With the release of the Panama papers, attention is very much focused on tax and offshore accounts. What’s maybe not so widely known is that the last two Prefab Sprout albums were essentially financed by tax evaders. It was essentially the same scheme Gary Barlow and Take That were involved in and which was ruled illegal in 2014.
Let’s be clear that neither Paddy nor Keith Armstrong from Kitchenware are tax evaders, at least as far as I know. They had nothing to do with what I’m about to describe, they were just flogging their art as usual.
When the album was up for release I did a little digging into Icebreaker, and was fascinated to find that it was being sold as an investment opportunity where the minimum investment was £250K, typically there would be 10-20 investors, and about 80% of the investment was expected to be borrowed. This raised my suspicions a bit, and I commented on it on the Sproutnet forum, towards the bottom of the page – happy to say I’d got the mechanics pretty much spot on.
How it worked was deliciously complex, with several parties involved, and close involvement by an offshore bank.
Let’s say we have 10 investors, each investing £500K, total of £5M. Of this, each invests £100K of their own money, and arranges a loan of £400K. This forms a partnership, or LLP.
The important point here, is that the loans were arranged by Icebreaker, on identical terms for each investor, and had to be with a particular bank. In the case of “Crimson/Red”, this was a bank in Curacao, the “United International Bank”. For “Lets Change the World With Music” this was S G Hambros in the Channel Islands.
On the day the partnership forms, lots of things happen. The bank releases the loan funds to the investors, who add their own cash and send it to Icebreaker. Icebreaker retain substantial fees, and pay a total of 2.4% of the loan amount to the bank, which is how the bank makes money. The remander is put to the credit of the LLP. At this point there will be an amount equal to the loan plus a comparatively small surplus, with the fees coming out of the “real” money.
Icebreaker, who have a power of attorney for the LLP, then pay the artist – Paddy in this case – something like £5K for the rights to the intellectual property forming the production. Don’t worry though, he gets more later.
They then – again on behalf of the LLP – pay almost all of the remainder from the LLP account to another company to exploit the intellectual property. For “Let’s Change the World With Music” this was Shamrock Solutions. Shamrock is actually a genuine exploitation company, i.e. it really worked to maximise returns from products and genuinely worked with the artists, but it was tied to Icebreaker by various contractual requirements. They weren’t frantically successful at exploiting work for profit, but they were genuine, and they tried hard. I’m not sure who did “Crimson/Red”, but it was the same structure. Let’s assume it was Shamrock for the sake of the explanation.
Shamrock then pays a large production fee to the artist’s company. Let’s say £1.8M. However the artist has to buy the rights to receive a percentage of proceeds, typically 50%. This could be £1.5M, leaving a net to the artist of £300K which is the actual production cost. This payment structure is expected and mandatory, it is a means of making the production costs look comparable to the amount paid by Icebreaker, when in fact they’re a small fraction. In fact although both amounts are invoiced, only the net amount is transferred.
Shamrock then are still holding a large amount of net cash from the LLP. So they take an amount exactly equal to the aggregated loans and deposit it with the same bank that lent it in the first place, with the bank having first charge on the deposit. The remainder is held to pay for the exploitation of the rights, marketing and so on. If they make a profit, some passes back to the LLP. Though that rarely if ever happened. The stated aim of this deposit is to provide security to the bank and investors in case the exploitation company folds, which as it happens it does, but the real reason is to offset the loans so the actual net cost to investors is zero.
So you can now breathe in… The positions are as follows:
- The investors have each put £100K of their own money in
- The bank has taken 2.4% of £4M = £96K
- The bank has lent out £4M to the investors but taken deposits of £4M from Shamrock which it has first call on if the investors don’t pay interest. It has therefore made £96K at zero risk for moving a number from one part of the balance sheet to another. Banks, eh?
- Icebreaker has taken a large fee from the investors and has no further interest in the success or failure of any project
- Icebreaker has paid well over £4M to (say) Shamrock – let’s say £4.5M – on behalf of the LLP
- Shamrock have paid (say) £1.8M to Paddy, but received £1.5M back instantly, net £300K and they have net funds (£200K) to exploit the resulting project. They also paid £4M into a deposit account they can’t get at, but that’s irrelevant to them.
- Paddy is up £305K and has transferred the rights to his work to the LLP – he will also receive 50% of net revenue.
- The LLP is left with a tiny residue. A few 10s of K.
If this was all there was to it, the investors would be praying for a highly successful project to get their own “real” money back.
But it isn’t.
Because of the large £4.5M payment to Shamrock, the LLP and therefore the investors has made an enormous year one trading loss. Which can be offset against income and capital gains tax for the last three years for each of the investors and more than pays back the cost of the “real” money. The investors don’t need a successful project, because they’re £20k to £60K up, courtesy of the taxpayer.
Moreover the bank pays and charges interest on the £4M at the same rate in both directions, and Shamrock are obliged to pay the interest they receive to the LLP. Who pay the bank. Net cost, zero. Risk, zero. At the end of the arrangement, Shamrock pay the capital back to the LLP which pays off the loans. So the borrowing exists only to inflate the tax loss.
It’s designed to look like a set of genuine transactions, and in fact the companies were operating at “arms length” but under the constraints of specifically and carefully designed agreements that removed risk and maximised tax “efficiency”. The practical upshot is that the investors had a guaranteed profit, zero risk, and a chance of a windfall profit from the resulting albums (although few if any Icebreaker projects made money).
In essence, the taxpayer picked up the tab for the albums. Instead of funding, say, care payments for the disabled or the NHS or deficit reduction. That’s why people get justifiably angry with Gary Barlow. But it wasn’t just him, there were upwards of 900 individuals doing this. Some were famous, some were just relatively high net worth individuals who’d been sucked in by the promises and been reassured by their financial advisors that it was above board.
And they would have gotten away with it, except that the pesky HMRC stepped in and had it stopped. They’re probably still trying to get the money back from the investors. If you’re interested, you can read the court document, which is fascinating, lengthy, but fascinating. And you can see the details of the LLPs including investors, Purplesun LLP for “Let’s Change the World with Music”, and Caldergrave LLP for “Crimson/Red”. I looked some of them up – one seems to be the CIO of Nissan, but rather amusingly it seems “Crimson/Red” was largely funded by a consortium of Orthodontists. Which given that getting Paddy to record is like pulling teeth seems more than a little appropriate…
But we’re left with an interesting question. Are we pleased these albums were released, even via tax evasion, or would we rather they were left unfunded but morally pure?
Not sure I can answer that myself.