulations due to its failure to keep its Relevant Costs under the 2021 Cost Cap.

The FIA acknowledges that had RBR applied the correct treatment within its Full Year Reporting Documentation of RBR's Notional Tax Credit within its 2021 submission of a value of 1,431,348, it would have been considered by the Cost Cap Administration to be in compliance with Article 4.1(b) of the Regulations and therefore RBR's Relevant Costs for the 2021 Reporting Period would have in fact exceeded the 2021 Cost Cap by 432,652 (0.37%).

On that basis, RBR has accepted the imposition of the following sanctions:

a) RBR must pay a Financial Penalty of USD 7,000,000 to the FIA within 30 days of the date of execution of the ABA (Article 9.5 of the Financial Regulations);

b) RBR receives a Minor Sporting Penalty in the form of a limitation of RBR's ability to conduct aerodynamic Testing during a period of 12 months from the date of execution of the ABA through the application of a reduction of 10% of the Coefficient C used to calculate the individual Restricted Wind Tunnel Testing (RWTT) and Restricted Computational Fluid Dynamics (RCFD) limits applicable to each Team as set out in Article 6 of Appendix 7 to the FIA Formula 1 Sporting Regulations. For example, if the Coefficient C, based on RBR's championship position is 70%, the effective new value of C will be: CNEW=70% x (1-0.10) = 63.0%; and

c) RBR bears the costs incurred by the Cost Cap Administration in connection with the preparation of the ABA.

The decision of the Cost Cap Administration to enter into the ABA constitutes its final decision resolving this matter and is not subject to appeal. Non-compliance by RBR with any terms of the ABA will result in a further Procedural Breach under Articles 6.30 and 8.2(f) of the Financial Regulations and automatic referral to the Cost Cap Adjudication Panel.

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READERS COMMENTS

 

1. Posted by mds167, 29/10/2022 0:19

"Without wanting to turn this into a discussion about UK tax @Firebreather, IR35 is complicated but A Newey could still use his ltd co if the completed determination showed his role as inside IR35 - RBR would just need to pay the appropriate tax and NI, etc. "

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2. Posted by Spindoctor, 28/10/2022 23:01

"An inconsequential wrist slap. Never saw that coming...."

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3. Posted by ian_w, 28/10/2022 22:08

"Based on my reading, the Cost Cap was $145M. The overspend of $1.8M, after accounting for the accounting errors is really about $450K.
The penalty on that is $7M, which is almost 5% of the budget, but also 16x the size of the overspend. That is far more harsh than any penalty the IRS would impose; no idea what UK tax penalties are like.

I agree that unless that is subtracted from the team's budget, then the penalty is rather meaningless as it's not paid by the entity which committed the penalty. Otherwise, it's not really impacting. Imagine a team like Williams which was a standalone entity listed on the stock exchange; they would have to report that in the their books. Red Bull could just charge the penalty to some other entity than Red Bull Racing.

I'd also expect the accountants to be coughing up a cheque back to RBR (and RBR handing them a pink slip), so that's where you need the "Restricted Wind Tunnel Testing (RWTT) and Restricted Computational Fluid Dynamics (RCFD)" penalties too. That will have the bigger impact."

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4. Posted by Firebreather, 28/10/2022 21:04

"Just playing devils advocate here (I don't like the fact that they seem to have gotten off quite lightly as an overspend is an overspend and the other teams all managed it), but this could be explained by the extremely confusing HMRC IR35 rules for contractors which came into force in April 2021 (if you're a contractor you'll know!). The employer's social insurance and the employer's apprenticeship levy are supposed to be paid by the contractors client (RBR in this case), but they, as with pretty much all companies in the UK employing inside IR35 contractors, are passing that cost on to the contractor through an umbrella company without uplifting the rate to compensate (which is actually unlawful and against the HMRC rules - but they're not doing anything about it as long as they get the money from someone). Both of those payments come to 14.2% of a contractors rate. So if, for example, Adrian Newey is a contractor (which I believe he is) was on 10,000,000 (he's going to be on a pretty high rate surely!), he would have to be considered inside IR35 as he been technically employed by RBR for the last 15 years, and would have people that he manages, so that 14.2% which he is having to pay would add up to 1,420,000 and that's pretty much the overspend.


I can't quite blame RBR for this as HMRC's rules are beyond stupid and massively overcomplicated, but it does still mean they had an extra 1,420,000 to play with.



However, there could potentially be a massive silver lining to this as there may now be precedent (seeing as the FIA's many expensive lawyers have looked into this) that shows that UK companies are actually responsible for paying the employer's social security and apprenticeship levy, and in no way should be passing that on to the contractor. This could very good news for a contractors all over the country who have been screwed over by their client but didn't have the money and time to get lawyers involved. So thank you RBR and FIA!"

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5. Posted by Hobgoblin, 28/10/2022 20:58

"They should Mercedes to pay it - it was all their fault anyway.
(Apparently)"

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6. Posted by KKK, 28/10/2022 19:34

"Absolutely pathetic judgement. The FIA should have made Red Bull's 2023 cap 7m lower. Where is the money going ? F1 is dying, this is another nail in the coffin"

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7. Posted by ZJAY, 28/10/2022 19:17

"First nail in the coffin of the cost cap. 2 million over budget essentially costs 9. Big teams were spending 100 million over the cap. They can easily go close to the 5% mark and be safe. Essentially minor beach cost money.

"

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8. Posted by Burton, 28/10/2022 18:12

"The fine is reasonable in terms of a multiple of the breach but it should really come out of next year's budget. This is no penalty at all."

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9. Posted by ronniecabers, 28/10/2022 17:59

"So from reading the article Red Bull really need to sack their accountants!! on saying that though they still exceeded the Cost Cap Budget. SO $7 Million fine and 10% reduction in Wind testing and CFD ?...Not enough to deter other teams that have big money from doing it.

If the FIA really want to stamp some authority on the Cost Cap then a minor breach needs to be something like a $50million fine and 100 constructors points deducted, a major breach - disqualification. I will pretty much guarantee if the FIA write that into the rules then NO team will breach the cost cap. And if written in the rules , there is no negotiating...black and white , you go over , you suffer"

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10. Posted by Defiant, 28/10/2022 17:52

"I think ARL nails it.

I'm pleased the $ value (or at least what they are saying it is) is low and they are reporting that RB acted honourably during the investigation but I also agree that a fine that does not come out of a budget is a ridiculous and hollow penalty that a huge multi-national will brush off without a care in the world. At least we got more info that we did in 2019.

This all just screams incompetent FIA and RB accountants."

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11. Posted by ARL, 28/10/2022 17:44

"9/10 teams on the grid managed to stick by the rules.

A fine that does not come out of the budget for 2023 has no significant impact on the operation of the F1 team. The confected outrage of Helmut and Christian rings ever more hollow.

What chance of apologies from the pair to those threatened with legal action?

In other news the sun rises and dog bites man. Now on to the 2022 financial farrago this time next year. "

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12. Posted by Anthony, 28/10/2022 16:58

"So they actually exceeded the cap by 432,000 rather than $1.8m when all items are taken into account…… Clearly they need to improve their reporting processes but I don’t think anyone could say that they got off lightly for these errors and if they had been on top of the accounting during the course of the year they would surely have been able to reduce their expenses by enough to come under the cap."

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13. Posted by yakker, 28/10/2022 16:08

"As per a previous comment of mine, RedBull needs a better accountancy team.
Social security, catering, non F1 activities, apprenticeship levies and the governments notional tax credit.
Who would want to be an F1 team nowadays! Hard enough to build a winning team without all this crap.

I assume that teams pay their accountancy company out of the budget cap also."

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