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VAT - Film Financing - Treatment of returns

Uncertainty over VAT treatment of returns from Film Investment

Good morning all, 

I have a query regarding the VAT treatment of payments received in connection with investment in films. I appreciate this is quite a specialist area that may need further professional advice. I am just hoping to sense check my logic with the interpretation of other professionals here before discussing this with the Directors of the business. I am inclined to advise they seek professional advice from an expert in this area, but would like to be able to explain why/have some confidence in what I am saying prior to discussing it.

See below an example of the scenario:

A Film investment company (FIC) makes two agreements to invest in two different film projects with another company run by film producers who own the rights to these film projects (the Rights Holding Company 'RHC'). Both contracts are the same, the FIC provides £1m of funding for each project and is one of a number of funders who contribute to a £5m budget for each film. The RHC appoints a sales agent to promote each film and sign licence agreements with distributors for the film around the world. All payments from the exploitation of each film are paid to a central 'Collection Account' set up for the specific film and managed by a non-uk based Collection Agent who then distributes the funds to the various parties in accordance with their contracts.

The contracts between the FIC and the RHC are identical for Film A and Film B, each states that the FIC as an early stage investor is entitled to be repaid its initial investment plus a 15% premium in a priority position before any other participants in the film from receipts in to the collection account, along with a 10% share of 'Net Profit'. Net profit is defined as what is available to be distributed once all investors have fully recouped their initial investment (so the full £5m budget has been recouped) plus any premiums they are entitled to.

Film A is produced entirely on location in the UK. 

Film B is produced entirely on location in the EU. 

The FIC and RHC companies are both UK registered companies.

The FIC has, to date, not accounted for VAT on the payments received. When asked to explain why they have been unsure, partly due to changes in Directors & bookkeepers meaning no one remains from when the investment was first set up and they have simply carried on accounting for receipts 'the way it has always been done'.

I believe the income would be classed as a supply of services. For both Film A and Film B, as a service, the place of supply would follow the general rule for B2B and be deemed a UK supply as the customer (RHC) is a UK registered business.

My query is, what should be the VAT treatment of the different elements of income the FIC receives? The first £1m plus Premium of 15% could be classed as exempt from VAT as a repayment of a loan/credit facility (even though the contract does not specifically state the funds are a 'loan' they are referred to as 'production funding'). This is perhaps why no VAT was initially charged by the company. However the Net Profit Share element would seem to be clearly standard rated as it is more akin to 'Royalties, Licenses and similar payments'. 

I think that the fact the payments come from the collection agent based in the EU is irrelevant for VAT purposes as the Collection Agent is not party to the service being supplied by the FIC to the RHC, being the provision of production funding.

Many thanks as always for the opinions of members and any pointers to HMRC guidance on these issues. 

Regards, 

WA.

 

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