Film Partnership Investment, Associated Companies

Film Partnership Investment, Associated Companies

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The Inland Revenue have argued that an investment in a film partnership will be an associated company with the directors personal company - causing it to lose out on the opportunity to claim small companies relief thus paying tax at 30% rather than 19% - has anyone been able to counter this arguement please
hillary dell

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By Paul Soper
18th Dec 2006 17:30

Yes but...
ITTOIA 2005, applicable from 6.4.05 onwards contains the derivation of s118ZA in s863 and starts "For income tax purposes - " and amends s118ZA to leave it applicable for CT purposes. The former wording, which applies up to 5.4.05 used the words "For the purposes of the Tax Acts", which emcompasses both. They are not then thrown back onto s118ZA(2) because it deems, unless provided otherwise, that an LLP is, effectively, a partnership. Good luck with the battle but I'm not going to hold my breath.

I note that the question talks of the film partnership being an associated company - rather than the usual argument that it is the film partner's own companies that are associated. I suppose if they are arguing that it is only the film partnership that is an associated company then that is actually a good result!

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By Paul Soper
18th Dec 2006 15:14

Hmmmm
I think the revenue are absolutely correct on this - and it is a danger that has been discussed for a number of years. When considering associated company status you look to see how many companies are under 'common control' and this refers to the close company definition of control which includes companies controlled by associates. An associate includes a partner in a business venture and any companies that your partners control will be under common control for this purpose. If we accept that for an ordinary trading or professional partnership, as we must, its in the legislation, why should it be any different for a film partnership. The only discernable difference is that in an ordinary partnership you know who your partners are (unless like PwC it's a large professional practice) whereas in a film partnership you don't. I think your time might be better spent looking to see who sold the film partnership to the client and whether this problem was explained in any way at all, so that a misselling, misrepresentation or negligence issue arises.

I have heard that the revenue have started approaching some partners in one film partnership for details of their companies so that they can build up a complete picture of just how many companies are involved.

Incidentally, unless you know how many associated companies there are you cannot state the number on the CT600 and so cannot use the 19% rate etc. at all.

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By wdr
18th Dec 2006 15:39

Then Revenue argument is flawed. ICTA s118ZA deals with the appl

Subsection (1)(b) is a deeming provision , and restricted solely to matters as between members of the LLP and the LLP itself, and does not address the relationship between one member and another. There is no requriement under that deeming provision to extend its effect beyond the matters it covers.

The Revenue are therefore thrown back onto looking at Subsection (2)(a), and to arguing that the term 'members of a partnership' is the same as 'partners'.

There is a fundamental error in that approach.
I am trying to assemble a fighting fund on this in anticipation of an argument befroe the Special Commissioners, and have a number of interested prospective contributors.

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By rdrtaxwizard
28th Dec 2006 20:14

associated companies and partners
I arrange a lot of film partnerships and have been receiving queries from clients who are getting letters from Wick District asking partners to help HMRC to do their own job.

The view of the Tax Faculty, with whom I have had extensive correspondence, is that HMRC are correct in law, but there is no legal compulsion to answer the letter, and indeed that the letter is potentially misleading and could result in respondents incorrectly identifying associated companies which are not associated for these purposes. See the December Faculty newswire, and also look out for a more detailed article in January's TaxLine.

Even if this exercise proceeds and a company's corporation tax is amended, how will the company know that HMRC have calculated it correctly. Firstly they will be relying on possibly incorrect data, and secondly the company will not have details of the associated companies concerned as this will remain confidential.

My position is of the bigger picture. ESC C9 includes the disapplication of the "associates" rules where companies are controlled by relatives other than married couples and minor children and where there is no substantial trading interdependence between the companies. HMRC have been unable to explain what the imperative was behind that concession, and if if was good enough for relatives whose companies may even trade with eachother to a modest extent, why is it not good enough for partners in film partnerships who don't even know eachother and whose companies almost certainly don't trade with eachother.

HMRC admit that these rules are anti-avoidance, to prevent those in control of a business from fragmenting it in order to maximise the small companies rate. The Courts when dealing with tax avoidance have repeatedly applied a purposive test, so is it right that companies which are associated by accident should be caught?

The CBI have taken up the argument because they are persuaded that HMRC's attempts to bash SMEs in this way is oppressive. I would also observe that people have invested in film partnerships as part of a Government financed incentive to support the British Film Industry. There should be no sting in the tail.

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By Paul Soper
31st Dec 2006 20:24

Yeah but...
Under self assessment it is the company's obligation to calculate its liability not the revenue's and the company's burden of proof to displace an adjustment made by the revenue on enquiry.

The company has to state the number of associated companies on the CT600 and if they don't, or as is more the point can't, then they must surely self assess at 30%.

This isn't a new problem, its one that has been discussed for sometime now. I'm not supporting the revenue position but just trying to point out the problem.

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