The bottom line

There are also a number of exclusions from the cost cap. Driver salaries and costs are exempt, which has been a controversial topic, though I think it’s probably right because otherwise the drivers would end up doing private endorsement deals with the teams and sponsors outside their contracts, circumnavigating the cost cap regulations altogether.

The fact that the salaries of the top three executives in each team are also exempt is particularly amusing considering the team principals voting for it are almost certain to be among them. You can imagine the conversation, can’t you? ‘Yes, yes we all need to cut costs, but let’s just make sure we keep earning the big bucks, okay…’

Other exceptions include marketing, property, finance, HR, legal and corporation tax as well as any licence and entry fees paid to the FIA to compete.

In terms of personnel, maternity and paternity pay is excluded as well as any payments made to temporary staff hired to cover for those on sick leave. All employee termination benefits together with any social security contributions are also exempt, although critically only until the end of 2022. There’s even a $1m allowance for entertainment costs throughout the year.

Flight and hotel expenses for events are also excluded, although weirdly trains and buses are not, meaning no one’s going to take the Eurostar to Spa any more. An odd twist is that freight costs are a part of the cap, so I strongly suspect teams are getting their staff to max out their baggage allowances…

Non-F1 activities such as Mercedes’ involvement in the INEOS America’s Cup team are outside the cap and have been a clever way for the teams to re-deploy their highly skilled workforce to generate additional revenue. Any capital expenditure is also given an allowance outside of the cost cap. A team like McLaren, which is building a wind tunnel, is given a separate pre-defined allowance for this sort of investment.

Reporting and auditing the annual accounts are further complicated by how teams are structured. For example, Red Bull Racing is a separate entity from the energy drinks business whereas the Ferrari F1 team is part of the wider road car business. This makes the audit and reporting process far more complicated as you have to find a way to divide up the expenditure.

To confuse things further, Mercedes, Ferrari, Alpine and Red Bull Technologies are engine suppliers closely linked to the race teams, whereas customer teams have to pay them for engines. The FIA therefore has created a maximum price of €15m for the power units which need to be accounted for by all 10 teams within the cap.

Regarding the cap itself, the main concern has always been about how effectively it can be policed. For example, what would stop a team setting up a group of people in another office in another part of the world as an external supplier? Can the FIA truly monitor every penny being spent by the teams?

The FIA has a Cost Cap Administration team and there are links to Statutory Accounts/Audit procedures. The regulations work on the basis that they first require the disclosure of all relevant costs, from all related parties, before then allowing exclusions.

To some extent, the teams have to be self-policing but the FIA has warned that any major breach will be dealt with via financial and sporting penalties which could even include disqualification from the World Championship. The FIA has engaged auditors Deloitte to support the overall regulation and the governing body itself has a team of people who show up unannounced at the team’s factories and pits at the track for spot checks on working hours and expenditure.

The system is relatively new and is still evolving every month. There is an Established Financial Advisory Committee chaired by the FIA, which is a forum in which all CFOs participate to evolve the regulations and the teams are constantly seeking clarifications.

As for the current controversy, the opaque way this investigation has been handled by the FIA really isn’t great for the sport. The FIA leaks more than Thames Water and in Singapore it was already widely known that Red Bull and Aston Martin were being investigated, the former for a ‘minor breach’ and the latter for a procedural one. We were meant to get an announcement about this before Japan, which then got delayed to the Monday after the race when most of the paddock was in the air. But the announcement didn’t tell us anything we didn’t already know.

By how much has Red Bull allegedly breached the cap? In what area or areas has it supposedly broken it? What is the process in terms of applying penalties, and what’s the process of appeal? There seem to be more questions than answers at the moment.

Ultimately, the teams will always look for loopholes as they do in every other type of regulation because that’s what they all do, and understandably so. It’s part of the game and has been so since the dawn of F1. So it’s now up to the FIA to establish the legality of their actions as well as the credibility of the regulations.