Fifty-four page financial document covers everything—except it's not clear what to do if someone breaks the cost cap rules.
- The FIA has already announced that Red Bull was in breach of the $145 million cap for 2021.
- The Formula 1 series spells out its financial regulations in a 54-page document that also lists expenses that AREN’T even included in the cap.
- According F1’s regulations, the penalty for a breach could range anywhere from a public reprimand to a disqualification from the season in question.
While the Formula 1 paddock and F1 fans around the world wait patiently for F1’s decision for a penalty in the case of Red Bull Racing’s cost cap breach, it’s worth noting that the governing body has plenty of tools in its toolbox.
The FIA has already announced that Red Bull was in breach of the $145 million cap for 2021. Reports from media in Europe say the breach was about $1.8 million.
No big deal, you say?
If that’s your stance, what IS a big deal? Would $5 million get your attention, or $10 million?
Formula 1 spells out its financial regulations in a 54-page (yep, 54 pages!) document that lists expenses that AREN’T even included in the cap. That list (see below) is likely longer than the list of items that ARE included in the cap. It also reads in a format that only an accountant can truly appreciate.
And, no, teams are not spending “only” $145 million on their F1 program. It’s clearly a lot more than that (driver salaries, salaries of three highest-paid employees on the team, and engine development—three large line items for most teams—are not even included).
Red Bull isn’t the only one on sweating out the ultimate penalties handed down for the team’s 2021 cost cap breach.
Mark ThompsonGetty Images
That said, Red Bull’s breach puts the FIA and Formula 1 in a tough, some say impossible, position. Red Bull’s rivals, who say they’re playing by the rules, want a tough penalty—one that will get everyone’s attention and to discourage further breaches.
“Well, it’s a new process,” Red Bull team principal Christian Horner said this past weekend in Austin, Texas. “What you have to remember, with these regulations, is that they were introduced at a level of $175 million. It was then reduced by $30 million during the pandemic (to make the final number $145 million). It’s a complicated set of regulations. It’s 52 pages (actually, it’s 54) and of course we’ve been through that process, and 2021 was the first-ever year of a set of very complicated financial regulations, which of course, have varying… interpretations to them from different accounting specialists.
“So obviously, the findings of the FIA have been made public recently. And we’re now in a voluntary process with the FIA, going through that process with them. And I hope you will be able to conclude it in the near future. But that’s where we currently are.”
McLaren’s Zak Brown
Jared C. TiltonGetty Images
McLaren Racing CEO Zak Brown has been a leading proponent calling for harsh penalties. Come down hard or run the risk of teams losing incentive to stick to the rules. After all, what’s a $10 million fine to a team like Red Bull, one that has been known to spend more than $350 million on an F1 season.
“I think the budget cap is very important for the future of the sport. I think everybody recognizes that and that’s why it was put in place. It is complicated, it is new. I think none of us know any details. So, I think we need to wait for the FIA and Red Bull to finish up the process that they’re in.”
“And I think just even like on the Super License, it was a shame not to get Colton Herta into the sport. I think he too would have been an excellent addition to the grid. And I think with this being a new process, what we need to do is come out of the backside of this, and learn from it and see what we need to do—as we need to do with other regulations—modify them from time to time. I think we all have opinions but we need to kind of see it through and then—as the teams, the FIA and Formula 1 do—sit around a table and say this probably isn’t perfect. I don’t think anyone thought it would be perfect. And then go: ‘What should we do to modify it moving forward?’ But fundamentally, the cost cap is a very important part of Formula 1’s future.”
So, the ball is in the FIA’s court. According to its own rules, the penalty could range anywhere from a public reprimand to a disqualification from the season in question. In other words, yes, the FIA could take Max Verstappen’s 2021 title away and give it to Lewis Hamilton. Verstappen’s 8-point championship margin wouldn’t hold up to a 50-point penalty.
“I’ve heard the things that have been said,” said Hamilton, who might stand to be the biggest winner in all of this. “I’m generally looking forwards. I’m looking at how I can win another championship. I have my own opinions of what we did as a team and how we did it last year. And I’m really proud of that. And, belief in what we earned. It doesn’t really change a huge amount.
“I do think that sport needs to do something about this in the future. Otherwise, if it’s quite relaxed… if they relax with these rules, then all the teams would just go over, spending millions more and then only having a slap on the wrist—it’s obviously not going (to) be great for the sport. They might as well not have a cost cap in the future.”
That might be the very penalty that Alfa Romeo team principal Frederic Vasseur would like to see. Financial penalties, he believes, would be little more than a slap on the wrist to the bigger teams.
The FIA confirmed Red Bull was in breach for the 2021 season more than two weeks ago yet still has not announced a penalty resolution.
“For sure, at the end, the sooner the better, but the most important for me is to have the good level of penalty,” Vasseur said. “It’s not because we are in a rush that we have to do something like this and to take any decision.
“This is crucial for the F1, for the future for the cost cap and now it’s into the hands of the FIA to find the right level of punishment. But for me, it has to be (a) sporting (punishment), because at the end, it’s a sporting infringement. We are not speaking about financial, we are speaking about (car) updates, and at the end we have to find the right level of punishment.”
What Can Red Bull Expect?
It’s likely that the probable outcome will land somewhere closer to public reprimand than an outright disqualification or points deduction that costs Verstappen his 2021 championship. One possible outcome is a cost cap penalty that lowers Red Bull’s cost cap for futures year(s) that would force Red Bull to work under a tighter budget than the other teams. Another possible penalty could be a limit to valuable wind tunnel testing.
The FIA and F1 are clearly in a tough position that they likely didn’t expect to be in during the first year of the cost cap. At the very least, the 54-page F1 Financial Regulations could have devoted a few more pages toward the penalty phase and spell out the penalties in much clearer and more precise language.
The FIA and F1 have painted themselves into a corner. And it’s going to be tough for anyone to come out of this one looking good.
Red Bull’s Christian Horner, left, Max Verstappen, center and engineer Adrian Newey.
NurPhotoGetty Images
Possible penalties for breach of financial regulations, per the FIA:
Possible Sanctions for Breach
SANCTIONS
9.1 The following sanctions may be imposed for breach of these Financial Regulations as set out in Article 8:
(a) A “Financial Penalty”, meaning a fine in an amount to be determined on a case by case basis.
(i) public reprimand;
(ii) deduction of Constructors’ Championship points awarded for the Championship that took place within the Reporting Period of the breach;
(iii) deduction of Drivers’ Championship points awarded for the Championship that took place within the Reporting Period of the breach;
(iv) suspension from one or more stages of a Competition or Competitions, excluding for the avoidance of doubt the race itself;
(v) limitations on ability to conduct aerodynamic or other Testing; and/or
(vi) reduction of the Cost Cap, provided that the penalty specified in Article 9.1(b)(vi) shall only be applied with respect to the Full Year Reporting Period immediately following the date of the imposition of the sanction (and subsequent Full Year Reporting Periods, where applicable).
(i) deduction of Constructors’ Championship points awarded for the
Championship that took place within the Reporting Period of the breach;
(ii) deduction of Drivers’ Championship points awarded for the Championship that took place within the Reporting Period of the breach;
(iii) suspension from one or more stages of a Competition or Competitions, excluding for the avoidance of doubt the race itself;
(iv) limitations on the ability to conduct aerodynamic or other Testing;
(v) suspension from an entire Competition or Competitions, including for the avoidance of doubt the race itself;
(vi) exclusion from the Championship; or
(vii) reduction of the Cost Cap, provided that the penalty specified in Article 9.1(c)(vii) shall only be applied with respect to the Full Year Reporting Period immediately following the date of the imposition of the sanction (and subsequent Full Year Reporting Periods, where applicable).
Enhanced monitoring and suspended sanctions
9.2 In addition to any of the sanctions listed in Article 9.1, the Cost Cap Adjudication Panel has the power to impose enhanced monitoring in respect of an F1 Team.
9.3 At its sole discretion, the Cost Cap Adjudication Panel may suspend the application of any imposed sanction in whole or in part.
9.4 For the avoidance of doubt, in the event of an appeal of any decision, the application of all imposed sanctions shall be suspended until final decision is made by the ICA.
Payment of a Financial Penalty
9.5 Payment of all fines under these Financial Regulations shall be made within 30 days of the date of the relevant decision. In the event an appeal is made, payment shall be suspended until the outcome of the appeal is determined.
9.6 Subject to Article 9.5, any delay in the payment of all fines under these Financial Regulations automatically divests the F1 Team concerned of the right to participate in the Championship until that payment has been made.
9.7 Without prejudice to Article 9.6, interest shall be payable by the F1 Team to the FIA in respect of any fines not paid by the due date, accruing daily on the principal amount outstanding from the due date until the date of actual payment, at a rate of 2% above the US Federal Reserve System federal funds rate on the relevant due date.
Individual responsibility
9.8 In the event that:
(a) an F1 Team’s Full Year Reporting Documentation is incomplete, inaccurate or misleading in any material respect; and
(b) the Cost Cap Adjudication Panel determines that that F1 Team’s CEO, CFO, TeamPrincipal and/or Technical Director was aware, or ought reasonably to have been aware, of the same, the Cost Cap Adjudication Panel may impose any of the sanctions permitted under the International Sporting Code on the individual(s) concerned, with the exclusion of fines.
Team Costs Not Counted Against Cost Cap
EXCLUSIONS
3.1 In calculating Relevant Costs, the following costs and amounts within Total Costs of the Reporting Group must be excluded (“Excluded Costs”):
(a) All costs Directly Attributable to Marketing Activities;
(b) All costs of Consideration provided to an F1 Driver, or to a Connected Party of that F1 Driver, in exchange for that F1 Driver providing the services of an F1 Driver to or for the benefit of the F1 Team, together with all travel and accommodation costs in respect of each F1 Driver;
(c) All costs of Consideration provided to an Other Racing Driver, or to a Connected Party of that Other Racing Driver, in exchange for that Other Racing Driver providing the services of an Other Racing Driver to or for the benefit of the F1 Team, together with, all travel and accommodation costs in respect of each Other Racing Driver;
(d) All costs of Consideration provided to the three individuals (other than any individual in respect of whom all costs of Consideration are excluded pursuant to any other sub-Article of this Article 3.1) in respect of whom the highest aggregate amount of Consideration has been recognized in Total Costs of the Reporting Group during theReporting Period (the “Excluded Persons”), or to a Connected Party of any Excluded Person, in each case in exchange for that Excluded Person providing services to or fort he benefit of the F1 Team, together with associated employer’s social security contributions and all travel and accommodation costs in respect of each ExcludedPerson;
(e) With respect to Heritage Asset Activities:
(i) all costs Directly Attributable to Heritage Asset Activities; and
(ii) if the F1 Team can prove to the satisfaction of the Cost Cap Administration that an identifiable portion of the Consideration provided to any Heritage AssetPersonnel relates to Heritage Asset Activities, that portion of those costs, together with associated employer’s social security contributions;
(f) All Finance Costs;
(g) All Corporate Income Tax;
(h) With respect to Non-F1 Activities:
(i) all costs Directly Attributable to Non-F1 Activities; and
(ii) if the F1 Team can prove to the satisfaction of the Cost Cap Administration that an identifiable portion of the following costs relates to Non-F1 Activities, that portion of those costs:
(i) Consideration provided to, and associated employer’s social security contributions incurred in respect of any Personnel engaged in both F1Activities and Non-F1 Activities;
(ii) electricity, gas and water costs incurred in the course of both F1Activities and Non-F1 Activities;
(iii) lease costs in respect of plant and equipment used in the course of both F1 Activities and Non-F1 Activities; and
(iv) costs of parts and consumables, and outsourced services, incurred for the maintenance of an item of plant or equipment used in the course of both F1 Activities and Non-F1 Activities;
(i) All costs Directly Attributable to Human Resources Activities, Finance Activities or Legal Activities;
(j) All Property Costs;
(k) All Employee Bonus Costs, subject to a maximum amount in any Full Year ReportingPeriod of the lower of:
(i) 20% of the Total Fixed Employee Remuneration; and
(ii) the Excluded Bonus Maximum Amount, adjusted (if applicable) for Indexation; plus the amount of any employer’s social security contributions in respect of the amount of such Employee Bonus Costs excluded pursuant to this Article 3.1(k);
(l) The following amounts:
(i) payable to the FIA by an F1 Team in relation to its entry to, and participation in, the Championship taking place in the applicable Reporting Period; and
(ii) payable to the FIA by an F1 Team in relation to the FIA Super License of any F1 Driver in respect of the Championship taking place in the applicableReporting Period; and
(iii) payable to the Commercial Rights Holder to the Championship by an F1 Team pursuant to its acceptance as a signatory to a contract with the Commercial Rights Holder and/or the FIA relating to the F1 Team’s participation in theChampionship;
(m) All Financial Penalties in respect of any breach of these Financial Regulations;
(n) All costs of goods and services within the Power Unit Supply Perimeter for use by theF1 Team, up to an amount in any Full Year Reporting Period equal to the applicable maximum price as set out in the Sporting Regulations;
(o) All amounts of depreciation, amortization, impairment loss, and amounts as a result of revaluation or disposal of tangible assets and intangible assets;
(p) All foreign exchange gains and losses recognized in profit or loss, whether arising from settlement and/or re-measurement of monetary items denominated in a foreign currency, or otherwise;
(q) Where a Reporting Group Entity is required by applicable laws to pay employer’s social security contributions, the amount by which such mandatory contributions exceed 13.8% of the Total Employee Remuneration;
(r) All flight and hotel costs in connection with a Competition or Testing of Current Cars by Personnel;
(s) All costs incurred with a Power Unit supplier that are Directly Attributable to thedevelopment, testing and validation of an Alternative Fuel and Oil for use with thePower Unit in F1 Cars of the F1 Team;
(t) All costs Directly Attributable to entertainment provided for the benefit of all employees of all Reporting Group Entities on a substantially equal basis, subject to a maximum amount of U.S. Dollars 1,000,000, adjusted (if applicable) for Indexation;
(u) All costs of Consideration provided to employees in respect of maternity leave, paternity leave, shared parental leave or adoption leave (together with associated employer’s social security contributions) in each case pursuant to a bona fide formal written policy that applies substantially equally to all employees of all Reporting GroupEntities;
(v) All costs of Consideration (together with associated employer’s social security contributions) provided to an individual (excluding existing Personnel) engaged as cover for an employee on sick leave during the period that the relevant employee isnot working, subject to a maximum amount equal to: (i) the Consideration that would have been provided to the relevant employee over the same period were that employee not on sick leave; plus (ii) the employer’s social security contribution associated with that Consideration. For the avoidance of doubt, an individual engaged to replace an employee whose costs of Consideration have been excluded pursuant to Article 3.1(w) is not engaged as cover;
(w) All costs of Consideration (together with associated employer’s social security contributions) that an F1 Team demonstrates to the reasonable satisfaction of the Cost Cap Administration have been provided to an employee that has been formally placed on indefinite sick leave or disability leave and is not expected to return to work, to the extent provided during the relevant employee’s period of absence; and
(x) All Employee Termination Benefits (together with associated employer’s socialsecurity contributions), incurred in the Full Year Reporting Periods ending on 31 December 2021 and 31 December 2022.
3.2 If a cost within Total Costs of the Reporting Group is Directly Attributable to any combination of the following activities:
(a) Marketing Activities;
(b) Heritage Asset Activities;
(c) Non-F1 Activities;
(d) Human Resources Activities;
(e) Finance Activities; and
(f) Legal Activities, such cost shall be an Excluded Cost.
3.3 For the purposes of this Article 3, where an F1 Team has a Presentation Currency other thanUS Dollars, amounts expressed in US Dollars shall be converted into that F1 Team’sPresentation Currency at the Initial Applicable Rate.
Source: FIA
Mike Pryson Mike Pryson covered auto racing for the Jackson (Mich.) Citizen Patriot and MLive Media Group from 1991 until joining Autoweek in 2011.
Keyword: How F1 Painted Itself into a Corner with Cost Cap Regulations