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Friday, 11 September 2009

Why stop at the Phoenix 4?

It seems the government is intent on punishing the directors of the Phoenix consortium for helping themselves to £42 million by banning them from future directorships.

It seems that the source of much of this cash was not from the MG company but from the acquisition of 2 leasing companies from Barclays capital in transactions organised by Deloittes, according to the report from the BERR.

These transactions, listed as Projects Aircraft and Trinity, involved the sale to Phoenix ventures of aircraft leasing companies owned by Barclays Mercantile, the leasing arm of Barclays. Sitting on the Barclays side of the deal was Iain Abrahams. The idea behind the deal is quite complicated. During the opening years of these aircraft leases the transactions would have generated substantial tax losses from the potential value of capital allowances and the leasing company would have surrendered these losses to the Barclays group to shelter UK tax liabilities.

In later years the leases would have created taxable profits far in excess of book profits, creating substantial deferred tax liabilities in the Barclays accounts. By selling the leasing companies the tax liabilities could be avoided, giving rise to book gains for Barclays. Clearly any purchaser would want to be compensated for accepting the liabilities, but a group that had substantial losses that it was never likely to use would want a reduced amount and in this case, Barclays agree to allow for a discount in the price equal to 35% of the present value of the future tax liabilities to Phoenix Ventures. The balance was shared between Barclays and the respective lessees.

But that is never the whole story because Barclays and the lessees probably planned to terminate the leases anyway, so the present value of the tax actually avoided would have been much higher, and even if they hadn't, when Barclays started reporting undre IAS it would have hadto report the nominal value of future tax laibilities rather than their economic (discounted) cost it had shown under UK GAAP. So all in all, a very lucrative transaction.

Phoenix Venture Holdings didn't have any tax losses itself. Losses had to be surrendered by MG Rover to its parent. According to the BERR report, Barclays would not countenance a sale to MGRC bcause oif credit concerns, but were amenable to a sale to the parent. Now Barclays would have had a good idea about the position of the Phoenix/MG group. They have good reason to do so because if the tax liabilities in the leasing comapny had not been met, the law would allow the Revenue to go after the seller for any unpaid tax, unless the seller could iestablish that it was not reasonable to infer that the tax would not be paid at the time the company was sold. That means that Barclays and their advisers would have been all over the deal to establish where the losses would have been coming from.

As it happens, Phoenix managed to arrange for the surrender of the losses for no consideration, which appears to be a matter that the BERR appears to find objectionable, all though there have been no prosecutions from DTI/BERR nor from the SFO.

But if the Phoenix 4 are culpable of anything, why is no action being taken against Barclays, against Eversheds or against Deloittes the auditors and tax advisers to Phoenix who pocketed over £2 million in fees from these transactions and £30m from the group over the years 2000-2005? It is notable that only about £4m of that £30m was for audit work. Can Deloittes really claim to have been independent with so much fee income from non-audit work?

The suspicion has to be that the directors are easy prey and the others would be much more likely to see off Mandelson.


Anonymous said...

Why focus on the Phoenix 4 (or 5)? Because they were the ones that actually controlled the company and chose to enrich themselves instead of looking after the thousands of other people who worked there. Ultimately, Barclays' job was to look after itself. So Mandelson accepts that we live in a capitalist world, but not that directors can rip off to any extreme the companies they run and their employees. Face it, capitalism has unacceptable faces, and the Phoenix 5 are five of them.

Alex said...

What makes Barclays or Deloittes any less culpable.

Deloittes, the auditors trousered £30m in fees, of which only about 1/8th was from audit work.

The rest was from advising on the deals that enriched the directors.

Barclays may have a responsibility to look after itself, but if the managers are culpable for selling the group tax losses for no consideration for the company, Barclays are just as culpable for bying them. If you know how the tax indemnities work in companies with latent UK tax liabilities, particularly when sold to companies with unsound credit, you will know that Barclays would not have done the deal unless they knew exactly what was going on inside the buyer's group.