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Film schemes: The taxman strikes back

31st May 2013
Freelance journalist
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In the 1968 film The Producers a washed-up theatrical producer and his neurotic accountant deliberately try to put on a musical that will close as quickly as possible, writes Nick Huber.

They deliberately raise more money than they need for the production and because backers will not expect any money back from a flop, the producers hope to run with the surplus cash.

But their plans go awry when their musical, called 'Springtime for Hitler' (see above), written by an escaped Nazi, is a hit.

Fast forward four decades and real-life get-rich schemes in film are still making headlines.

Film Investments

Over the past few years HMRC has challenged and shut down various film tax schemes which it says have abused rules on tax relief for film partnerships or for fraudulently claimed film tax credits and VAT.

One high-profile film scheme, contested by HMRC, reportedly involved investors including Sir Alex Ferguson, Sven-Göran Eriksson and a host of sports stars and City figures.

The 289 investors in Eclipse 35, a film partnership ruled to be an “aggressive” tax avoidance scheme by a tax tribunal in April, could end up paying several times more than the total of £117m tax they sought to avoid as the Revenue examines the large bank loans they took on to participate in the scheme, the Financial Times reported in 2012.

In March, five men behind a £2.8m film tax scam were jailed for more than 22 years after an HMRC investigation found they fraudulently claimed film tax credits and VAT.

The gang claimed that their film, 'A Landscape of Lives', starred Hollywood A-list actors, but it was never intended for the big screen and was a sham production, HMRC said.

One tax expert says that film investment schemes can be expensive and risky.

Dave Horsley, a director at tax advisory firm Six Forward, which has advised clients on film tax matters, said: “At the aggressive end of the [film investment] market, some tax advisers are overlooking simpler, more appropriate, and effective reliefs such as capital allowances, research and development, and enterprise investment schemes as they [have the advantage of not attracting] the high adviser and QC fees of a [film investment] scheme.’’

The taxman strikes back

Tax avoidance schemes are usually promoted by small “boutique” tax firms which find a film and sell them to investors. Typically, most of the money investors pay comes from a “non recourse” loan, which doesn't have to be repaid, or if it does have to be repaid only from income generated from the film scheme.

The promoter of the scheme will take a minority of the money from investors. Most of the rest of the money is put on deposit in a bank to guarantee future interest and therefore returns for investors. The remainder is invested into the film.

Investors claim income tax relief on their money which in effect goes round in circles. For every £20 higher-rate taxpayers invest they can get £40 from the taxman. “It all works as a cash refund,” says Bill Dodwell, head of tax policy at Deloitte. “The investors don’t part with any money. They make a profit out of the middle of nowhere if the [film scheme] works.”

In the past few years, most film schemes have failed, tax experts say. HMRC has shut them down by going to court. Its main argument has been most of the money from investors has never been invested in a film. Instead it goes on a deposit in a bank to give investors a guaranteed return.

Many of the film investment schemes that have been challenged by HMRC would now be impossible, experts say, because they were designed before a tightening of film-relief rules. Tax relief for individual investors in films was withdrawn in 2008 and so-called “sideways” tax relief (allowing losses on investments to be offset against income), has been limited to £25,000 for most situations.

Film finance

Avoidance schemes are one of the many examples of unintended consequences of changes to the tax system. In 2005 the Labour Government announced tax breaks for low- and large-budget British films.

Under the legislation, introduced in 2006, tax relief would fund 20% of production costs for British films with budgets up to £20m.

The government said that previous legislation on film tax relief was vulnerable to abuse. Under one loophole, called “double dipping”, producers could claim relief on both production costs and the sale and leaseback of the final film print.

To qualify for the new relief, a film had to meet three conditions: be made to be shown commercially in cinemas; pass a “cultural test” administered by the Department for Culture Media and Sport; and incur at least 25% of its total production expenditure on film-making activities in the UK.

The tax breaks for British films have been extended to 2015.

The scheme is widely viewed as a success, helping fund films in Britain including Harry Potter and the Deathly Hallows and Brighton Rock. Earlier in May, it was announced that filming of the next Star Wars movie will return to the UK – a decision partly attributed to tax breaks for film makers.

The scheme for film tax relief isn't the only help for film makers, however.

Accountant Farook Owadally used the enterprise incentive scheme (EIS) to help raise funds for film about Liverpool Football Club’s thrilling European Cup final victory in 2005 over AC Milan in Istanbul.

The financing for the film, One Night in Istanbul, involved Big Ears Entertainment, of which Owadally is one of the directors, in association with Stray Dog Films and nearly 30 other investors, including Liverpool FC players. The use of the enterprise incentive scheme (EIS) made it possible to bring in a wider number of investors, Owadally said he chose EIS because it enabled the investor to claim EIS tax relief of 30% on their investment.

Will there be a sequel to film avoidance schemes? Tax breaks for investment in deprived areas could be a contender, although HMRC is consulting on tightening rules for the business premises renovation allowance (BPRA) amid reports that some wealthy investors are exploiting it.

HMRC is also reviewing tax rules for limited liability partnerships, which means that accountants could have their self-employment status challenged.

These and other tax schemes may be caught by the new general anti-abuse rule (GAAR) enacted to counter tax avoidance. The legislation, which comes into effect in July, would differentiate between what counts as responsible tax planning and what is abusive tax avoidance.

This new law should save HMRC time and money because it won’t need to legislate against each individual tax avoidance scheme deemed to be aggressive.

Replies (8)

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By adambl
03rd Jun 2013 11:32

Film schemes

 

All responsible tax advisers would agree that some of the film schemes were too aggressive but I feel that Nick you're misleading readers when saying "for every £20 higher-rate taxpayers invest they can get £40 from the taxman". 

 

All of the schemes I have seen (most of which were originally accepted by HMRC) are nothing more than a cash-flow advantage to the investor because they have to repay the £40 over the lifetime of the scheme.

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By RobertG
04th Jun 2013 09:37

FILM INVESTMENT

All of these `schemes` which are nothing more than tax avoidance plans with no commercial purpose have, quite rightly, been smashed. The British film industry is enjoying an exciting time because  those that intend to actually make a film, have a passion, and want it ro be successful. They will do so correctly, seek experienced advice and have the schemes (SEIS, EIS or a combination) pre approved by HMRC. The deluded few that try and circumvent the system to fraudulently claim VAT and or the UK film tax credit will get discovered at some point.  Projects are examined by HMRC before being approved and once underway are presented to BFI usually twice (interim and final) which examines the project as a whole and then HMRC will examine the accounting and computation of the claim again on two levels. Most film schemes are now presented by specialist firms with many projects behind them and are known to BFI and HMRC as dare I say it legitimate `players`.

With a strong project, a pedigree cast, crew and distribution in place British film investment is now a real alternative to other investments. For lower budget UK films, the SEIS gives a 50% tax break on investment amongst a raft of other benefits depending on an investors tax position.  Once 70% of that has been spent the film can move into an EIS to raise larger sums for bigger projects. 

Rob Graham, Graham Associates (International) Ltd www.graham-assoc.co.uk

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By stevebritgimp
03rd Jun 2013 12:17

Liverpool

(Liverpool played Milan).

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By Red1960
03rd Jun 2013 12:48

If it looks too good to be true...

I don't have a single client who doesn't regret their involvement in film partnership schemes.

The individuals who promoted these schemes so aggressively must be looking anxiously over their shoulders and towards their indemnity premiums these days because they certainly weren't looking towards their consciences at the time they were promoted.

Enough said.

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By jonnyd
03rd Jun 2013 14:15

Film Partnership

Couldn't agree more with comments of Red1960. My former Practice supported a leading Film Partnership Promoter based in London for a number of years. We relied heavily on the honesty of one of the Directors. Of course none of his "guarantees" came to fruition which effectively destroyed my Firms' reputation. To add to the misery this former Promoter of the Schemes has now joined a Company suing IFA's and Accountants for promoting them in the first place! How the man sleeps in his bed at night is beyond me.

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By RobertG
04th Jun 2013 09:48

FILM INVESTMENT

Red has a good point - the potential PI claims to come must be horrendous for the advisers of partnerships.  But the negative impact of the partnerships has hurt many advisers and made some investors very wary.

Fortunately these are long gone now and the excitement of film investment has returned.

Caveat Emptor reigns here. Carry out due dilligence any wild claims will be just that.  Any film production company must be able to show that they can do what they say and have done it before.  But only invest for the right reasons - to make a film and make it successful

Seeing that the model of making British films works first hand on over 16 films we created our own production company which has financed 3 features in 18 months (the first to be released sits next to FLIGHT with Denzil Washington in the charts) all of which have received worldwide distribution and have become self funding to the extent that we will finance at least 4 films a year with 2 more green lit for October.

Meet the stars, visit the set, attend the premiere and be in a movie as an extra.....Who said accountancy was boring?

Best regards

Rob Graham

Graham Associates (International) Ltd www.graham-assoc.co.uk

 

 

 

 

 

 

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Replying to timothyvogel:
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By jonnyd
04th Jun 2013 10:58

FILM PARTNERSHIPS

Been there, done that, didn't get the T-Shirt! Have never been involved in a Film Partnership that actually declared a profit! Apparently Mr Bean's holiday which took over $250m worldwide made a loss! (According to the Promoters!)

 

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By RobertG
04th Jun 2013 12:40

Now we have another story - Hollywood accounting. Where the biggest movies (on paper) make no money. No net means no distributions to participants.  I have seen the Harry Potter`s profit statement where the film took in $1billion in a weekend and still made a loss.  Hollywood A listers negotiate gross percentages as they know there is no net. Note here is never invest in big budget movies with big studios attached.  Invest in people who have made money for people and can show you the numbers.  We are attached to lower budget UK films where we control the accounting and investors have made over 300% and more importantly actually see it. That way they reinvest and so the wheel keeps turning.

Best regards

Rob Graham

Graham Associates (International) Ltd www.graham-asoc.co.uk

 

 

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