Salary cap, Shmalary Cap

[P38 in workshop]

Are you quite sure about that?If,for example,he had a company based in Panama or Switzerland,I don't believe they require the levying of VAT.Which leads to the point that the invoice could be sent to Austria,or in an echo of times past,Switzerland.Lots of sponsorship used to be routed through Switzerland for tax purposes,or so it was claimed.Others might tell you that the team's representative and the sponsor's representative had more than one contract prepared and the numbers differed a bit.The difference being shared between the intermediaries.Or so it was said.The only people able to confirm or deny such things probably wouldn't divulge what actually went on.

[Mike Harte]

P38, I did only say "may" come into the equation, not "will" come into the equation.

[peebee2]

Originally Posted by Mike Harte

Look, I know you have a huge need to be right all the time, but might I suggest that you read the question that was posed ever so slowly so that you are able to fully comprehend what was actually asked. crmalcom asked what the benefit to Red Bull was, and I answered the question about that benefit to Red Bull. It matters not a jot about where Newey's company is based!

However, dependent on Newey's company's turnover, VAT may come into the equation.

LOL, fair point!

On the other hand, I realise that detail may not be a strong point, but you might do well to consider that should someone be employed by the Red Bull group of companies there is no certainty at all that they would come under the UK tax or NIC regime.

Crmalcom asked what the benefit to Red Bull was, and you answered the question about a benefit to Red Bull that is only a possible benefit. It depends entirely how the employment is structured as to NIC savings and it matters a BIG jot about which jurisdiction that employment would come under too!

[Adam43]

[mod]
We are all trying to be right and work out what could be going on here. However I’m not sure anyone is trying to be right at the expense of others, rather just trying to develop the ideas and add more detail. All good

Let’s assume the best from all and that everyone is just trying to add interesting detail as we hypothesize what on earth is going on here.

Cheers all.

[S griffin]

AM are close to an agreement with the FIA

https://www.planetf1.com/news/aston-...reach-penalty/

Have to wait for RBR due to the death of their founder

[crmalcolm]

Originally Posted by Mike Harte

Yes, it saves the company employer NIC at the very least.

Mike - Thanks.

As I understand it, regardless of which company RBR registers their employee contracts in, there would be some form of NIC or Social Security (or equivalent to pay).

So I can see the (possible) benefit to Red Bull in this situation by opting to pay a contract fee rather than a salary. Now of course, this depends on whether the NIC/Social Security payment is also excluded from the overall budget.


Hypothetically, let's assume that Newey's salary would be in the region of $10M, and that any NIC/Social Security would be approximately 1%. (The values are not important, just the concept).

IF these payments from the employer are considered part of the top earners' salary payments, then it would make no difference to Red Bull's budget how Newey is paid (the NIC/Social is excluded too). They would still have an overall corporate saving.
BUT, if these payments from the employer are part of their budgeted expenses, then by paying Newey in this way, they are saving (hypothetically) $100k. If there are other salary-related costs (depending on the country of employment) this figure could be higher.

[Mike Harte]

Added to which there might also be such things as employee benefits which may possibly include items such as pension contributions, sickness benefits, holiday pay and death in service premiums. And that is not necessarily the only benefits that could, in theory be part of the costs involved in employing Newey that may or may not have to be included by the FIA in how they mandate an employee's total salary.

[crmalcolm]

Originally Posted by Mike Harte

Added to which there might also be such things as employee benefits which may possibly include items such as pension contributions, sickness benefits, holiday pay and death in service premiums. And that is not necessarily the only benefits that could, in theory be part of the costs involved in employing Newey that may or may not have to be included by the FIA in how they mandate an employee's total salary.

I would imagine the whole remuneration package surrounding the top earners in F1 is a fairly complex matter - and what is in/out of the permitted F1 budget will surely be part of the discussion between RBR and FIA.

[peebee2]

Trying to get back to the actual topic, and avoiding all of this nonsense about who is contracted in what way, and in which jurisdiction (which makes bagger all difference under the F1 budget cap anyway)...

RB have AN as one of their top three paid employees, and thus not included in the budget cap. FIA say he isn't an employee and thus is included, and they replace him in the top three with a much lower earner.

Issue for FIA is RB could choose to go legal about the FIA definition of employed - and FIA realise they would have a too high chance of losing that.

They'll also have to deal with 2022 as same problem likely and possibly too late in the year to rectify.

[crmalcolm]

Originally Posted by peebee2

Trying to get back to the actual topic, and avoiding all of this nonsense about who is contracted in what way, and in which jurisdiction (which makes bagger all difference under the F1 budget cap anyway)...

I think the question of who is contracted in what way is at the heart of the discussion, and not nonsense. Hence the reason for:

Originally Posted by peebee2

RB have AN as one of their top three paid employees, and thus not included in the budget cap. FIA say he isn't an employee and thus is included, and they replace him in the top three with a much lower earner.

Surely this comes down exactly to who is contracted in what way?
If Red Bull had AN as an employee - the disagreement between RBR and FIA would not have occurred. [If that is what has happened]

Originally Posted by peebee2

and FIA realise they would have a too high chance of losing that.

Is this an assumption, or is there a source to confirm this is the FIA position?

Originally Posted by peebee2

They'll also have to deal with 2022 as same problem likely and possibly too late in the year to rectify.

True - if Red Bull are found to have been in breach due to the way they interpreted the regulations, then 2022 will also be a problem for them. That is why I suspect any agreement reached (if this is the 'problem') will include the measures being applied for 2021 and 2022.

[Akrapovic]

A dry run of the financial regulations was done in 2020 so everybody knew what to expect. It sounds like someones contract was changed to try and work around the known regulations then.

[peebee2]

Originally Posted by crmalcolm

Surely this comes down exactly to who is contracted in what way?
If Red Bull had AN as an employee - the disagreement between RBR and FIA would not have occurred. [If that is what has happened]

That’s the problem. Legally the word employed does not necessarily mean someone legally defined as an employee…

[VIVA GT]

Originally Posted by crmalcolm

I think the question of who is contracted in what way is at the heart of the discussion, and not nonsense. Hence the reason for:



Surely this comes down exactly to who is contracted in what way?
If Red Bull had AN as an employee - the disagreement between RBR and FIA would not have occurred. [If that is what has happened]





Is this an assumption, or is there a source to confirm this is the FIA position?



True - if Red Bull are found to have been in breach due to the way they interpreted the regulations, then 2022 will also be a problem for them. That is why I suspect any agreement reached (if this is the 'problem') will include the measures being applied for 2021 and 2022.

I agree with all of this but wish to add the qustion that: Didn't all of the teams have a 'dry run' with the cost-cap in 2020? If so, and mis-interpretations should have been highlighted to (or has AN's status as employee/contractor changed since then, hence the 'confusion'?

[Anyopenroad]

Originally Posted by peebee2

That’s the problem. Legally the word employed does not necessarily mean someone legally defined as an employee…

That makes no sense .

I think I get what you mean though. As far as HMRC (and presumably the equivalent in other countries) are concerned, ‘employment’ is defined by law, not by what an company/worker chooses to call their relationship. One key element is how much of a monopoly a company has over someone’s time. The more a company can require/expect you to be in a certain place at a certain time doing certain things, the more likely the authorities are to call you an employee.

Employed/employee thus has a legal definition which might not completely overlap with the colloquial use of the words.

[chillibowl]

Originally Posted by Akrapovic

A dry run of the financial regulations was done in 2020 so everybody knew what to expect. It sounds like someones contract was changed to try and work around the known regulations then.

but surely if they were trying to change it around (to get around the regulations) then they would have made (or kept) AN a direct employee as to qualify his (presumably much higher than their 4th highest 'employee') salary under the exemption no?

i am assuming that they wanted to keep AN renumeration's out of the cap calculation, then making him a direct employee would have been the way to do this...they apparently went a different way though.

but agreed this is something they should have learned/realized in 2020.

will add that typically when these distinctions are made between a direct employee and a contractor (and while the employer does benefit in having to pay less matching contributions), its typically the worker how benefits to a greater degree by having much more control over their own taxation situation...rather its possible that AN himself required to be paid this way and the team acquiesced because...well because AN is a genius?

Originally Posted by Mike Harte

Added to which there might also be such things as employee benefits which may possibly include items such as pension contributions, sickness benefits, holiday pay and death in service premiums. And that is not necessarily the only benefits that could, in theory be part of the costs involved in employing Newey that may or may not have to be included by the FIA in how they mandate an employee's total salary.

its a good question.

given that different countries deduct different amounts for state run pensions, unemployment insurance funds, requirements for sick and holiday pays, even differing rates for overtime, and even different customs around the need for or size of pension matching contributions or employee stock purchasing options etc etc...

one would hope there is some sort of equivalency formula to take this into account because teams employ people in different countries.

while this may not seem like a big issue, but without some sort of metric to correct for this (if these things are even included in in cap calculations that is or vice versa that these benefits are included), then teams operating in some regions may find themselves with unintentional benefits in what they can offer in terms of employee wages & benefits.

again maybe a small thing but theoretically could an employer at a US facility be able to offer potential employees more in wages and less in by way of deductions, benefits, and marginal tax rates then say a facility run in say Italy which may have higher employer paid costs associated with payroll and taxes?

by way of comparison, the N.American sports leagues also struggle with balancing their cap with the reality that some regions afford much lower tax rates which possibly allows them to offer lower salaries to players who actually end up netting more in after tax dollars. and thus making these places more desirable to play in.

arguable how much of an effect this has had (although successful hockey teams in Tampa Bay Florida suggest otherwise), it does highlight the need for the cap rules to evolve from year to year.

even the N.A. leagues with a long history with caps had major problems in their early days and frankly its still a contentious issue.

of course i support the cap systems but this is just the beginning....wait for collective bargaining agreements and/or strike/lockouts as the various stakeholders vie for increasing chunks of their now limited budgets.

[Mike Harte]

chilli, there's no simple answer about overseas employee's remuneration; a lot will depend on the arrangements between employer and employee. For example, and I don't know the tax position - his earnings and taxation are not my business - but one of my sons is a partner in one of the big 4 accountancy firms who had been headhunted by them to leave one of the other big 4 firms. He drove a hard bargain to jump ship, and to entice him they agreed to pay him an annual retainer plus a percentage of the profit share that partners get.

I bring this up because he has been seconded for 2/3 years to manage one of the departments in an overseas offices. And some of his remuneration is being paid by the UK office, whilst other payments come from offices in two other countries, and in their local currencies which fluctuate according to exchange rates. Even as a tax specialist, he finds the arrangement quite confusing trying to work out where and how his income is coming from, and to whom he is responsible for paying tax.

And, he told me, is all designed to reduce the tax liability of the firm and not for his benefit.

[VIVA GT]

All very interesting discussion about different taxation system around The World, but really this has no bearing on the subject in hand. The salary part of the budget cap is surely the gross spend by the team (as that is what is coming out of their budget), not the 'wages' that the employee finally receives after deductions?

[chillibowl]

Originally Posted by Mike Harte

chilli, there's no simple answer about overseas employee's remuneration...

indeed!

Originally Posted by VIVA GT

All very interesting discussion about different taxation system around The World, but really this has no bearing on the subject in hand. The salary part of the budget cap is surely the gross spend by the team (as that is what is coming out of their budget), not the 'wages' that the employee finally receives after deductions?

possibly...deductions like pension stuff is most likely besides the point (and small amounts relatively speaking) but Newey's (or his corp's) ability to deduct other types of expenses from his gross remuneration ( for example business expenses and write offs - rather other types of business deductions not available to your typical direct employees) may very well indicate whether he is a deemed employee of RB or if he just has a supply contract with them and thus should be treated under the cap as any company selling parts to RB.

and thus outside the 3 highest earner exclusion.

anyways, its very odd that this sort of stuff hasent been already sorted out or clarified by now by either RB or the other teams.

obviously i am just speculating (a lot) but i see implications for people like Toto who is an employee (presumably of the Mercedes F1 team), a part owner in the team (i believe), a board member of Daimler (or reporting to them in some capacity and i imagine not for free), he has (or had) a business partner also involved with the team (so that suggest they have their own business which controls part of and/or is paid by the team)...

for sure im trying perhaps to hard to defend RB here, but the lack of clarity in what constitutes an employee or not could suggest the cap regulators were never interested in parsing the myriad of remuneration structures that the top three earners use.

[BTCC frog]

Surprisingly, this is a good thread to read. On other websites arguments seem to be about, 'Red Bull exceeded the budget cap deliberately, are disgusting cheats and should be banned from Formula 1,' or 'they definitely won't be punished because the FIA fixed the championship last year so they would win,' or 'they should not be punished because they wouldn't have exceeded the budget cap without the collision in Silverstone', or 'we don't necessarily know they wouldn't have won anyway without breaching the cap so don't punish them'.

However, on here, F1 fans seem to be actually discussing why Red Bull might have breached the cap (I would have no idea about all this stuff about Newey had it not been on here) in order to come up with a conclusion, rather than just automatically siding with the team they support and resorting to personal attacks against the opposing team/driver. I personally still want to see Red Bull heavily punished but am glad that some who don't see it that way have genuine reasons and aren't just biased Verstappen fans. Thank you for this.

[Aysedasi]

I agree, it's always good to read debate about these things where people can freely give their opinions, particularly when they're not routinely corrected by others who think they know better. It's a real relief from the total dross written in the general social media slime pool.....

[crmalcolm]

One way to look at this (if it does turn out that Newey is a sub-contractor and not an employee) is to consider a following hypothetical situation.

If Adrian Newey is allowed to provide his services as a contract to Red Bull, and Red Bull are allowed to include him as one of their top three earners, then Mercedes might choose to:

Toto Wolff establishes a company called 'Wolff Motorsport Services'.
Wolff Motorsport Services takes on the running of a significant part of the Mercedes F1 team.
Mercedes pays 'Wolff Motorsport Services' $145 million for the services they provide.
Toto then pays himself a salary of $140 million from this company, that Mercedes can then exclude from their budget as being one of the top three earners.
This leaves Mercedes with another $140 million to spend internally on their entry.
Meanwhile, Toto 'invests' $130 million of his salary into another subsidiary company that provides F1 services to 'Wolff Motorsport Services', who in turn provide these services to Mercedes F1.

Mercedes has now seen $255 million spent on their entry for 2023.
Toto's salary of $140 million has been excluded from their cap, meaning their included budget for the FIA cap is $145 million.
Toto has earnt $10 million.

[peebee2]

Originally Posted by crmalcolm

Meanwhile, Toto 'invests' $130 million of his salary into another subsidiary company that provides F1 services to 'Wolff Motorsport Services', who in turn provide these services to Mercedes F1.

This is where most people don't understand that the budget cap isn't a strict financial set of rules at all - it is a set of rules with many, many set allowances for different areas of budget.

What a team spends and what the budget cap shows can be quite different - either higher or lower.

[crmalcolm]

Originally Posted by peebee2

This is where most people don't understand that the budget cap isn't a strict financial set of rules at all - it is a set of rules with many, many set allowances for different areas of budget.

What a team spends and what the budget cap shows can be quite different - either higher or lower.

Yes - I understand that. For example, teams are allowed to incur a total of £36m on capital costs over a 4-year period, and this has been increased to $45m for the 2021-2024 period.

In the example I presented (and it is hypothetically), then Mercedes would have incurred the $130 million provided by the subsidiary company as salary to Toto. Which would be in the excluded 3 top earners.

This is what appears to be at the heart of the current issue with Red Bull / Newey. Red Bull seem to be recognising Newey's salary as part of their top 3, but when you are paying this through a third party contract to another company, it is impossible to separate the different streams of money in that third party.


Moving on - there is more news appearing that the 'overspend' by Red Bull might be related to heritage machinery.

In 2019, FIA reported that: "Teams such as Williams run Heritage car programmes. These will be excluded too, as will all corporate income tax and other non-F1 activities. Their property costs – such as the factory – employee bonus costs and fees to enter the championship and purchase superlicences are also exempt."

At Austin, there has been speculation that the FIA 'moved the goalposts' by now including parts for heritage machinery in the budget cap. The FIA rectified the regulations in June to include these parts.

Horner has said: "We feel that, again, at such an immature set of regulations, there’s going to be clarifications and tidying up, and I think, certainly how unused inventory was treated was, in our view, a change to the regulation. Certainly we applied a very strict ruling in the way that we treated our new stock. And I think that a clarification came out in June that changed the application of that. That had a seven-digit effect on our submission. But, of course, retrospectively, we were not allowed to change your submission."

[Anyopenroad]

If multiple teams were being caught out by differing interpretations of “immature” rules then I would have sympathy for the argument that everyone - FIA included - is learning how to manage a complex problem.

But it isn’t. It’s one team out of ten.

[Aysedasi]

Originally Posted by Anyopenroad

If multiple teams were being caught out by differing interpretations of “immature” rules then I would have sympathy for the argument that everyone - FIA included - is learning how to manage a complex problem.

But it isn’t. It’s one team out of ten.

And it's probably unfair, but I have to say it - if you had to guess which team it was going to be, it was always going to be RBR - wasn't it?