Film partnerships lose tax relief appeal

Share this content

Two film partnerships have lost an appeal to claim tax relief on their losses after the upper tribunal ruled that they were not run for commercial purposes.

To receive tax relief on their expenditure, the partnerships [Samarkand Film Partnership No 3, Proteus Film Partnership and three partners v HMRC], which acquired and leased films produced films including The Queen, for which Helen Mirren received a Best Actress, had to prove that their fees were an expense incurred “wholly and exclusively for the purpose of the trade.”

In 2011, the partnerships lost a case in the first tier tribunal, which ruled that they were not done on a commercial basis and so not entitled to the tax relief.

The judge said some of the business practices of the partnerships was “sloppy” and queried Samarkand’s title rights to The Queen.

The upper tribunal agreed and said it was reasonable for HMRC to believe that the film schemes were designed to avoid tax.

About Nick Huber

Nick Huber profile image

I’m a specialist business journalist and have a particular interest in tax and technology. 

Replies

Please login or register to join the discussion.

avatar
18th May 2015 12:07

Another HMRC victory

Well done HMRC for exposing these transparent tax avoidance schemes, why,... why... why... did it take so long for HMRC to look into this and similar schemes. 

Thanks (3)
avatar
18th May 2015 12:26

I think

This is much more a case of the current judiciary leaning heavily against those participating in any type of tax avoidance planning, plus the fact that it is very hard indeed to overturn the FTT's findings of fact (which I thought were a bit harsh in this case for the aforesaid reason). The lawyers must be laughing all the way to the bank here, as these appeals will cost around £1m with a Magic Circle firm and top QCs and due the enormous sums at stake the taxpayers have little choice but to keep appealing using these rather expensive lawyers.   

Thanks (0)
avatar
18th May 2015 12:35

But don't forget those "rather expensive lawyers" will be paying a commensurate amount of tax on those fees so HMRC wins all round. Unless, of course, the lawyers have tax planning schemes of their own.....

Thanks (1)
avatar
18th May 2015 15:28

designed by Mickey Mouse again?

Tribunals I have read seem to follow a similar theme:

designed by Mickey Mouse, pedalled by Donald Duck and bought by Goofy.

Is it worth reading this one or is it all a bit pathetic as usual?

Thanks (4)
avatar
18th May 2015 13:28

Film partnerships

 Wasn't it Mickey Mouse?

Thanks (1)
avatar
18th May 2015 15:29

yes LOL

David Clutterbuck wrote:

 Wasn't it Mickey Mouse?

bloody spellcheckers not working and obviously not using it i've lost it. (spelling that is)

 

corrected

Thanks (0)
avatar
18th May 2015 13:38

HMRC are being hypocritical

What tax avoidance (legal) was designed to occur? The deferral of the income tax liability by virtue of the sideways loss relief until it recrystalised over the term of the loan from the loan repayments. Partners would have gained 40% tax relief and part of those repayments would be at 45% now. By loosing this case, HMRC denies the up front relief and the full income stream remains taxable. The loan repayment now has to be paid from repayments net of tax. In other words HMRC gets more tax with the scheme by virtue of the change in income tax rates but still wants to unwind it's own published position. Disgraceful.

Thanks (2)
avatar
18th May 2015 14:26

Samarkand decision

It is far more complicated than some of the respondents think.  the bog standard sale and leaseback scheme was simply a tax deferral, not avoidance, fully approved by HMRC provided that the boxes were ticked.  In net terms they were not a tax avoidance scheme because the participants stood to pay more tax over the life of the lease than they had saved at the outset.  The irony is that although Samarkand had some structural features that could possibly have been used to convert the  scheme into pure tax avoidance, the fact is that they were never used.  Yet the mere existence of these unused facilities persuaded the Court, in the Judicial Review element if its decision, that HMRC were not bound by its normal film partnership approval procedures as set out in the Business Income Manual.  That is a very odd decision and which ought to be appealed.

The second point is that if this appeal decision, insofar as it relates to the trading issue, is confirmed by the Supreme Court ( as I expect) think what is likely to happen to all your clients in sale and leaseback partnerships.  HMRC will say, "sorry folks, the Courts have said that you are not trading so we will no longer allow you relief for your loan interest deductions, nor can you treat the film partnership profits as relevant income for pension contribution purposes".  There is a huge number of film partnerships which are still under enquiry pending this decision, but there would be nothing to stop HMRC applying the same rules to members of film partnerships where the enquiries have been settled.

Thanks (0)
avatar
18th May 2015 15:26

that's the interesting bit

rdrtaxwizard wrote:

The second point is that if this appeal decision, insofar as it relates to the trading issue, is confirmed by the Supreme Court ( as I expect) think what is likely to happen to all your clients in sale and leaseback partnerships.  HMRC will say, "sorry folks, the Courts have said that you are not trading so we will no longer allow you relief for your loan interest deductions, nor can you treat the film partnership profits as relevant income for pension contribution purposes".  There is a huge number of film partnerships which are still under enquiry pending this decision, but there would be nothing to stop HMRC applying the same rules to members of film partnerships where the enquiries have been settled.

or that the sums borrowed were not used for the partnership trades but in the purchase of a capital asset, as in the one I've read in more detail. ( a trade was accepted but not on a commercial basis with a view to profit) I expected to read the same in this case but the result is slightly different.

Does seem that the purchaser of the scheme will be in a worse situation than before.

Interesting tactics from HMRC and the courts, because they don't fail on Ramsay but would have done if needed.

Could be interesting especially as some promotors half knew these schemes did not work and their fall back position was "it's just a cash flow excercise"

 

 

Thanks (0)
avatar
18th May 2015 14:49

GB & GB, who was the loser?

I well remember Gordon Brown trumpetting the success of the film finance initiatives and the impact on UK based production facilities (and the resultant tax flowing there from) So both GBs won. Following the withdrawal of the reliefs much of that good work was lost to the likes of Hungary and both GBs lost. True there were some rogues and dodgy practices such as "double dipping"(claiming two sets of relief on the same film but under different procedures) which I would never condone. This case smacks more of politics than it does of good law and justice. How about some fair dealing from our taxing authority? I won't hold my breath.

Thanks (0)
avatar
18th May 2015 15:18

Samarkand decision

Moneymanager is bang on.  Gordon Brown fell in love with the luvvies and introduced the tax reliefs on which film partnerships were based.  When he was told what it was costing the Treasury  -despite the quantity of film business coming into the UK as a result - methinks he would have told the Treasury and HMRC to find ways of attacking all the schemes, which they have done quite successfully.  Of course the relief spawned all sorts of schemes which went beyond the intention of the legislation, but that is the fault of the legislators.  The golden rule is that for every tax relief there is a tax avoidance scheme.

 

I spend most of my time working for film partnership investors and their partnerships.  There is real fear that HMRC will apply the Samarkand decision across the board. The investors find themselves in a position that was never contemplated and where they considered themselves entitled to the tax treatment set out in the Business Income Manual.  Today I came off a conference call with a  tax QC who agrees.

 

 

Thanks (0)
avatar
19th May 2015 11:32

Cost?

But what did it cost? I would love to see an all encompassing analysis but I would not be surprised that in the round tax was neither loast nor dealyed but actually increased and accelerated in receipt. The UK facilities generated significant PAYE and VAT and 100% (more for additional rate tax payersof the initial relief would be paid back anyway.

Thanks (0)
avatar
18th May 2015 15:38

business Income Manuals
But we all know you cant rely on HMRC manuals to set out the correct answer if it costs them too much money

Thanks (0)
avatar
19th May 2015 11:13

love it

Are we saying it's all HMRC's fault because the manual on film partnerships didn't explain, to so called experts, the other rules and concepts in tax law. (statute and case)

Namely:

Substance over form,

Ramsay,

generally accepted accounting practice,

carrying on with a view to a profit,

capital v's revenue,

etc

etc

Surely getting these bits wrong when you have professed to be an expert is at least negligence or perhaps even Fradulent trading as defined in s.213 IA 1986 and s.993 CA 2006

Why are actions not being take against the promotors and sellers of these schemes especially as there are now losses for a damages claim.

as for Counsel's opinion and approved by HMRC (as if) these are surely misrepresentations to a contract (Misrep act 1967) . Counsel seem to have been misrepresented as surely they did not get this wrong.

interesting but when someone  says "counsels opinion" which used to be valued, what do you now think?

My view is that it was all just a sophisticated scam. The lame, and inexperienced accountantants were sucked in with the lure of huge commissions (should have read their rule book and considered their clients interest in an independent fashion) and fear tactics from the promotors and accountants that couldn't even pass the exams saying we would get sued if we didn't peddle this nonsense.

Really is a disgraceful episode for HMRC, the accountancy and legal profession all of which have failed in their responsibilties and values. HMRC are at least coming good albeit a bit late in the game.

Thanks (3)
avatar
19th May 2015 15:28

Samarkand decision

Black Knight quotes, I think, from the Icebreaker appeal decision.  I do not think that Ramsay was mentioned in Samarkand.  However the potential outcome for investors in either (as well as Eclipse) is the same.  HMRC are seeking to tax the "dry income", ie the minimum income receipts out of which the investor would pay the loan interest, but to disallow the deduction for loan interest on the grounds of no trade.  It would have been better had Ramsay been applied because then we could ignore all the transactions.

Make no mistake, this will go to the Supreme Court and a lot of investors will be seriously hurt.

The only possible escape route will be if HMRC are out of time to assess.

Thanks (0)